**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **(Mark One)**
 **[x]**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**For
                  the quarterly period endedJune
                  30, 2005
 
 **or**
 **[
                  ]**
              **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:** **1-12109**
  
 
 **DELTA
        FINANCIAL CORPORATION**
 
 (Exact
        name of registrant as specified in its charter)
 
 **Delaware**
              **11-3336165**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)
 
 **1000
        Woodbury Road, Suite 200, Woodbury, New York 11797**
 
 (Address
        of registrant’s principal executive offices including ZIP Code)
 
 **(516)
        364 - 8500**
 
 (Registrant’s
        telephone number, including area code)
 
 **No
        Change**
 
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 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
        [
        ]
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).
 Yes
        [
        ]   No
        [ x
        ]
 
 As
        of
        August 4, 2005, 20,362,187 shares of the Registrant’s common stock, par value
        $0.01 per share, were outstanding.
 
 
 
 
 **INDEX
        TO FORM 10-Q**
 
 
 **Page
                  No.****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              Financial
                  StatementsConsolidated
                  Balance Sheets as of June 30, 2005 (unaudited) and December 31,
                  2004
              1Consolidated
                  Statements of Operations for the three and six months ended June
                  30, 2005 and 2004 (unaudited)
              2Consolidated
                  Statement of Changes in Stockholders’ Equity for the six
                  months ended
                  June 30, 2005 (unaudited)
              3Consolidated
                  Statements of Cash Flows for the six months ended June
                  30, 2005 and 2004 (unaudited)
              4Notes
                  to Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              21Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              52Item
                  4.
              Controls
                  and Procedures
              55**PART
                  II - OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              56Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              58Item
                  3.
              Defaults
                  Upon Senior Securities
              58Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              58Item
                  5.
              Other
                  Information
              58Item
                  6.
              Exhibits
              59Signatures
              60
 
 
  
   **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1 - Financial Statements.**
 
 **DELTA
        FINANCIAL CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 *(Dollars
        in thousands, except for share data)*
 
 **June
                  30,**
                **2005**
              
              **December
                  31,**
                **2004***(Unaudited)***Assets:**Cash
                  and cash equivalents
              
              $
              4,376
              
              $
              5,187Mortgage
                  loans held for investment, net of discounts and deferred
                origination
                  fees
              
              
              3,462,651
              
              
              2,351,272Less:
                  Allowance for loan losses
              
              
              (23,983
              )
              
              (10,278
              )Mortgage
                  loans held for investment, net
              
              
              3,438,668
              
              
              2,340,994Trustee
                  receivable
              
              
              45,531
              
              
              30,197Accrued
                  interest receivable
              
              
              19,114
              
              
              12,280Excess
                  cashflow certificates
              
              
              11,024
              
              
              14,933Equipment,
                  net
              
              
              4,963
              
              
              4,298Accounts
                  receivable
              
              
              8,052
              
              
              6,453Prepaid
                  and other assets
              
              
              29,382
              
              
              26,125Deferred
                  tax asset
              
              
              53,778
              
              
              50,326Total
                  assets
              
              $
              3,614,888
              
              $
              2,490,793**Liabilities
                  and Stockholders’ Equity****Liabilities:**Bank
                  payable
              
              $
              972
              
              $
              1,110Warehouse
                  financing
              
              
              119,104
              
              
              135,653Financing
                  on mortgage loans held for investment, net
              
              
              3,368,929
              
              
              2,236,215Other
                  borrowings
              
              
              2,550
              
              
              3,330Accrued
                  interest payable
              
              
              7,546
              
              
              4,282Accounts
                  payable and other liabilities
              
              
              25,850
              
              
              23,023Total
                  liabilities
              
              
              3,524,951
              
              
              2,403,613**Stockholders’
                  Equity:**Common
                  stock, $.01 par value. Authorized 49,000,000 shares;
                20,478,987
                  and 20,403,187 shares issued and 20,362,187 and
                20,286,387
                  shares outstanding at June 30, 2005 and December 31,
                2004,
                  respectively
              
              
              205
              
              
              204Additional
                  paid-in capital
              
              
              119,816
              
              
              119,451Accumulated
                  deficit
              
              
              (25,349
              )
              
              (28,950
              )Accumulated
                  other comprehensive (loss) income, net of taxes
              
              
              (3,417
              )
              
              (2,207
              )Treasury
                  stock, at cost (116,800 shares)
              
              
              (1,318
              )
              
              (1,318
              )Total
                  stockholders’ equity
              
              
              89,937
              
              
              87,180Total
                  liabilities and stockholders’ equity
              
              $
              3,614,888
              
              $
              2,490,793
 See
        accompanying notes to consolidated financial statements.
  **1**
  **DELTA
        FINANCIAL CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**(Unaudited)
 *(Dollars
        in thousands, except share and per share data)*
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Interest
                  income
              
              $
              66,157
              
              $
              18,759
              
              $
              121,033
              
              $
              26,043Interest
                  expense
              
              
              36,489
              
              
              5,510
              
              
              64,272
              
              
              7,423Net
                  interest income
              
              
              29,668
              
              
              13,249
              
              
              56,761
              
              
              18,620Provision
                  for loan losses
              
              
              7,478
              
              
              2,243
              
              
              14,342
              
              
              2,675Net
                  interest income after provision for loan losses
              
              
              22,190
              
              
              11,006
              
              
              42,419
              
              
              15,945Non-interest
                  income:Net
                  gain on sale of mortgage loans
              
              
              6,592
              
              
              1,513
              
              
              11,920
              
              
              9,253Other
                  income
              
              
              2,581
              
              
              108
              
              
              5,396
              
              
              204Total
                  non-interest income
              
              
              9,173
              
              
              1,621
              
              
              17,316
              
              
              9,457Non-interest
                  expense:Payroll
                  and related costs
              
              
              15,027
              
              
              12,595
              
              
              30,181
              
              
              24,154General
                  and administrative
              
              
              10,099
              
              
              7,583
              
              
              19,894
              
              
              13,712Loss
                  (gain) on derivative instruments
              
              
              334
              
              
              (4,585
              )
              
              318
              
              
              139Total
                  non-interest expense
              
              
              25,460
              
              
              15,593
              
              
              50,393
              
              
              38,005Income
                  (loss) before income tax expense (benefit)
              
              
              5,903
              
              
              (2,966
              )
              
              9,342
              
              
              (12,603
              )Provision
                  for income tax expense (benefit)
              
              
              2,328
              
              
              (1,136
              )
              
              3,708
              
              
              (4,858
              )Net
                  income (loss)
              
              $
              3,575
              
              $
              (1,830
              )
              $
              5,634
              
              $
              (7,745
              )**Other
                  Comprehensive (Loss) Income**:Net
                  unrealized holding (losses)/gains onderivatives
                  arising during the
                period, net of tax
              
              
              (6,012
              )
              
              45
              
              
              (1,210
              )
              
              45Other
                  comprehensive income (loss)
              
              $
              (2,437
              )
              $
              (1,785
              )
              $
              4,424
              
              $
              (7,700
              )**Per
                  Share Data:**Basic
                  - weighted average number of sharesoutstanding
              
              
              20,324,356
              
              
              16,943,982
              
              
              20,310,194
              
              
              16,934,174Diluted
                  - weighted average number of sharesoutstanding
              
              
              21,260,925
              
              
              16,943,982
              
              
              21,248,274
              
              
              16,934,174Net
                  income (loss) applicable to common shares
              
              $
              3,575
              
              $
              (1,830
              )
              $
              5,634
              
              $
              (7,745
              )Basic
                  earnings per share - net income (loss)
              
              $
              0.18
              
              $
              (0.11
              )
              $
              0.28
              
              $
              (0.46
              )Diluted
                  earnings per share - net income (loss)
              
              $
              0.17
              
              $
              (0.11
              )
              $
              0.27
              
              $
              (0.46
              )
  
  See
        accompanying notes to consolidated financial statements.
  **2**
  **DELTA
        FINANCIAL CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**(Unaudited)
 **For
        the Six Months Ended June 30, 2005**
 *(Dollars
        in thousands)*
 
 **Common
                  Stock**
              
              **Additional**
                **Paid-in
                  Capital**
              
              **Accumulated
                  Deficit**
              
              **Accumulated
                  Other Comprehensive (Loss) Income, Net of Taxes**
              
              **Treasury
                  Stock**
              
              **Total**Balance
                  at December 31, 2004
              
              $
              204
              
              $
              119,451
              
              $
              (28,950
              )
              $
              (2,207
              )
              $
              (1,318
              )
              $
              87,180Stock
                  options exercised, inclusiveof
                  tax benefit
              
              
              1
              
              
              365
              
              
              --
              
              
              --
              
              
              --
              
              
              366Cash
                  dividend paid
              
              
              --
              
              
              --
              
              
              (1,015
              )
              
              --
              
              
              --
              
              
              (1,015
              )Dividend
                  declared and payable
              
              
              --
              
              
              --
              
              
              (1,018
              )
              
              --
              
              
              --
              
              
              (1,018
              )Net
                  unrealized losses fromderivatives,
                  net of tax
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,210
              )
              
              --
              
              
              (1,210
              )Net
                  income
              
              
              --
              
              
              --
              
              
              5,634
              
              
              --
              
              
              --
              
              
              5,634Balance
                  at June 30, 2005
              
              $
              205
              
              $
              119,816
              
              $
              (25,349
              )
              $
              (3,417
              )
              $
              (1,318
              )
              $
              89,937
 
 See
        accompanying notes to consolidated financial statements.
  **3**
  **DELTA
        FINANCIAL CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**(Unaudited)
 *(Dollars
        in thousands)*
 
 **Six
                  Months Ended June 30,****2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              5,634
              
              $
              (7,745
              )Adjustments
                  to reconcile net income to net cash used in operatingactivities:Provision
                  for loan losses
              
              
              14,342
              
              
              2,675(Recovery)
                  provision for recourse loans
              
              
              (331
              )
              
              --Depreciation
                  and amortization
              
              
              1,105
              
              
              913Deferred
                  tax benefit
              
              
              (2,679
              )
              
              (5,655
              )Deferred
                  origination costs
              
              
              (3,779
              )
              
              (1,035
              )Gain
                  on change in fair value of excess cashflow certificates
              
              
              (5,193
              )
              
              --Gain
                  on sale of mortgage servicing rights
              
              
              (72
              )
              
              --Amortization
                  of bond securitizations deferred costs and premiums
              
              
              1,364
              
              
              (4,011
              )Cash
                  flows received from excess cashflow certificates, net of 
amortization
              
              
              9,102
              
              
              589Proceeds
                  from sale of mortgage servicing rights, net
              
              
              10,462
              
              
              7,350Changes
                  in operating assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              (1,599
              )
              
              553Decrease
                  in mortgage loans held for sale, net
              
              
              --
              
              
              51,269Increase
                  in trustee receivable, net
              
              
              (15,334
              )
              
              --Increase
                  in accrued interest receivable
              
              
              (6,914
              )
              
              (5,860
              )Increase
                  in prepaid and other assets
              
              
              (5,620
              )
              
              (10,905
              )Increase
                  in accrued interest payable
              
              
              3,264
              
              
              1,245Increase
                  in accounts payable and other liabilities
              
              
              2,791
              
              
              5,503Net
                  cash provided by operating activities
              
              
              6,543
              
              
              34,886Cash
                  flows from investing activities:Increase
                  in mortgage loans held for investment, net
              
              
              (1,116,649
              )
              
              (1,059,052
              )Purchase
                  of equipment
              
              
              (1,770
              )
              
              (1,427
              )Net
                  cash used in investing activities
              
              
              (1,118,419
              )
              
              (1,060,479
              )Cash
                  flows from financing activities:Repayment
                  of warehouse financing, net
              
              
              (16,549
              )
              
              (61,049
              )Proceeds
                  of financing on mortgage loans held for investment, net
              
              
              1,130,194
              
              
              1,101,143(Repayment
                  of) proceeds from other borrowings, net
              
              
              (780
              )
              
              651Decrease
                  in bank payable
              
              
              (138
              )
              
              (1,379
              )Cash
                  dividends paid on common stock
              
              
              (2,028
              )
              
              --Redemption
                  of preferred stock
              
              
              --
              
              
              (13,916
              )Proceeds
                  from exercise of stock options
              
              
              366
              
              
              182Net
                  cash provided by financing activities
              
              
              1,111,065
              
              
              1,025,632Net
                  (decrease) increase in cash and cash equivalents
              
              
              (811
              )
              
              39Cash
                  and cash equivalents at beginning of period
              
              
              5,187
              
              
              4,576Cash
                  and cash equivalents at end of period
              
              $
              4,376
              
              $
              4,615
 
 **4**
 
 
 **Six
                  Months Ended June 30,****2005**
              
              **2004**Supplemental
                  Information:Cash
                  paid during the period for:Interest
              
              $
              58,844
              
              $
              6,163Income
                  taxes
              
              $
              11,285
              
              $
              672Non-cash
                  transactions:Dividends
                  payable
              
              $
              1,018
              
              $
              848Transfer
                  of mortgage loans held for investment to real estate owned,
                  net
              
              $
              1,905
              
              $
              --
 
  See
        accompanying notes to consolidated financial statements.
 
  **5**
  **DELTA
        FINANCIAL CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **(1)**  **Basis
        of Presentation**
 
 Delta
        Financial Corporation is a Delaware corporation, organized in August
        1996.
 
 The
        accompanying unaudited consolidated financial statements include the accounts
        of
        Delta Financial Corporation and its wholly owned subsidiaries (collectively,
        the
“Company,”“we” or “us”). The consolidated financial statements reflect all
        normal recurring adjustments that, in the opinion of management, are necessary
        to present a fair statement of the financial position and results of operations
        for the periods presented. Certain reclassifications have been made to
        prior-period financial statements to conform to the 2005
        presentation.
 
 Certain information and footnote disclosures normally included in financial
        statements prepared in accordance with U.S. generally accepted accounting
        principles (“GAAP”) have been condensed or omitted pursuant to the rules and
        regulations of the U.S. Securities and Exchange Commission (“SEC”). The
        preparation of financial statements in conformity with GAAP requires our
        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 income and
        expenses during the reporting periods. Actual results could differ from those
        estimates and assumptions.
 
 These
        unaudited consolidated financial statements should be read in conjunction
        with
        the audited consolidated financial statements and notes thereto included
        in our
        Annual Report on Form 10-K. The results of operations for the three and six
        months ended June 30, 2005 are not necessarily indicative of the results
        that
        will be expected for the entire year.
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        conformity with the instructions to Form 10-Q and Article 10, Rule 10-01
        of
        Regulation S-X for interim financial statements. Accordingly, they do not
        include all of the information and footnotes required by GAAP for complete
        financial statements.
 
 **(2)**  **Basis
        of Consolidation**
 
 The accompanying consolidated financial statements are prepared on the accrual
        basis of accounting and include our accounts and those of our wholly owned
        subsidiaries. All significant inter-company accounts and transactions have
        been
        eliminated in consolidation.
 
 **(3)**  **Summary
        of Significant Accounting Policies**
 
 ***(a)
        Cash and Cash Equivalents***
 
 For
        cash flow reporting purposes, cash and cash equivalents includes cash in
        checking accounts, cash in interest bearing deposit accounts, amounts due
        from
        banks, restricted cash and money market investments. Included in cash and
        cash
        equivalents were $226,000 and $215,000 of interest-bearing deposits with
        select
        financial institutions at June 30, 2005 and December 31, 2004,
        respectively.
 
 Additionally,
        cash and cash equivalents as of June 30, 2005 and December 31, 2004 included
        restricted cash held in various accounts totaling $344,000 and $461,000,
        respectively.
 
 ***(b)
        Mortgage Loans Held for Sale, Net***
 
 Until
        the
        third quarter of 2004, we classified all mortgage loans originated by us
        and
        held pending securitization or sale as mortgage loans held for sale. Commencing
        in the fourth quarter of 2004, mortgage loans held pending securitization
        or
        sale have been classified as mortgage loans held for investment -
        pre-securitization. We changed this classification because we determined
        that we
        would ultimately securitize the majority of the mortgage loans held through
        securitizations structured as secured financings. The majority of these loans,
        therefore, will remain on our balance sheet as mortgage loans held for
        investment - securitized. While we may from time to time ultimately sell
        some of
        the mortgage loans we hold, we usually do not make the determination regarding
        which mortgage loans will be sold until sometime in the following reporting
        period. As
        such,
        at June 30, 2005 and December 31, 2004, we did not hold any mortgage loans
        for
        sale.
 
 **6**
 Prior
        to
        the change in classification, mortgage loans held for sale, net represented
        fixed-rate and adjustable-rate mortgage loans that had a contractual maturity
        of
        up to 30 years. These mortgage loans were secured by residential properties
        and
        were recorded at the lower of amortized cost or fair value, as determined
        on a
        loan-by-loan basis. We typically held our mortgage loans held for sale for
        no
        more than 120 days, and for 60 days on average, before they were sold and/or
        securitized in the secondary market. During the period in which the loans
        were
        held for sale, we earned the coupon rate of interest paid by the borrower,
        and
        paid interest to the lenders that provide our warehouse financing to the
        extent
        that we utilized such financing. We also paid a sub-servicing fee to a third
        party during the period the loans were held for sale. Loan origination fees,
        discount points and certain direct origination costs associated with loans
        held
        for sale were initially recorded as an adjustment of the cost to the loan.
        Gains
        or losses on sales of mortgage loans were recognized based upon the difference
        between the selling price and the carrying value of the related mortgage
        loans
        sold.
 
 ***(c)
        Mortgage Loans Held for Investment, Net***
 
 Mortgage
        loans held for investment, net represent loans we securitized through
        transactions structured to be accounted for as secured financings (mortgage
        loans held for investment - securitized) and loans we hold pending
        securitization or sale (mortgage loans held for investment -
        pre-securitization). Mortgage loans held for investment are stated at amortized
        cost, including the outstanding principal balance, net of the allowance for
        loan
        losses, net of discounts and net of deferred origination fees or
        costs.
 
 The
        allocated cost basis of mortgage servicing rights (“MSRs”) is recorded as an
        asset with an offsetting reduction ( *i.e.* ,
        discount) in the cost basis of the mortgage loans. Under Statement of Financial
        Accounting Standards (“SFAS”) No. 140, “ Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities - a replacement of FASB Statement No. 125,” the discount is measured using the relative fair values of
        the mortgage loans and MSRs to allocate the carrying value between the two
        assets. The MSRs
        are generally sold to a third-party servicer. The resulting discount is accreted
        to interest income on a level-yield basis over the contractual life of the
        related loans, on a pool-by-pool basis, using the interest method
        calculation.
 
 Additionally,
        in accordance with SFAS No. 91, “ Accounting
        for Nonrefundable Fees and Costs Associated with Originating or Acquiring
        Loans
        and Initial Direct Costs of Leases - an amendment of FASB Statements No.
        13, 60,
        and 65 and a rescission of FASB Statement No. 17,” the
        net
        deferred origination fees or costs associated with our mortgage loans held
        for
        investment are amortized to income on a level-yield basis over the contractual
        life of the related loans, on a pool-by-pool basis, using the interest method
        calculation.
 
 The
        amount of deferred nonrefundable fees is determined based on the amount of
        such
        fees collected at the time of loan closing. We determine the amount of direct
        loan origination costs to be deferred based on the amount of time spent and
        actual costs incurred by loan origination personnel in the performance of
        certain activities directly related to the origination of funded mortgage
        loans
        for that period. These activities include evaluating the prospective borrower’s
        financial condition, evaluating and recording collateral and security
        arrangements, negotiating loan terms, processing loan documents and closing
        the
        loan. Management believes these estimates reflect an accurate cost structure
        related to successful loan origination efforts for the six months ended June
        30,
        2005. Management periodically reviews its time and cost estimates to determine
        whether revisions to the deferral amounts are necessary. Revisions would
        be
        considered necessary if it was determined that the time spent and/or costs
        incurred related to performing the above activities had significantly changed
        from the previous period. This estimate is made for all loans originated
        by our
        wholesale and retail segments.
 
 The
        secured financing related to the loans held for investment - securitized
        is
        included in our consolidated balance sheet as financing on mortgage loans
        held
        for investment. Once the loans are securitized, we earn the pass-through
        rate of
        interest paid by the trustee and pay interest on our financing on mortgage
        loans
        held for investment.
  **7**
  ***(d)
        Allowance and Provision for Loan Losses***
 
 In
        connection with our mortgage loans held for investment, we established an
        allowance for loan losses based on our estimate of losses to be incurred
        in the
        foreseeable future. Provisions for loan losses are made for loans to the
        extent
        that probable losses on these loans are borne by us. Provision amounts are
        charged as a current period expense to operations. We charge-off uncollectible
        loans against the allowance for loan losses at the time they are deemed not
        probable of being collected. In order to estimate an appropriate allowance
        for
        loan losses on mortgage loans held for investment, we estimate losses using
        a
        detailed analysis of historical loan performance by product type, origination
        year and securitization issuance. The results of that analysis are then applied
        to the current long-term mortgage portfolio on a pool-by-pool basis and an
        allowance estimate is created. In accordance with SFAS No. 5, “Accounting for
        Contingencies,” we believe that pooling of mortgages with similar
        characteristics is an appropriate methodology in which to calculate or estimate
        the allowance for loan losses. We do not assess individual mortgage loans
        for
        impairment due to the homogeneous nature of the loans.
 
 In
        evaluating the adequacy of this allowance, there are qualitative factors
        and
        estimates that must be considered when assessing and measuring potential
        expected losses on mortgage loans. These items include, but are not limited
        to,
        current performance of the loans, economic indicators that may affect the
        borrower’s ability to pay, changes in the market value of the collateral,
        political factors and the general economic environment. As these factors
        and
        estimates are influenced by factors outside of our control, there is inherent
        uncertainty in these items and it is reasonably possible that they could
        change.
        In particular, if conditions were such that we were required to increase
        the
        provision for losses, any increase in the provision for losses would decrease
        our income for that period. Management considers the allowance for loan losses
        at June 30, 2005 to be adequate.
 
 Additionally,
        in connection with loans sold on a recourse basis (prior to 1991), we have
        a
        recourse reserve (included on the balance sheet within “accounts payable and
        other liabilities”), which is based on our estimate of probable losses to be
        borne by us under the terms of the recourse obligation. The methodology under
        which the recourse reserve is calculated is similar to the methodology utilized
        in determining the allowance for loan losses. Management considers the recourse
        reserve at June 30, 2005 to be adequate.
 
 ***(e)
        Trustee Receivable***
 
 Trustee
        receivable principally represents any un-remitted principal payments collected
        by the securitization trust’s third-party loan servicer subsequent to the
        monthly remittance cut-off date. Each month, the third-party loan servicer,
        on
        behalf of each securitization trustee, remits all of the scheduled loan payments
        and unscheduled principal payoffs and curtailments received through a mid-month
        cut-off date. Unscheduled principal payments and prepaid principal loan payments
        received after the cut-off date for the current month are recorded by us
        as a
        trustee receivable on the consolidated balance sheet. The trustee or third-party
        loan servicer retains these unscheduled principal payments until the following
        month’s scheduled remittance date, at which time they principally will be used
        to pay down financing on mortgage loans held for investment, net.
 
 ***(f)
        Excess Cashflow Certificates***
 
 Prior
        to
        2004, we structured our securitization transactions to be accounted for as
        sales. In these transactions the excess cash flow certificates represent
        one or
        all of the following assets: (1) residual interest (“BIO”) certificates, (2) P
        certificates (prepayment penalty fees), (3) payments from our interest rate
        cap
        providers, and (4) net interest margin (“NIM”) owner trust certificates. Our
        excess cashflow certificates are classified as “trading securities” in
        accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and
        Equity Securities.” The amount initially recorded for the excess cashflow
        certificates at the date of a securitization structured as a sale reflected
        their allocated fair value. The amount recorded for the excess cashflow
        certificates is reduced for cash distributions received, and is adjusted
        for
        income accretion and subsequent changes in the fair value in accordance with
        SFAS No. 140. Any changes in fair value are recorded as a component of “other
        income” or “other expense” in our consolidated statement of operations. For the
        three and six months ended June 30, 2005, we recorded $2.5 million and $5.2
        million, respectively, of income due to an increase in the fair value of
        excess
        cashflow certificates. For the three and six months ended June 30, 2004,
        we
        recorded no fair value adjustments related to excess cashflow
        certificates.
 
 **8**
 We
        are
        not aware of any active market for the sale of our excess cashflow certificates.
        Accordingly, our estimate of fair value is subjective. Although we believe
        that
        the assumptions we use are reasonable, there can be no assurance as to the
        accuracy of the assumptions or estimates. The valuation of our excess cashflow
        certificates requires us to forecast interest rates, mortgage principal
        payments, prepayments and loan loss assumptions, each of which is highly
        uncertain and requires a high degree of judgment. The rate used to discount
        the
        projected cash flows is also critical in the valuation of our excess cashflow
        certificates. Management uses internal, historical mortgage loan performance
        data and forward London
        Interbank Offering Rate (“LIBOR”) interest
        rate curves to value future expected excess cash flows. We regularly analyze
        and
        review our assumptions to determine that the expected return (interest income)
        on our excess cashflows certificates is within our expectations.
 
 The
        Emerging Issues Task Force (“EITF”) issued EITF 99-20, “Recognition of Interest
        and Impairment on Purchased and Retained Beneficial Interests in Securitized
        Financial Assets,” which provides
        guidance on expected return (interest income) recognition and fair value
        measurement for interests (excess cashflow certificates) retained in a
        securitization transaction accounted for as a sale. In order
        to determine
        whether there has been a favorable change (increase to earnings) or an adverse
        change (decrease to earnings) in excess
        cashflow certificates, a comparison is made between (1) the present value
        of the
        excess cash flows at period end, and (2) the estimated carrying value at
        period
        end - which is based on the change from the beginning period and adjusted
        for
        the required rate of return within the period (currently, the required rate
        of
        return is our discount rate of 15% per annum). If the present value of the
        excess cash flows at period end is greater than the carrying value at period
        end, the change is considered favorable. If the present value of the excess
        cash
        flows at the end of the period is less than the carrying value, the change
        is
        considered adverse. In both situations, the fair value adjustment, if any,
        will
        be equal to the excess above or the deficit below the required rate of return
        (the discount rate).
 
 ***(g)
        Equipment, Net***
 
 Equipment,
        including leasehold improvements, is stated at cost, less accumulated
        depreciation and amortization. Depreciation of equipment is computed using
        the
        straight-line method over the estimated useful lives of three to seven years.
        Leasehold improvements are amortized over the lesser of the terms of the
        lease
        or the estimated useful lives of the improvements. Ordinary maintenance and
        repairs are charged to expense as incurred.
  Depreciation
        and amortization are included in “general and administrative expenses” in our
        consolidated statements of operations, and amounted to approximately $543,000
        and $478,000 for the three months ended June 30, 2005 and 2004, respectively,
        and $1.1 million and $913,000 for the six months ended June 30, 2005 and
        2004,
        respectively.
 
 ***(h)
        Real Estate Owned***
 
 Real
        estate owned (“REO”) represents properties acquired through, or in lieu of,
        foreclosure. REO properties are recorded at the lower of cost or fair value,
        less estimated selling costs. REO properties are periodically evaluated for
        recoverability and any subsequent declines in value are reserved for through
        a
        provision. Gains or losses on the sale of REO properties are recognized upon
        disposition.
 
 The
        balance of REO is included in “prepaid expenses and other assets” on the
        consolidated balance sheet. We had $2.0 million and $578,000 of REO properties
        as of June 30, 2005 and December 31, 2004, respectively. No provision was
        made
        during the three and six months ended June 30, 2005 for the decrease in the
        fair
        value of the REO properties. No provision was made during the three and six
        months ended June 30, 2004 as we held no REO properties during the first
        six
        months of 2004.
 
 ***(i)
        Warehouse Financing***
 
 Warehouse
        financing represents the outstanding balance of our borrowings collateralized
        by
        mortgage loans held pending securitization or sale. Generally, warehouse
        financing facilities are used as interim, short-term financing which bear
        interest at a fixed margin over an index, such as LIBOR. The outstanding
        balance
        of our warehouse lines will fluctuate based on our lending volume, cash flows
        from operations, whole-loan sale transactions, other financing activities
        and
        equity transactions.
  **9**
  ***(j)
        Financing on Mortgage Loans Held for Investment, Net***
 
 Financing
        on mortgage loans held for investment, net represents the securitization
        debt
        (asset-backed certificates or notes, referred to as “asset-backed securities”)
        used to finance loans held for investment - securitized, along with any
        discounts on the financing. The balance of this account will generally increase
        in proportion to the increase in mortgage loans held for investment -
        securitized.
 
 Asset-backed
        securities are secured, or backed, by the pool of mortgage loans purchased
        by
        the securitization trust, which are recorded as mortgage loans held for
        investment - securitized on our balance sheet. Generally,
        the asset-backed security financing is comprised of a series of senior and
        subordinate securities with varying maturities ranging generally from one
        to 20
        years and bearing either a fixed rate of interest or a variable rate of interest
        (representing a fixed margin over one-month LIBOR). The variable-rate
        asset-backed securities adjust monthly. Prior
        to
        2004, we did not structure our securitizations as secured financings and
        we did
        not have mortgage loans held for investment or related borrowings.
 
 Any
        securitization debt issuance costs are deferred and amortized, along with
        any
        discounts on the financing, on a level-yield basis over the estimated life
        of
        the debt issued. From time to time we may utilize derivative instruments
        (cash
        flow hedges), such as interest rate swap contracts and corridors (corresponding
        purchase and sale of interest rate caps with similar notional balances at
        different strike prices), in an effort to maintain a minimum margin or to
        lock
        in a pre-determined base interest rate on designated portions of our prospective
        future securitization financing (collectively, the hedged risk).
 
 Our securitizations are structured legally as sales and thus, we
        are
        not legally required to make payments to the holders of the asset-backed
        securities. The only recourse of the asset-backed securities holders for
        repayment is from the underlying mortgages specifically collateralizing the
        debt. The assets held by the securitization trusts are not available to our
        general creditors. As with past securitizations, we have potential liability
        to
        each of the securitization trusts for any breach of the standard representations
        and warranties that we provided in connection with each
        securitization.
 
 Under SFAS
        140,
        the securitizations are accounted for as financings. The securitization trusts
        do not meet the qualifying special purpose entity (“QSPE”) criteria under SFAS
        140 and related interpretations due to their ability to enter into derivative
        contracts. Additionally, we have the option to purchase loans from the trust
        at
        our discretion. Our
        pre-2004 securitizations did meet the QSPE criteria, which required the
        securitizations to be accounted for as a sale of mortgage loans.
 
 **(** ***k)***  ***Interest
        Income***
 
 Interest
        income primarily represents the sum of (a) the gross interest, net of servicing
        fee, we earn on mortgage loans held for investment - securitized; (b) the
        gross
        interest we earn on mortgage loans held for investment - pre-securitization;
        (c)
        securitization accrued bond interest (income received from the securitization
        trust for fixed-rate asset-backed securities at the time of securitization
        settlement); (d) excess cashflow certificate income; (e) interest earned
        on bank
        accounts; (f) prepayment penalty fees; and (g) amortized discounts, deferred
        costs and fees recognized on a level-yield basis.
 
 Interest
        on mortgage loans is recognized as revenue when earned according to the terms
        of
        the mortgages and when, in the opinion of management, it is deemed collectible.
        Mortgage loans are placed on non-accrual status generally when the loan becomes
        90 days past due or earlier when concern exists as to the ultimate
        collectability of principal or interest. A non-accrual loan will be returned
        to
        accrual status when principal and interest payments are no longer 90 days
        past
        due, and the loan is anticipated to be fully collectible.
 
 At
        June
        30, 2005 and December 31, 2004, we had $46.0 million and $19.8 million,
        respectively, of mortgage loans held for investment on non-accrual
        status.
  **10**
  ***(l)
        Interest Expense***
 
 Interest
        expense primarily represents the borrowing costs under (a) our warehouse
        credit
        facilities to finance loan originations; (b) securitization debt; (c) equipment
        financing; and (d) amortized discounts and deferred costs on a level-yield
        basis.
 
 ***(m)
        Gain on Sale of Mortgage Loans***
 
 Gains
        and
        losses on the sale of mortgage loans are recognized at settlement date and
        are
        determined by the difference between the selling price and the carrying value
        of
        the loans sold. These transactions are treated as sales in accordance with
        SFAS
        No. 140.  Any
        unamortized origination fees or costs at the date of sale are reflected as
        an
        adjustment to gain on sale.
 
 We
        generally sell loans on a non-recourse servicing-released basis and as such,
        the
        risk of loss or default by the borrower has generally been assumed by the
        purchaser. However, we are generally required to make certain representations
        and warranties by these purchasers relating to borrowers’ creditworthiness, loan
        documentation and collateral. To the
        extent that we do not comply with such representations, or there are early
        payment defaults, we may be required to repurchase loans or indemnify these
        purchasers for any losses from borrower defaults.
 
 We
        establish a reserve for the contractual obligation to rebate a portion of
        any
        premium paid by a purchaser when a borrower prepays a sold loan within an
        agreed
        period. The premium recapture reserve is recorded as a liability on our
        consolidated financial statements when the mortgage loans are sold based
        on
        our historical experience. The
        provision for premium recapture is recognized at the date of sale and is
        included in the consolidated statements of operations as a reduction of gain
        on
        sale of mortgage loans.
 
 ***(n)
        Mortgage Servicing Rights Sales***
 
 We
        generally sell the mortgage servicing rights to a third party as of the
        securitization date. Upon the sale, we allocate a portion of the accounting
        basis of the mortgage loans held for investment to the mortgage servicing
        rights, which results in a discount to the mortgage loans held for investment.
        That discount is accreted as an adjustment to yield on the mortgage loans
        over
        the estimated life of the related loans, on a pool-by-pool basis, using the
        interest method calculation. For the three and six months ended June 30,
        2005,
        we received $5.2 million and $10.5 million, respectively, from a third-party
        servicer for the right to service the mortgage loans collateralizing our
        securitizations that were structured to be accounted for as secured financings.
        For the three and six months ended June 30, 2004, we received $4.2 million
        and
        $6.6 million, respectively, from the third-party servicer for the right to
        service the mortgage loans.
 
 Additionally,
        for the six months ended June 30, 2004, we received $661,000 from the
        third-party servicer for the right to service the mortgage loans collateralizing
        our securitization that was structured to be accounted for as a sale. This
        amount reflected the monies we received for $113.9 million of mortgage loans
        we
        delivered in January 2004 under a pre-funding feature in our fourth quarter
        2003
        securitization. Because this securitization transaction was accounted for
        as a
        sale, we recorded the $661,000 that we received for the mortgage servicing
        rights relating to the $113.9 million of mortgage loans as gain-on-sale revenue
        during the first quarter of 2004.
 
 ***(o)
                  Derivative
                  Instruments***
 
 We
        regularly issue securitization asset-backed securities collateralized by
        fixed-
        and variable-rate mortgage loans. As a result of this activity, we are exposed
        to interest rate risk beginning when our mortgage loans close and are recorded
        as assets, until permanent financing is arranged, such as when asset-backed
        securities are issued. Our strategy is to use derivative instruments, in
        the
        form of interest rate swap contracts, in an effort to effectively lock in
        a
        pre-determined interest rate on designated portions of our prospective future
        securitization financings. At times, we also use corridors that are designed
        to
        limit our financing costs within the securitization by maintaining minimum
        margins. Both the interest rate swaps and corridors are derivative instruments
        that trade in liquid markets, and neither is used by us for speculative
        purposes.
 
 **11**
 In
        accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
        Activities,” all derivatives are recorded on the balance sheet at fair value.
        When derivatives are used as hedges, certain criteria must be met, including
        contemporaneous documentation, in order to qualify for hedge accounting.
        Under
        SFAS No. 133, cash flow hedge accounting is permitted only if a hedging
        relationship is properly documented and qualifying criteria are satisfied.
        For
        derivative financial instruments not designated as hedging instruments, all
        gains or losses, whether realized or unrealized, are recognized in current
        period earnings.
 
 Cash
        flow
        hedge accounting is appropriate for hedges of uncertain cash flows associated
        with future periods - whether as a consequence of interest to be received
        or
        paid on existing variable-rate assets or liabilities or in connection with
        intended purchases or sales.
 
 Under
        cash flow hedge accounting treatment, derivative results are divided into
        two
        portions, “effective” and “ineffective.” The effective portion of the
        derivative's gain or loss is initially reported as a component of OCI and
        subsequently reclassified into earnings when the forecasted transaction affects
        earnings. The ineffective portion of the gain or loss is reported in earnings
        immediately.
 
 To
        qualify for cash flow hedge accounting treatment, all of the following factors
        must be met:
 
 ·
              hedges
                  must be documented, with the objective and strategy stated, along
                  with an
                  explicit description of the methodology used to assess and measure
                  hedge
                  effectiveness;·
              dates
                  (or periods) for the expected forecasted events and the nature
                  of the
                  exposure involved (including quantitative measures of the size
                  of the
                  exposure) must be explicitly documented;·
              hedges
                  must be expected to be “highly effective” both at the inception of the
                  hedge and on an ongoing basis. Effectiveness measures must relate
                  the
                  gains or losses of the derivative to the changes in cash flows
                  associated
                  with the hedged item;·
              forecasted
                  transactions must be probable; and·
              forecasted
                  transactions must be made with different counterparties than the
                  reporting
                  entity.
 
 If
        and
        when hedge accounting is discontinued, typically when it is determined that
        the
        hedge no longer qualifies for hedge accounting, the derivative will continue
        to
        be recorded on the balance sheet at its fair value, with gains or losses
        being
        recorded in earnings. Any amounts previously recorded in OCI related to the
        discontinued hedge are classified to earnings over the remaining duration
        of the
        debt.
 
 **(4)**  **Recent
        Accounting Developments**
 
 *Accounting
        Changes and Error Corrections* .
        In May
        2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections - a replacement of APB Opinion No.
        20
        and FASB Statement No. 3,” which provides guidance on the accounting for and
        reporting of accounting changes and error corrections. SFAS No. 154 establishes,
        unless impracticable, retrospective application as the required method for
        reporting a change in accounting principle in the absence of explicit transition
        requirements specific to the newly adopted accounting principle. It also
        provides guidance for determining whether retrospective application of a
        change
        in accounting principle is impracticable and for reporting a change when
        retrospective application is impracticable. The correction of an error in
        previously issued financial statements is not an accounting change. However,
        the
        reporting of an error correction involves adjustments to previously issued
        financial statements similar to those generally applicable to reporting an
        accounting change retrospectively. Therefore, the reporting of a correction
        of
        an error by restating previously issued financial statements is also addressed
        by SFAS No. 154. SFAS
        No.
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005. Early adoption is permitted for
        accounting changes and corrections of errors made in fiscal years beginning
        after the date SFAS No. 154 was issued. SFAS No. 154 does not change the
        transition provisions of any existing accounting pronouncements, including
        those
        that are in a transition phase as of the effective date of SFAS No.
        154.
 
 **12**
  *Share-Based
        Payment.* In
        December 2004, the FASB published SFAS No. 123 (revised), “Share-Based
        Payment.” ** SFAS No.
        123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and
        supersedes APB Opinion No. 25, “Accounting for Stock Issued to
        Employees.” ** SFAS
        No.
        123(R) also amends SFAS No. 95, “Statement of Cash Flows,” ** to
        require that excess tax benefits be reported as a financing cash inflow rather
        than as a reduction of taxes paid.
 
 SFAS
        No.
        123(R) is intended to provide investors and other users of financial statements
        with more complete and neutral financial information by requiring that the
        compensation cost relating to share-based payment transactions be recognized
        in
        financial statements. The cost will be measured based on the fair value of
        the
        equity or liability instruments issued. We will be required to apply SFAS
        No.
        123(R), as amended by the SEC on April 14, 2005, as of the annual reporting
        period that begins after June 15, 2005 (or January 1, 2006). SFAS No. 123(R)
        applies to all awards granted after the required effective date and will
        not be
        applied to awards granted in periods before the required effective date,
        except
        to the extent that prior periods’ awards are modified, repurchased or cancelled
        after the required effective date. The cumulative effect of initially applying
        SFAS No. 123(R), if any, will be recognized as of the required effective
        date.
        We are currently evaluating pricing models and the transition provisions
        of this
        standard and will begin expensing stock options in the first quarter of
        2006.
 
 SFAS
        No.
        123(R) provides two alternatives for adoption: (1) a "modified prospective"
        method in which compensation cost is recognized for all awards granted
        subsequent to the effective date of SFAS No. 123(R) as well as for the unvested
        portion of awards outstanding as of the effective date; or (2) a "modified
        retrospective" method which follows the approach in the "modified prospective"
        method, but also permits the restatement of prior periods to record compensation
        costs calculated under SFAS No. 123 for the pro forma disclosure. We plan
        to
        adopt SFAS No. 123(R) using the modified retrospective method. Since we
        currently account for stock options granted to employees in accordance with
        the
        intrinsic value method permitted under Accounting
        Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
        Employees,” no
        compensation expense is recognized. The impact of adopting SFAS No. 123(R)
        cannot be accurately estimated at this time, as it will depend on the market
        value and the amount of share based awards granted in future periods. However,
        had we adopted SFAS No. 123(R) in a prior period, the impact would approximate
        the impact as described in the disclosure of pro forma net income and earnings
        per share under SFAS No. 123 in Note 5 “- Stock-Based Compensation.” SFAS No.
        123(R) also requires that tax benefits received in excess of compensation
        cost
        be reclassified from operating cash flows to financing cash flows in the
        consolidated statement of cash flows. This change in classification will
        reduce
        net operating cash flows and increase net financing cash flows in the periods
        after adoption.
 
 **(5)**  **Stock-Based
        Compensation**
 
 In
        December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
        Compensation - Transition and Disclosure,” which amended SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS No. 148 provides three
        alternative methods for a voluntary change to fair value accounting for
        stock-based compensation as permitted under SFAS No. 123. SFAS No. 123
        established accounting and disclosure requirements using a fair-value-based
        method of accounting for stock-based employee compensation plans. In accordance
        with SFAS No. 148, and as allowed by SFAS No. 123, we continue to apply the
        intrinsic-value method of accounting prescribed by APB Opinion No. 25 and
        related interpretations, including FASB Interpretation (“FIN”) No. 44,
“Accounting for Certain Transactions Involving Stock Compensation, an
        Interpretation of APB Opinion No. 25,” to account for our fixed-plan stock
        options. Under this method, compensation expense is recorded over the vesting
        period only if the current market price of the underlying stock exceeded
        the
        exercise price on the date of grant. Accordingly, no compensation expense
        has
        been recognized for stock option awards granted through June 30, 2005, since
        the
        exercise price was at the fair market value of our common stock on the grant
        date. We have elected to adopt only the disclosure requirements of SFAS No.
        123.
        The following table illustrates the pro forma net income (loss) as if the
        fair-value-based method of SFAS No. 123 had been applied to account for
        stock-based compensation expenses:
 
 **13**
 
 
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,***(Dollars
                  in thousands, except share data)*
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  income (loss), as reported
              
              $
              3,575
              
              $
              (1,830
              )
              $
              5,634
              
              $
              (7,745
              )Deduct
                  total stock-based employee compensation
                expense
                  determined under fair-value-based method
                for
                  all awards, net of tax
              
              
              88
              
              
              74
              
              
              279
              
              
              143Pro
                  forma net income (loss) applicable to
                common
                  shares
              
              $
              3,487
              
              $
              (1,904
              )
              $
              5,355
              
              $
              (7,888
              )**Earnings
                  per share:**Basic
                  - as reported
              
              $
              0.18
              
              $
              (0.11
              )
              $
              0.28
              
              $
              (0.46
              )Basic
                  - pro forma
              
              $
              0.17
              
              $
              (0.11
              )
              $
              0.26
              
              $
              (0.47
              )Diluted
                  - as reported
              
              $
              0.17
              
              $
              (0.11
              )
              $
              0.27
              
              $
              (0.46
              )Diluted
                  - pro forma
              
              $
              0.16
              
              $
              (0.11
              )
              $
              0.25
              
              $
              (0.47
              )
 
 **(6)**  **Mortgage
        Loans Held for Investment, Net and Allowance for Loan
        Losses**
 
 Mortgage
        loans held for investment represents our basis in the mortgage loans that
        were
        either delivered to securitization trusts (denoted as mortgage loans held
        for
        investment - securitized) or are pending delivery into future securitizations
        or
        sale on a whole-loan basis (denoted as mortgage loans held for investment
        -
        pre-securitization), net of discounts, deferred fees and allowance for loan
        losses. Prior to 2004, we did not structure our securitizations as financings
        and we did not have mortgage loans held for investment.
 
 Mortgage
        loans held for investment - securitized is comprised of the mortgage loans
        collateralizing our outstanding securitization asset-backed securities. During
        the six months ended June 30, 2005, we closed two securitization transactions
        totaling $1.5 billion ($729.0 million closed during the three months ended
        June
        30, 2005) of secured financing, which was collateralized by $1.5 billion
        ($750.0
        million of collateral relates to the second quarter of 2005 securitization)
        of
        mortgage loans held for investment - securitized. During the year ended December
        31, 2004, we closed four securitization transactions totaling $2.3 billion
        of
        secured financings, which were collateralized by $2.3 billion of mortgage
        loans
        held for investment - securitized. All of these securitization transactions
        were
        structured to be accounted for as secured financings. Mortgage loans held
        for
        investment - securitized had a weighted-average interest rate of 7.74% and
        7.81%
        per annum at June 30, 2005 and December 31, 2004, respectively.
 
 Mortgage
        loans held for investment - pre-securitization is comprised of mortgage loans
        to
        be included in a securitization and, to a lesser extent, an amount of loans
        that
        may be sold on a whole-loan basis. Included in our mortgage loans held for
        investment - pre-securitization at June 30, 2005 and December 31, 2004, was
        approximately $119.1 million and $135.7 million of these mortgages that were
        pledged as collateral for our warehouse financings at June 30, 2005 and December
        31, 2004, respectively. Mortgage loans held for investment - pre-securitization
        had a weighted-average interest rate of 8.01% and 7.86% per annum at June
        30,
        2005 and December 31, 2004, respectively.
 
 The
        following table presents a summary of mortgage loans held for investment,
        net at
        June 30, 2005 and December 31, 2004:
 
 *(Dollars
                  in thousands)*
              
              **At
                  June 30,**
                **2005**
              
              **At
                  December 31, 2004**Mortgage
                  loans held for investment - securitized
              
              $
              3,311,652
              
              $
              2,165,353Mortgage
                  loans held for investment - pre-securitization
              
              
              179,587
              
              
              206,289Discounts
                  (MSR related)
              
              
              (21,452
              )
              
              (14,570
              )Net
                  deferred origination fees
              
              
              (7,136
              )
              
              (5,800
              )Allowance
                  for loan losses
              
              
              (23,983
              )
              
              (10,278
              )Mortgage
                  loans held for investment, net
              
              $
              3,438,668
              
              $
              2,340,994
 
 **14**
 For
        the
        three months ended June 30, 2005 and 2004, we recorded interest income related
        to our mortgage loans held for investment - securitized, net of $57.4 million
        and $13.3 million, respectively. For the six months ended June 30, 2005 and
        2004, we recorded interest income related to our mortgage loans held for
        investment - securitized, net of $103.3 million and $15.7 million,
        respectively.
 
 For
        the
        three months ended June 30, 2005 and 2004, we recorded interest income related
        to our mortgage loans held for investment - pre-securitization (mortgage
        loans
        held for sale), net of $6.9 million and $3.5 million, respectively. For the
        six
        months ended June 30, 2005 and 2004, we recorded interest income related
        to our
        mortgage loans held for investment - pre-securitization (mortgage loans held
        for
        sale), net of $13.7 million and $7.2 million, respectively.
 
 The
        following table presents a summary of the activity for the allowance for
        loan
        losses on all mortgage loans held for investment for the three and six months
        ended June 30, 2005 and 2004. We did not have mortgage loans held for investment
        or a related allowance prior to 2004.
 
 *(Dollars
                  in thousands)*
              
              **For
                  the Three Months Ended June 30,**
              
              **For
                  the Six Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Beginning
                  balance
              
              $
              16,808
              
              $
              432
              
              $
              10,278
              
              $
              --Provision
              
              
              7,478
              
              
              2,244
              
              
              14,342
              
              
              2,676Charge-offs
              
              
              (303
              )
              
              --
              
              
              (637
              )
              
              --Ending
                  balance
              
              $
              23,983
              
              $
              2,676
              
              $
              23,983
              
              $
              2,676
 
 As
        of
        June 30, 2005 and December 31, 2004, we had $46.0 million and $19.8 million,
        respectively, of mortgage loans held for investment that were 90 days or
        more
        delinquent under their payment terms, all of which were on non-accrual status.
        If these mortgage loans had been current throughout their terms, interest
        income
        would have increased by approximately $1.0 million and $1.6 million for the
        three and six months ended June 30, 2005, respectively.  At
        and
        for the six months ended June 30, 2004, we had no mortgage loans held for
        investment that were 90 days or more delinquent.
  **(7)**  **Excess
        Cashflow Certificates**
 
 The
        following table presents the activity related to our excess cashflow
        certificates for the six months ended June 30, 2005 and the year ended December
        31, 2004:
 
 *(Dollars
                  in thousands)*
              
              **For
                  the Six**
                **Months
                  Ended**
                **June
                  30, 2005**
              
              **For
                  the**
                **Year
                  Ended**
                **December
                  31, 2004**Balance,
                  beginning of year
              
              $
              14,933
              
              $
              19,853Accretion
              
              
              895
              
              
              2,073Cash
                  receipts
              
              
              (9,997
              )
              
              (8,359
              )Net
                  change in fair value
              
              
              5,193
              
              
              1,366Balance,
                  end of period
              
              $
              11,024
              
              $
              14,933
 In
        accordance with EITF 99-20, we regularly analyze and review our assumptions
        to
        determine whether the actual rate of return (interest income) on our excess
        cashflow certificates is within our expectations. The expected rate of return
        is
        recorded as a component of interest income. Any return that is either greater
        than or less than the expected rate of return is reflected as a fair value
        adjustment and is recorded as a component of “other income” in the consolidated
        statement of operations.
 
 Since
        we
        structured our 2005 and 2004 securitizations to be accounted for as secured
        financings, we no longer record excess cashflow certificates on our consolidated
        balance sheet for our newly issued securitizations.
  **15**
  **(8)**  **Warehouse
        Financing**
 
 Our
        warehouse lines of credit are collateralized by specific mortgage loans held
        for
        investment - pre-securitization, the balances of which are equal to or greater
        than the outstanding balances under the lines at any point in time. The amounts
        available under these warehouse lines are based on the amount of the collateral
        pledged. The amount we have outstanding on our committed facilities at any
        quarter end generally is a function of our mortgage loan originations relative
        to the timing of our securitizations and whole-loan sales.
 
 The
        following table summarizes information regarding warehouse financing at June
        30,
        2005 and December 31, 2004:
 
 *(Dollars
                  in thousands)*
              
              
              **Balance
                  at****Warehouse
                  Line of Credit**
              **Facility
                  Amount**
              **Interest
                  Rate**
              **6/30/05**
              **12/31/04**
              **Expiration
                  Date**RBS
                  Greenwich Capital
              $
                  350,000
              Margin
                  over LIBOR
              $
                  97,361
              $
                  135,653
              October
                  2005Citigroup
              350,000
              Margin
                  over LIBOR
              21,743
              --
              March
                  2006Friedman,
                  Billings, Ramsey
              200,000
              Margin
                  over LIBOR
              --
              --
              November
                  2005Total
              $
                  900,000
              
              $
                  119,104
              $
                  135,653
 
 As
        securitization transactions are completed, a portion of the proceeds from
        the
        long-term debt issued in the securitization is used to pay down our warehouse
        lines of credit. Therefore, the outstanding amount of warehouse financing
        will
        fluctuate from quarter to quarter, and could be significantly higher or lower
        than the $119.1 million we held at June 30, 2005, as our mortgage production
        and
        securitization programs continue.
 
 The
        terms
        of our warehouse agreements require us to comply with various operating and
        financial covenants, which are customary for agreements of this type. The
        continued availability of funds provided to us under these agreements is
        subject
        to, among other conditions, our continued compliance with these covenants.
        We
        believe that we are in compliance with such covenants as of June 30,
        2005.
 
 **(9)**  **Financing
        on Mortgage Loans Held for Investment, Net**
 
 Commencing
        in 2004, we began structuring our securitizations to be accounted for as
        secured
        financings, in accordance with SFAS No. 140. We have completed six
        securitizations (two in 2005 and four in 2004) that were structured to be
        accounted for as secured financings. Prior to March 2004, we structured our
        securitizations to be accounted for as sales.
 
 For
        the
        six securitizations completed since March 2004, the securitization trust
        or
        special purpose entity (“SPE”) holds mortgage loans, referred to as
“securitization loans,” and issues debt (and certificates in 2004) represented
        by securitization asset-backed securities. Accordingly, the securitization
        loans
        are recorded as an asset on our balance sheet under “mortgage loans held for
        investment, net” and the corresponding securitization debt is recorded as a
        liability under “financing on mortgage loans held for investment, net.” Since
        these securitizations were structured as financings and not sales, no
        gain-on-sale revenue was recorded at the time the securitizations closed.
        Rather, we record interest income from the securitized loans and interest
        expense from the asset-backed securities issued in connection with each
        securitization over the life of the securitization. Deferred securitization
        debt
        issuance costs are amortized on a level-yield basis over the estimated life
        of
        the asset-backed securities. We also allocate a portion of the accounting
        basis
        of the mortgage loans held for investment to the MSRs, which results in a
        discount to the mortgage loans held for investment. Both the discount related
        to
        the MSRs and the net incremental direct fees and costs to originate the loans
        are amortized on a level-yield basis over the estimated life of the related
        loans using the interest method calculation.
 
 **16**
 We
        have
        historically sold or financed our mortgage loans through the securitization
        market, issuing asset-backed securities. We will continue to build our loan
        portfolio and match fund our mortgage loans using asset-backed securities
        issued
        in the securitization market. We believe that issuing asset-backed securities
        provides us a low cost method of financing our mortgage loan portfolio. In
        addition, it allows us to reduce our interest rate risk on our fixed-rate
        loans
        by securitizing them. Our ability to issue asset-backed securities depends
        on
        the overall performance of our assets, as well as the continued general demand
        for securities backed by non-conforming mortgage loans.
 
 At
        June
        30, 2005 and December 31, 2004, the outstanding financing on mortgage loans
        held
        for investment, net consisted of $3.4 billion and $2.2 billion,
        respectively.
 
 The
        following table summarizes the expected maturities on our secured financings
        at
        June 30, 2005:
 
 *(Dollars
                  in thousands)*
              
              **Total**
              
              **Less
                  than**
                **One
                  Year**
              
              **One
                  to**
                **Three
                  Years**
              
              **Three
                  to**
                **Five
                  Years**
              
              **More
                  than**
                **Five
                  Years**Securitization
                  asset-backedsecurities,
                  net
              
              $
              3,368,929
              
              $
              1,034,858
              
              $
              1,348,990
              
              $
              524,166
              
              $
              460,915
 
 Amounts
        shown above reflect estimated repayments based on anticipated receipt of
        principal and interest on the underlying mortgage loan collateral using similar
        prepayment speed assumptions we use to value our excess cashflow
        certificates.
 
 **(10)**  **Derivative
        Instruments**
 
 We
        account for our derivative financial instruments such as corridors and interest
        rate swaps as cash flow hedges. The corridors hedge our interest rate risk
        on
        securitization variable-rate debt and the interest rate swaps hedge uncertain
        cash flows associated with future securitization financing. At June 30, 2005
        and
        December 31, 2004, the fair value of our corridors totaled $14.5 million
        and
        $16.1 million, respectively, and the fair value of our interest rate swaps
        totaled losses of $528,000 and $166,000, respectively. The fair value of
        our
        corridors and interest rate swaps are recorded as a component of other assets
        and other liabilities. As of June 30, 2005, the effective portion of the
        changes
        in fair value of the corridors, interest rate swaps and the loss on the
        terminated swaps are recorded as components of accumulated other comprehensive
        income and total losses, net of tax, of $76,000, $322,000 and $3.0 million,
        respectively. As of December 31, 2004, the effective portion of the changes
        in
        fair value of the corridors, interest rate swaps and the loss on the terminated
        swaps are recorded as components of accumulated other comprehensive loss
        and
        total losses, net of tax, of $476,000, $101,000 and $1.6 million, respectively.
        Accumulated other comprehensive income or loss relating to cash flow hedging
        is
        reclassified to earnings as a yield adjustment to interest expense as the
        interest payments affect earnings. Prior to receiving hedge accounting treatment
        in May 2004, derivatives that were not designated as hedging instruments
        resulted in a $4.3 million gain and $377,000 net loss for the three and six
        months ended June 30, 2004, respectively. As of June 30, 2005, all of the
        outstanding derivatives were designated as hedging instruments. Hedge
        ineffectiveness associated with hedges resulted in losses of $334,000 and
        $318,000 for the three and six months ended June 30, 2005, respectively.
        Hedge
        ineffectiveness resulted in a gain of $238,000 for both the three and six
        months
        ended June 30, 2004, respectively.
 
 **17**
 The
        following table summarizes the notional amount, expected maturities and
        weighted-average strike price for the corridors that we held as of June 30,
        2005:
 
 *(Dollars
                  in thousands**except
                  strike price)*
              
              **Total**
              
              **One
                  Year**
              
              **Two
                  Years**
              
              **Three
                  Years**
              
              **Four
                  Years**
              
              **Five
                  Years & Thereafter**Caps
                  bought - notional
              
              $
              2,698,082
              
              $
              1,685,722
              
              $
              645,815
              
              $
              195,053
              
              $
              42,721
              
              $
              128,771Weighted
                  average strikeprice
              
              $
              5.35
              
              $
              4.48
              
              $
              6.32
              
              $
              7.86
              
              $
              7.43
              
              $
              7.44Caps
                  sold - notional
              
              $
              2,698,082
              
              $
              1,685,722
              
              $
              645,815
              
              $
              195,053
              
              $
              42,721
              
              $
              128,771Weighted
                  average strikeprice
              
              $
              8.08
              
              $
              7.55
              
              $
              8.73
              
              $
              9.48
              
              $
              9.27
              
              $
              9.29
 
 The
        notional amount of the caps bought and sold totaled $1.9 billion each at
        December 31, 2004.
 
 **(11)**  **Earnings
        Per Share**
 
 Earnings
        per share (“EPS”), is computed in accordance with SFAS No. 128, “Earnings Per
        Share.” Basic
        earnings per share are computed by dividing net income by the weighted average
        number of common shares outstanding during each period presented. The
        computation of diluted earnings per share gives effect to stock options (except
        for those stock options with an exercise price greater than the average market
        price of our common stock during the period) outstanding during the applicable
        periods. The
        following is a reconciliation of the denominators used in the computations
        of
        basic and diluted EPS. The numerator for calculating both basic and diluted
        EPS
        is net income (loss).
  **Three
                    Months Ended**
                  **June
                    30,**
                
                **Six
                    Months Ended**
                  **June
                    30,***(Dollars
                    in thousands, except share and**per
                    share data)*
                
                **2005**
                
                **2004**
                
                **2005**
                
                **2004**Net
                    income (loss), as reported
                
                $
                3,575
                
                $
                (1,830
                )
                $
                5,634
                
                $
                (7,745
                )Less
                    preferred stock dividends
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    income (loss) available tocommon
                    shareholders
                
                $
                3,575
                
                $
                (1,830
                )
                $
                5,634
                
                $
                (7,745
                )Basic
                    - weighted-average shares
                
                
                20,324,356
                
                
                16,943,982
                
                
                20,310,194
                
                
                16,934,174Basic
                    EPS
                
                $
                0.18
                
                $
                (0.11
                )
                $
                0.28
                
                $
                (0.46
                )Basic
                    - weighted-average shares
                
                
                20,324,356
                
                
                16,943,982
                
                
                20,310,194
                
                
                16,934,174Incremental
                    shares-options(1)
                
                
                936,569
                
                
                --
                
                
                938,080
                
                
                --Diluted
                    - weighted-average shares
                
                
                21,260,925
                
                
                16,943,942
                
                
                21,248,274
                
                
                16,934,174Diluted
                    EPS(1)
                
                $
                0.17
                
                $
                (0.11
                )
                $
                0.27
                
                $
                (0.46
                )
  *(1)*  *For
        the three and six months ended June 30, 2004 weighted-average shares of
        approximately 1.0 million and 1.1 million, respectively, of in-the-money
        employee stock were excluded from the calculation of diluted earnings per
        share
        since their effect was anti-dilutive.*
 
 The
        weighted-average share count for the three and six months ended June 30,
        2005
        also reflects the full impact of our public offering in the third quarter
        of
        2004. On July 21, 2004, we announced the public offering of 4,375,000 shares
        of
        our common stock at a price of $6.50 per share. The offering closed on July
        26,
        2004. We sold 3,137,597 of these shares from authorized but unissued shares
        and
        existing stockholders sold 1,237,403 shares. In August 2004, the underwriters
        exercised a portion of their over-allotment option, which resulted in existing
        shareholders selling 85,000 additional shares on August 25, 2004. We received
        approximately $18.7 million in net proceeds from the offering, which excludes
        the proceeds related to those shares sold by existing stockholders and after
        underwriting and other related professional fees. The proceeds were used
        to
        repay warehouse financings and originate mortgage loans.
 
 **(12)**  **Series
        A 10% Preferred Stock**
 
 In
        August
        2001, as part of our August 2001 exchange offer, the holders of approximately
        $139.2 million (of the initial $150.0 million) principal amount of our 9.5%
        senior notes due 2004 exchanged their notes for, among other interests, 139,156
        shares of our then newly issued Series A 10% Preferred Stock, having an
        aggregate preference amount of approximately $13.9 million.
 
 **18**
 On
        June
        14, 2004, we redeemed all of our outstanding Series A 10% Preferred Stock
        at its
        preference amount, or approximately $13.9 million. Holders of the Series
        A 10%
        Preferred Stock were previously entitled to receive cumulative preferential
        dividends at the rate of 10% per annum of the preference amount, payable
        in cash
        semi-annually, commencing in July 2003.
 
 **(13)**  **2005
        Stock Incentive Plan and 2005 Senior Executive Bonus Plan**
 
 On
        May
        24, 2005, the stockholders approved our (a) 2005 Stock Incentive Plan (“2005
        Plan”) and (b) 2005 Senior Executive Bonus Plan (“2005 Bonus Plan”) at our
        annual stockholders meeting. In March 2005, our Board of Directors approved
        the
        adoption of the 2005 Plan and the 2005 Bonus Plan, and the Compensation
        Committee of the Board of Directors (“Compensation Committee”) designated the
        participants in the 2005 Bonus Plan for 2005 (including establishing for
        each
        participant a target award, performance goal and formula to determine the
        actual
        award). The 2005 Plan became effective upon approval by our stockholders
        at the
        annual stockholders meeting. The 2005 Bonus Plan became effective in March
        2005
        upon its adoption by the Board of Directors but was subject to approval by
        our
        stockholders at the annual stockholders meeting.
 
 **2005
        Stock Incentive Plan** - A
        total
        of 1,000,000 shares of our common stock are initially reserved for issuance
        under the 2005 Plan, subject to adjustment only in the event of a stock split,
        stock or other extraordinary dividend, or other similar change in our common
        stock or capital structure.
 
 The
        2005
        Plan is administered by the Compensation Committee. The 2005 Plan provides
        for
        the grant of stock options, restricted stock, restricted stock units, stock
        appreciation rights and dividend equivalent rights (collectively referred
        to as
“awards”). Incentive stock options may be granted only to employees. Awards
        other than incentive stock options may be granted to employees, directors
        and
        consultants.
 
 The
        term
        of any award granted under the 2005 Plan may not be for more than ten years
        (or
        five years in the case of an incentive stock option granted to any participant
        who owns stock representing more than 10% of the combined voting power of
        our
        company or any parent or subsidiary of ours), excluding any period for which
        the
        participant has elected to defer the receipt of the shares or cash issuable
        pursuant to the award.
 
 The
        2005
        Plan authorizes the administrator to grant incentive stock options and
        non-qualified stock options at an exercise price not less than 100% of the
        fair
        market value of our common stock on the date the option is granted (or 110%,
        in
        the case of an incentive stock option granted to any employee who owns stock
        representing more than 10% of the combined voting power of us or any parent
        or
        subsidiary of ours). In the case of stock appreciation rights, the base
        appreciation amount will not be less than 100% of the fair market value of
        our
        common stock on the date of grant. In the case of all other awards granted
        under
        the 2005 Plan, the exercise or purchase price will be determined by the
        administrator. The exercise or purchase price is generally payable in cash,
        check, shares of common stock or with respect to options, payment through
        a
        broker-dealer sale and remittance procedure.
 
 As
        of
        June 30, 2005, no executive officer, employee or director, and no associate
        of
        any executive officer or director, has been granted any options under the
        2005
        Plan.
 
 **2005
        Senior Executive Bonus Plan -** Under
        Section 162(m) of the Internal Revenue Code of 1986, as amended, (the “Code”)
        the federal income tax deductibility of compensation paid to our Chief Executive
        Officer and to each of our four other most highly compensated executive officers
        may be limited to the extent that such compensation exceeds $1.0 million
        in any
        one year. Under Section 162(m) of the Code, we may deduct compensation in
        excess
        of that amount if it qualifies as “performance-based compensation,” as defined.
        The 2005 Bonus Plan is designed to qualify awards made under the plan as
        performance-based compensation so that we may receive a federal income tax
        deduction for the payment of incentive bonuses to our executives.
 
 The
        2005
        Bonus Plan is administered by the Compensation Committee in accordance with
        the
        requirements of Section 162(m) of the Code.
 
 **19**
 All
        of
        our officers are eligible to participate in the 2005 Bonus Plan. Participation
        in the 2005 Bonus Plan by any particular officer is determined annually in
        the
        discretion of the Compensation Committee. For 2005, the participants in the
        2005
        Bonus Plan are Hugh Miller, our Chief Executive Officer, and Richard Blass,
        our
        Chief Financial Officer. Participation in future years will be at the discretion
        of the Compensation Committee, but it currently is expected that two to ten
        officers will participate each year.
 
 For
        each
        year, the Compensation Committee will establish in writing: (i) a target
        award
        for each participant; (ii) the performance goals which must be achieved in
        order
        for the participant to be paid the target award; and (iii) a formula for
        increasing or decreasing a participant’s target award depending upon how actual
        performance compares to the pre-established performance goals. Each
        participant’s target award will be expressed as either a percentage of his or
        her base salary or such other amount as determined by the Compensation
        Committee. Base salary under the 2005 Bonus Plan means the participant’s annual
        salary rate on the last day of the fiscal year.
 
 There
        are
        twenty-nine performance measures which the Compensation Committee may use
        in
        setting the performance goals for any year. Specifically, the performance
        goals
        applicable to any participant will provide for a targeted level of achievement
        using one or more of the following measures: (i) increase in share price,
        (ii)
        earnings per share, (iii) total stockholder return, (iv) operating margin,
        (v)
        gross margin, (vi) return on equity, (vii) return on assets, (viii) return
        on
        investment, (ix) operating income, (x) net operating income, (xi) pre-tax
        income, (xii) cash flow, (xiii) revenue, (xiv) expenses, (xv) earnings before
        interest, taxes and depreciation, (xvi) economic value added, (xvii) market
        share, (xviii) cost to originate loans, (xix) loan quality, (xx) loan
        origination, (xxi) corporate overhead costs, (xxii) loan delinquency rates,
        (xxiii) liquidity management, (xxiv) loan losses, (xxv) net interest income,
        (xxvi) net interest income margin, (xxvii) return on capital invested, (xxviii)
        stockholders’ equity and (xxix) income (before income tax expense).
 
 After
        the
        end of each year, the Compensation Committee must certify in writing the
        extent
        to which the performance goals applicable to each participant were achieved
        or
        exceeded. The actual award (if any) for each participant will be determined
        by
        applying the formula to the level of actual performance which has been certified
        by the Compensation Committee. However, the Compensation Committee retains
        the
        discretion to eliminate or reduce the actual award payable to any participant
        below that which otherwise would be payable under the applicable formula.
        Additionally, no participant’s actual award under the 2005 Bonus Plan may exceed
        $5.0 million for any year.
 
 Awards
        under the 2005 Bonus Plan generally will be payable in cash after the end
        of the
        year during which the award was earned. However, the Compensation Committee
        reserves the right to declare any award wholly or partially payable in an
        equivalent amount of restricted stock issued under the 2005 Plan or successor
        equity compensation plan.
 
 **(14)**  **Subsequent
        Events**
 
 We
        paid a
        cash dividend of $0.05 per common share on July 6, 2005 to shareholders of
        record as of the close of business on June 20, 2005.
 
 On
        August
        4, 2005, we announced the pricing of a private placement of 2,000,000 shares
        of
        our common stock at a price of $8.69 per share between and among two trusts
        controlled by the Miller family and a member of the Miller family, and a
        combination of new and existing institutional investors. We will not receive
        any
        of the proceeds from this transaction, nor will we incur any expenses, as
        all of
        the shares were sold by the selling stockholders and not us. As such, there
        was
        no dilution to our share count. After the closing, the Miller family will
        continue to be our largest shareholder, owning more than 37 percent of our
        outstanding shares. The closing of the transaction is expected to occur on
        August 8, 2005, subject to the satisfaction of closing conditions.
 
 The
        shares of common stock have not been registered under the Securities Act
        of
        1933, as amended, and may not be offered or sold in the United States absent
        registration or an applicable exemption from registration requirements. We
        have
        agreed to file a registration statement with the SEC for the resale of the
        common stock promptly after closing.
 
 This
        transaction facilitates our compliance with the federal tax rules (applicable
        to
        our Real Estate Investment Trust subsidiary), which, as previously disclosed
        in
        our first quarter Report on Form 10-Q and herein, provides generally that
        five
        or fewer stockholders may not own more than 50 percent of our common
        stock.
 
  **20**
  **Item
        2. Management’s Discussion andAnalysis of Financial
        Condition and Results of Operations.**
 
 *This
        Quarterly Report on Form 10-Q should be read in conjunction with the more
        detailed and comprehensive disclosures included in our Annual Report on Form
        10-K for the year ended December 31, 2004. In addition, please read this
        section
        in conjunction with our Consolidated Financial Statements and Notes to
        Consolidated Financial Statements herein, and please see “- Forward-Looking
        Statements and Risk Factors.”*
 
 **General**
 
 We
        are a
        specialty consumer finance company that originates, securitizes and sells
        and,
        prior to May 2001, serviced non-conforming mortgage loans. Our loans are
        primarily secured by first mortgages on one- to four-family residential
        properties. Throughout our 23-year operating history, we have focused on
        lending
        to individuals who generally do not satisfy the credit, documentation or
        other
        underwriting standards set by more traditional sources of mortgage credit,
        including those entities that make loans in compliance with conventional
        mortgage lending guidelines established by Fannie Mae and Freddie Mac. We
        make
        mortgage loans to these borrowers for purposes such as debt consolidation,
        refinancing, education, home purchase and home improvements. We
        provide our customers with a variety of loan products designed to meet their
        needs, using a risk-based pricing strategy to develop products for different
        risk categories. Historically, the majority of our loan production has been
        fixed-rate with amortization schedules ranging from five years to 30
        years.
 
 Our
        mortgage business has two principal components. First, we make mortgage loans
        to
        individual borrowers, which are a cash and expense outlay for us, because
        our
        cost to originate a loan exceeds the fees we collect at the time we originate
        the loan. At the time we originate a loan, and prior to the time we securitize
        or sell the loan, we either finance the loan by borrowing under our warehouse
        lines of credit or utilizing our available working capital. Second, we either
        securitize loans or sell our loans on a whole-loan basis, using the net proceeds
        from these transactions to repay our warehouse lines of credit and for working
        capital. Prior to 2004, we structured our securitizations to be accounted
        for as
        sales, which required us to record cash and non-cash revenues as gain-on-sale
        at
        the time the securitizations were completed. In 2004, we began structuring
        our
        securitizations to be accounted for as secured financings, which requires
        us to
        record revenues from these transactions over time. We record interest income
        from the securitized loans and interest expense from the asset-backed securities
        issued in connection with each securitization over the life of the loans
        or
        securities issued in the securitization. When we sell loans on a whole loan
        basis, we record the premiums received upon sale as revenue. (See “-
        Securitizations and Whole-Loan Sales”).
 
 **Origination
        of Mortgage Loans**
 
 We
        originate mortgage loans through two distribution channels, wholesale and
        retail. In the wholesale channel, we receive loan applications from independent
        third-party mortgage brokers who submit applications on a borrower’s behalf. In
        the retail channel, we receive loan applications directly from borrowers.
        We
        process and underwrite the submission and, if the loan conforms to our
        underwriting criteria, approve the loan and lend the money to the borrower.
        We
        underwrite loan packages for approval through our Woodbury, New York office,
        our
        Cincinnati, Ohio underwriting hub, or our regional offices in Phoenix, Arizona;
        Jacksonville, Florida and Boston, Massachusetts. If the loan package is
        approved, we will fund the loan. We also purchase closed loans on a limited
        basis.
 
 For
        the
        three and six months ended June 30, 2005 and 2004, we originated the following
        loans by origination channel:
 **For
                    the Three Months Ended**
                  **June
                    30,**
                
                **For
                    the Six Months****Ended**
                  **June
                    30,***(Dollars
                    in thousands)*
                
                **2005**
                
                **2004**
                
                **2005**
                
                **2004**Originations
                    by channel:Wholesale
                
                $
                488,562
                
                $
                409,251
                
                $
                956,012
                
                $
                716,327Retail
                
                
                392,567
                
                
                262,621
                
                
                761,837
                
                
                459,518Total
                    originations
                
                $
                881,129
                
                $
                671,872
                
                $
                1,717,849
                
                $
                1,175,845
 
  **21**
 
 For
        the
        three and six months ended June 30, 2005, we originated $881.1 million and
        $1.7
        billion, respectively, of loans, an increase of 31.1% and 46.1%, respectively,
        over the $671.9 million and $1.2 billion, respectively, of loans originated
        in
        the comparable periods in 2004. Loan originations for the three and six months
        ended June 30, 2005 were comprised of $488.6 million and $1.0 billion,
        respectively, of wholesale loans, representing 55.4% and 55.7%, respectively,
        of
        total loan production, and $392.6 million and $761.8 million, respectively,
        were
        retail loans, representing 44.6% and 44.3%, respectively, of total loan
        production. This compares to originations of $409.3 million and $716.3 million,
        respectively, of wholesale loans, or 60.9% and 60.9%, respectively, of total
        loan production, and $262.6 million and $459.5 million, respectively, of
        retail
        loans, or 39.1% and 39.1%, respectively, of total loan production, during
        the
        three and six months ended June 30, 2004.
 
 ***Wholesale
        Loan Channel.*** Through
        our wholesale loan distribution channel, which is principally conducted out
        of
        our Woodbury, New York headquarters, we primarily originate mortgage loans
        indirectly through independent mortgage brokers and other real estate
        professionals who submit loan applications on behalf of borrowers. We currently
        originate the majority of our wholesale loans in 29 states, through a network
        of
        approximately 2,300 independent brokers. The broker’s role is to source the
        business, identify the applicant, assist in completing the loan application,
        and
        process the loans, including, among other things, gathering the necessary
        information and documents, and serving as the liaison between the borrower
        and
        us through the entire origination process. We review, process and underwrite
        the
        applications submitted by the broker, approve or deny the application, set
        the
        interest rate and other terms of the loan and, upon acceptance by the borrower
        and satisfaction of all of the conditions that we impose as the lender, lend
        the
        money to the borrower. Due to the fact that brokers conduct their own marketing
        and employ their own personnel to complete loan applications and maintain
        contact with borrowers - for which they charge a broker fee - originating
        loans
        through our broker network is designed to allow us to increase our loan volume
        without incurring the higher marketing and employee costs associated with
        increased retail originations. Additionally, commencing in the third quarter
        of
        2004, and on a limited basis, we purchased loans on a flow basis from select
        independent correspondents. This typically involves purchasing individual
        loans
        shortly after the loans are originated, as opposed to bulk purchases, which
        entail purchasing typically larger pools of loans at one time. We re-underwrite
        every correspondent loan, in accordance with our underwriting standards,
        prior
        to purchasing.
 
 ***Retail
        Loan Channel.***  Through
        our retail distribution channel, we develop retail loan leads primarily through
        our telemarketing system located in Cincinnati, Ohio, and also through Internet
        leads, direct mail, radio advertising and our network of 11 origination centers
        located in nine states. We continually monitor the performance of our retail
        operations and evaluate current and potential retail office locations on
        the
        basis of selected demographic statistics, marketing analyses and other criteria
        that we have developed.
 
 Typically,
        contact with the customer is initially handled  through
        our telemarketing center. Through
        our marketing efforts, the retail loan channel is able to identify, locate
        and
        focus on individuals who, based on historic customer profiles, are likely
        customers for our products. Our telemarketing representatives identify
        interested customers and forward these potential borrowers to a branch manager
        through our proprietary loan origination system, Click & Close ® (“C&C”).
        The branch managers, in turn, distribute these leads to mortgage analysts
        via
        C&C by queuing the loan to a mortgage analyst’s “to do” list in C&C. The
        assigned mortgage analyst discusses the applicant’s qualifications and available
        loan products, negotiates loan terms with the borrower, ensures
        that an appraisal has been ordered from an independent third-party appraisal
        company (or may, when certain underwriting criteria have been met, obtain
        an Insured
        Automated Valuation Model (“Insured AVM”) value ( the
        coupling of a third-party valuation estimate and insurance on that
        value) ,
        orders
        a credit report from an independent, nationally recognized credit reporting
        agency and
        processes the loan through completion. Our
        mortgage analysts are trained to structure loans that meet the applicant’s needs
        while satisfying our lending guidelines. C&C
        is utilized to queue the loan to underwriters at the appropriate times for
        approvals and help to facilitate the loan application process through
        closing.
 
 ***Competition.*** As an
        originator of mortgage loans, we face intense competition, primarily from
        diversified consumer financial companies and other diversified financial
        institutions, mortgage banking companies, commercial banks, credit unions,
        savings and loans, mortgage real estate investment trusts (“REITs”),
        government-sponsored entities (such as Fannie Mae and Freddie Mac) and finance
        companies. Many of these competitors in the financial services business are
        substantially larger, have more capital and substantially greater resources
        than
        we do, a lower cost of funds and a more established market presence than
        we
        have. In addition, we have experienced increased competition over the Internet,
        where barriers to entry are relatively low. Competition can take many forms,
        including interest rates and costs of the loan, less stringent underwriting
        standards, convenience in obtaining a loan, customer service, amount and
        term of
        a loan and marketing and distribution channels. Furthermore, the level of
        gains
        realized by us and our competitors on the sale of the type of loans originated
        has attracted additional competitors into this market, which has lowered
        the
        gains that may be realized by us on future loan sales. In addition, efficiencies
        in the asset-backed market have generally created a desire for even larger
        transactions, giving companies with greater volumes of originations a
        competitive advantage, including a pricing advantage. In the wholesale channel,
        we seek to compete with our competitors through an emphasis on quality of
        service, diversified products, use of technology and competitive
        pricing.
 
 **22**
 We
        depend
        primarily on independent mortgage brokers for the origination of our wholesale
        mortgage loans, which constitute the majority of our loan production. These
        independent mortgage brokers have relationships with multiple lenders and
        are
        not obligated by contract or otherwise to do business with us. We compete
        with
        these lenders for the independent brokers’ business on the basis of pricing,
        service, loan fees, costs and other factors. Competition from other lenders
        could negatively affect the volume and pricing of our wholesale loans, which
        could reduce our loan production.
  ***Pooling
        of Loans Prior to Securitization or Whole-Loan Sales.*** After we
        fund a loan, we typically pledge the loan as collateral under a warehouse
        line
        of credit to obtain financing against that loan. By doing so, we replenish
        our
        capital so we can make new loans. Typically, loans are financed though a
        warehouse line of credit for only a limited time - generally, not more than
        three months - long enough to enable us to either securitize or sell the
        loans.
        During the time we hold the loans prior to securitization or whole-loan sale,
        we
        earn interest income from the borrower. The income is partially offset by
        any
        interest we pay to our warehouse creditors for providing us with financing.
        Additionally, we pay a third-party servicer a sub-servicing fee to perform
        the
        servicing of the mortgage loans during this pre-securitization or sale holding
        period.
 
 ***Securitizations
        and Whole-Loan Sales.*** We
        securitize or sell all of the mortgage loans we originate. As
        a
        fundamental part of our present business and financing strategy, we securitize
        a
        substantial portion of our mortgage loans. We may also choose to sell a portion
        of our loans as whole loans when we believe that market conditions present
        an
        opportunity to achieve a better return through such sales. We
        select
        the outlet depending on market conditions, relative profitability and cash
        flows.
 
 We
        apply
        the net proceeds from securitizations and whole-loan sales to pay down our
        warehouse lines of credit - in order to make available capacity under these
        facilities for future funding of mortgage loans - and utilize any additional
        funds for working capital.
 
 The
        following table sets forth certain information regarding loans sold through
        our
        securitizations and on a whole-loan basis during the three and six months
        ended
        June 30, 2005 and 2004:
 
 **Three
                  Months Ended**
                **June
                  30,**
              
              **Six
                  Months Ended**
                **June
                  30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004**Loan
                  securitizations - gain on sale(1)
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              113,927Loan
                  securitizations - portfolio based
              
              
              750,000
              
              
              654,873
              
              
              1,499,999
              
              
              1,069,991Whole-loan
                  sales
              
              
              134,306
              
              
              23,773
              
              
              239,725
              
              
              41,424Total
                  securitizations and whole-loan sales
              
              $
              884,306
              
              $
              678,646
              
              $
              1,739,724
              
              $
              1,225,342
 
 *(1)
        For the six months ended June 30, 2004, we delivered $113.9 million of mortgage
        loans under a pre-funding feature in our fourth quarter 2003 securitization
        and
        recorded gain-on-sale related revenue during the first quarter of 2004. Because
        the fourth quarter 2003 securitization was structured as a sale, we recorded
        gain-on-sale revenue during the six months ended June 30, 2004 when we delivered
        the loans under the pre-funding feature to the securitization trust in January
        2004.*
  **23**
  ***Securitizations.*** In
        a
        securitization, we pool together loans, typically each quarter, and sell
        these
        loans to a newly formed securitization trust. These trusts are established
        for
        the limited purpose of buying our mortgage loans and are bankruptcy remote
        -
        meaning that purchasers of asset-backed securities may rely only on the cash
        flows generated from the assets held by the securitization trust for payment
        and
        not upon us for payment; likewise, the assets held by the securitization
        trust
        are not available to our general creditors. We carry no contractual obligation
        related to these trusts or the loans sold to them, nor do we have any direct
        or
        contingent liability related to the trusts, except for the standard
        representations and warranties typically made as part of a sale of loans
        on a
        non-recourse basis, despite carrying the securitized loans and the
        securitization financing on our financial statements. Furthermore, we provide
        no
        guarantees to investors with respect to the cash flow or performance of these
        trusts.
 
 The
        following table sets forth information about our securitized mortgage loan
        portfolio, completed since the first quarter of 2004, at June 30,
        2005:
 
 *(Dollars
                  in thousands*)
              
              **Issue
                  Date**
              
              **Current
                  Loan Principal Balance****(1)**
              
              **Current
                  Asset-Backed Security Balance****(2)**Asset-backed
                  Security Series:2004-1
              
              
              March
                  30, 2004
              
              $
              370,763
              
              $
              363,0632004-2
              
              
              June
                  29, 2004
              
              
              407,066
              
              
              391,4662004-3
              
              
              September
                  29, 2004
              
              
              543,545
              
              
              526,9052004-4
              
              
              December
                  29, 2004
              
              
              559,628
              
              
              543,4282005-1
              
              
              March
                  31, 2005
              
              
              728,703
              
              
              707,3282005-2
              
              
              June
                  29, 2005
              
              
              750,000
              
              
              729,000Total
              
              
              
              
              $
              3,359,705
              
              $
              3,261,190
 
 *(1)*  *The
        current loan principal balance shown includes amounts reflected on the
        consolidated balance sheet as mortgage loans held for investment - securitized
        (excluding discounts and net deferred origination fees), REO (at its trust
        basis
        value) and trustee receivables.*
 
 *(2)*  *The
        current asset-backed security (financing on mortgage loans held for investment)
        balance shown excludes discounts of $2.1 million at June 30,
        2005.*
 
 The
        securitization trust raises cash to purchase the mortgage loans from us
        generally by issuing securities to the public. These securities, known as
        “asset-backed securities,” are secured, or backed, by the pool of mortgage loans
        held by the securitization trust. These asset-backed securities, which are
        usually purchased by insurance companies, mutual funds and/or other
        institutional investors, represent interests in the cash flows from the mortgage
        loans in the trust, which entitle their holders to receive the principal
        collected, including prepayments of principal, on the mortgage loans in the
        trust. In addition, holders receive a portion of the interest paid on the
        loans
        in the trust equal to the pass-through interest rate on the remaining principal
        balance of the asset-backed securities. We structured each of our
        securitizations in 2005 and 2004 to be accounted for as a secured financing,
        which is known as “portfolio accounting.” With portfolio accounting, the
        mortgage loans held in the securitization trust (that underlie the excess
        cashflow certificates and are sometimes referred to as “securitized loans”) are
        recorded on our balance sheet as mortgage loans held for investment, together
        with the related financing on the mortgage loans held for investment (which
        are
        the senior securities or bonds issued by the securitization trust). Prior
        to
        2004, we structured our securitizations to be accounted for as sales, which
        is
        known as “gain-on-sale accounting.” With gain-on-sale accounting, we recorded an
        upfront gain at the time of securitization and capitalized the excess cashflow
        certificates on our balance sheet.
 
 Each
        month, the holder of an excess cashflow certificate will receive payment
        only
        after all required payments have been made on all the other securities issued
        by
        the securitization trust, because the excess cashflow certificates are
        subordinate in right of payment to all other securities issued by the
        securitization trust. In addition, before the holder of the excess cashflow
        certificate receives payments, the excess cash flows are applied in a
“waterfall” manner as follows:
 
 **24**
 ·
              first,
                  to cover any losses on the mortgage loans in the related mortgage
                  pool;·
              second,
                  to reimburse the bond insurer, if any, of the related series of
                  asset-backed securities for amounts paid by or otherwise owing
                  to that
                  insurer;·
              third,
                  to build or maintain the required level of the overcollateralization
                  (“O/C”) provision, as described below, for that securitization trust
                  by
                  applying the funds as an accelerated payment of principal to the
                  holders
                  of the asset-backed securities of the related series;·
              fourth,
                  to reimburse holders of the subordinate securities of the related
                  series
                  of asset-backed securities for unpaid interest and for any losses
                  previously allocated to those securities; and·
              fifth,
                  to pay “the net rate cap carryover” which relates to the interest on the
                  related asset-backed securities that exceeded the maximum net interest
                  amount available from the mortgage loans underlying the securitization
                  trust.
 
 Each
        of
        our securitizations contains an O/C provision which is a credit enhancement
        that
        is designed to protect the securities sold to the securitization asset-backed
        investors from credit losses, which arise principally from defaults on the
        underlying mortgage loans. In short, overcollateralization occurs when the
        amount of collateral ( *i.e.* ,
        mortgage loans) owned by a securitization trust exceeds the aggregate amount
        of
        senior asset-backed securities. The O/C is created to absorb losses that
        the
        securitization trust may suffer, as loans are liquidated at a loss. Beginning
        with our 2002 securitizations, and in each of our subsequent securitizations,
        we
        created a fully-funded O/C at closing by initially selling asset-backed
        securities totaling approximately 97% to 98.5% of the total amount of mortgage
        loans sold to the trust. For example, if a securitization trust contains
        collateral of $100 million principal amount of mortgage loans, and our O/C
        requirement is 2%, we issue approximately $98 million in senior asset-backed
        securities.
 
 The
        O/C
        is generally expressed as a percentage of the initial mortgage loan or
        collateral principal balance sold to the securitization trust. The required
        O/C
        is initially determined by either the rating agencies and/or the bond insurer,
        if any, using various factors, including:
 ·
                characteristics
                    of the mortgage loans sold to the trust, such as credit scores
                    of the
                    borrowers and loan-to-value ratios;·
                the
                    amount of excess spread between the interest rate on the pool
                    of mortgage
                    loans sold to the securitization trust and the interest paid
                    to the
                    asset-backed security holders, less the servicing fee, and other
                    related
                    expenses such as trustee fees and bond insurer fees, if any;
                    and·
                the
                    structure of the underlying securitization (e.g.,
                    issuing BBB- securities creates greater credit enhancement in
                    the
                    securitization transaction, which generally results in a lower
                    O/C).
 Our
        securitizations have typically required an O/C of between 1.05% and 3.0%
        of the
        initial mortgage loans sold to the securitization trust. The required O/C
        can
        increase or decrease throughout the life of the transaction depending upon
        subordination levels, delinquency and/or loss tests and is subject to minimums
        and maximums, as defined by the rating agencies and/or the bond insurer insuring
        the securitization.
 
 Each
        securitization trust also has the benefit of either a financial guaranty
        insurance policy from a monoline insurance company or a “senior-subordinated”
        securitization structure, or a combination of the two (referred to as a
“hybrid”). In a securitization trust with a financial guaranty insurance policy,
        all bonds are senior securities. The monoline insurance company guarantees
        the
        timely payment of principal and interest to the senior security holders in
        the
        event that the cashflows are not sufficient. In “senior-subordinated”
        securitization structures, the senior security holders are protected from
        losses
        (and payment shortfalls) first by the excess cash flows and the O/C, then
        by
        subordinated securities which absorb any losses prior to the senior security
        holders. In a hybrid structure, the senior securities generally have both
        the
        subordinated securities to absorb losses and a monoline insurance company
        that
        guarantees timely principal and interest payments.
 
 **25**
 In
        the
        securitizations and related NIM transactions we completed prior to 2004,
        the
        underlying securitization was structured as a sale under SFAS No. 140. In
        these
        transactions, we recorded the net cash proceeds generated from the sale of
        the
        NIM notes as a component of our net gain on sale of mortgage loans. The NIM
        note(s) entitles the holder to be paid a specified interest rate, and further
        provides for all cash flows generated by the excess cashflow certificate
        to be
        used to pay all principal and interest on the NIM note(s) until paid in full,
        which typically occurs approximately 20 to 25 months from the date the NIM
        note(s) were issued. The excess cashflow certificate entitles us to all cash
        flows generated by the excess cashflow certificate after the holder of the
        NIM
        note(s) has been paid in full. Under this structure, we also retained, and
        recorded as a component of our net gain on sale of mortgage loans, a relatively
        small excess cashflow certificate. We initially recorded the excess cashflow
        certificates at their estimated fair value, which normally ranged from 0.0%
        to
        1.0% of the securitized collateral.
 
 The
        change to secured financing accounting from gain-on-sale accounting has not
        changed the overall economics of the transaction. Only the timing of income
        recognition and how it is recorded on our financial statements has been affected
        by the change in accounting. The use of portfolio-based accounting structures
        will result in differences in our future expected results of operations as
        compared to our pre-2004 historic results.
 
 ***Whole-Loan
        Sales*** *.* Whole-loan sales are the sale of pools of mortgage loans to banks, consumer
        finance-related companies and institutional investors on a servicing-released
        basis. We have found that, from time to time, we can receive better economic
        results by selling some of our mortgage loans on a whole-loan basis, without
        retaining servicing rights, generally in private transactions to financial
        institutions or consumer finance companies. We recognize a gain or loss when
        we
        sell loans on a whole-loan basis equal to the difference between the cash
        proceeds received for the loans and our investment in the loans, including
        any
        unamortized loan origination fees and costs. We generally sell these loans
        without recourse, except that we provide standard representations and warranties
        to the purchasers of such loans. During the three months ended June 30, 2005
        and
        2004, we sold whole-loans without recourse to third-party purchasers (with
        the
        exception of a premium recapture reserve described below) and on a
        servicing-released basis of $134.3 million and $23.8 million, respectively.
        The
        average gross premium we received for the whole-loans sold during the three
        months ended June 30, 2005 was 4.04%, compared to 4.98% for the comparable
        2004
        period (the premium paid to us by third-party purchasers in whole-loan sale
        transactions does not include premiums we pay to originate the mortgage loans,
        net deferred origination fees, or premium recapture - components of the gain
        on
        sale calculation). During the six months ended June 30, 2005 and 2004, we
        sold
        whole loans without recourse and on a servicing-released basis of $239.7
        million
        and $41.4 million, respectively. The average gross premium we received for
        the
        whole loans sold during the six months ended June 30, 2005 was 4.01%, compared
        to 5.12% for the comparable 2004 period.
 
 We
        maintain a premium recapture reserve related to our contractual obligation
        to
        rebate a portion of any premium paid by a purchaser when a borrower prepays
        a
        sold loan within an agreed period of time. The premium recapture reserve
        is
        established at the time of the loan sale through a provision for losses,
        which
        is reflected as a reduction of the gain on sale of mortgage loans. The premium
        recapture reserve is recorded as a liability on the consolidated balance
        sheet.
        We estimate losses due to premium recaptures on early loan prepayments by
        reviewing loan product and interest rate, borrower prepayment fee, if any,
        and
        estimate the impact of future interest rate changes. The premium recapture
        reserve totaled $408,000 and $262,000 at June 30, 2005 and December 31, 2004,
        respectively.
 
 ***Other
        Income.*** In
        addition to the income and cash flows we earn from securitizations (accounted
        for as sales and secured financings) and whole-loan sales, we also earn income
        and generate cash flows from:
 
 ·
              any
                  fair value adjustments related to the excess cashflow certificates
                  in
                  accordance with EITF 99-20;·
              distributions
                  from Delta Funding Residual Exchange Company LLC (the “LLC”), an
                  unaffiliated limited liability company, which holds excess cashflow
                  certificates. We have a non-voting membership interest in the LLC,
                  which
                  entitled us to receive 15% of the net cash flows from the LLC through
                  June
                  2004 and, thereafter, 10% of the net cash flows from the LLC. We
                  have not
                  received our distributions since the second quarter of 2003 due
                  to a
                  dispute with the LLC’s President which has led us to commence a lawsuit to
                  recover all of the amounts due to us. (See “-Part II, Item 1. - Legal
                  Proceedings”); and·
              miscellaneous
                  interest income, including prepayment penalties received on some
                  of the
                  mortgage loans we sold in connection with our securitizations prior
                  to
                  2002.
 
 **26**
 **Summary
        of Critical Accounting Policies**
 
 An
        understanding of our critical accounting policies is necessary to evaluate
        our
        financial results. These policies may require management to make difficult
        and
        subjective judgments regarding uncertainties, and as a result, these estimates
        may significantly impact our financial results. The accuracy of these estimates
        and the likelihood of future changes depend on a range of possible outcomes
        and
        a number of underlying variables.
 
 ***Excess
        Cashflow Certificates*** **.** In
        securitization transactions structured to be accounted for as a sale (prior
        to
        2004), the excess cash flow certificates represent one or all of the following
        assets:
 
 ·
              BIO
                  certificate, which represents a subordinate right to receive excess
                  cashflow, if any, generated by the related securitization pool.
                  As a
                  holder of the BIO certificate, we have the right to receive the
                  difference, if any, between the interest payments due on the mortgage
                  loans sold to the securitization trust and the interest payments
                  due, at
                  the pass-through rates, to the holders of the asset-backed securities
                  of
                  the same series, net of contractual servicing fees, trustee fees,
                  insurer
                  premiums, reimbursements and other costs and expenses of administering
                  the
                  securitization trust. As a holder of the BIO certificate, we will
                  receive
                  cash payments (which, when we sell NIM notes, is only received
                  after the
                  NIM notes are paid in full) only to the extent that the cash received
                  by
                  the securitization trust exceeds the amounts owed on all of the
                  securities
                  issued by that securitization trust, including amounts needed for
                  the
                  payment of any trust related expenses.·
              P
                  certificate, which represents a right to receive prepayment penalties
                  on
                  the mortgage loans sold to the securitization trust. Generally,
                  prepayment
                  penalties are received from borrowers who pay off their loans within
                  the
                  first few years after obtaining their loans (which, when we sell
                  NIM
                  notes, is only received after the NIM notes are paid in
                  full).·
              Cash
                  flows from corridors - we receive payments on corridors (a net
                  purchased
                  interest rate cap) from third-party cap providers through the
                  securitization trusts (which, when we sell NIM notes, is only received
                  after the NIM notes are paid in full).
 
 The
        excess cash flows we receive are highly dependent upon the interest rate
        environment because “basis-risk” exists between the securitization trust’s
        assets and liabilities. For example, in each of the securitizations that
        we
        issued in 2003 and 2002, the excess cashflow certificates are impacted by
        the
        securitization pass-through rate sold to investors, which is indexed against
        the
        one-month LIBOR. As a result, the interest rate received by the asset-backed
        security holders from the securitization trust each month may adjust upwards
        or
        downwards as the one-month LIBOR changes (liability) - while the majority
        of the
        underlying mortgage loans (assets) in the securitization trust are fixed-rate
        loans, or are at a fixed-rate for at least two to three years before becoming
        adjustable-rate loans. As a result, as rates increase and decrease, the fair
        value of our excess cash flows will decrease and increase, respectively.
        The
        excess cashflow certificates held at June 30, 2005 are those we generated
        before
        we began to structure our securitizations to be accounted for as secured
        financings in 2004.
 
 In
        each
        of our securitizations in which we sold NIM notes, we purchased an interest
        rate
        cap, which helps mitigate the basis-risk for the approximate time that the
        NIM
        notes are anticipated to be outstanding.
 
 The
        accounting estimates we use to value excess cashflow certificates are deemed
        to
        be “critical accounting estimates” because they can materially affect our
        income. The valuation of our excess cashflow certificates requires us to
        forecast interest rates, mortgage principal payments, prepayments, index
        rates
        and loan loss assumptions, each of which is highly uncertain and requires
        a high
        degree of judgment. The rate used to discount the projected cash flows is
        also
        critical in the valuation of our excess cashflow certificates. Management
        uses
        internal, historical mortgage loan performance data and forward LIBOR curves
        to
        value future expected excess cash flows. We believe that the value of our
        excess
        cashflow certificates at the date of a securitization reflected their fair
        value. The amount recorded for the excess cashflow certificates is subsequently
        reduced for cash distributions we receive, increased for the expected return
        and
        adjusted for changes in fair value of these excess cashflow
        certificates.
 
 **27**
 At
        the
        closing date of each securitization transaction structured to be accounted
        for
        as a sale, we determined the present value of the excess cashflow certificates
        using the same assumptions we made regarding the underlying mortgage loans.
        The
        excess cashflow certificate was then recorded on our consolidated financial
        statements at its estimated fair value. The value of each excess cashflow
        certificate represents the cash flow we expect to receive in the future based
        upon our best estimates. Although we believe that the assumptions we use
        are
        reasonable, there can be no assurance as to the accuracy of the assumptions
        or
        estimates. Our estimates primarily include the following:
 
 ·
              future
                  rate of prepayment of the mortgage loans - the expected amount
                  of
                  prepayments if the underlying borrowers pay off their mortgage
                  loans prior
                  to the expected maturity;·
              credit
                  losses (default rates) on the mortgage loans - our estimated amount
                  of
                  losses or defaults that will take place on the underlying mortgage
                  loans
                  over their life because the excess cashflow certificates are subordinated
                  to all other securities issued by the securitization trust. Consequently,
                  any losses sustained on mortgage loans comprising a particular
                  securitization trust are first absorbed by the excess cashflow
                  certificates;·
              the
                  LIBOR forward curve (using current LIBOR as the floor rate) - our
                  estimate
                  of future interest rates, which affects both the rate paid to the
                  floating
                  rate asset-backed security investors (primarily the one-month LIBOR
                  index)
                  and the rates earned from the adjustable rate mortgage loans sold
                  to the
                  securitization trust (which typically provide for a fixed-rate
                  of interest
                  for the first 24 or 36 months and a six-month variable rate of
                  interest
                  thereafter using the six-month LIBOR index); and·
              a
                  discount rate used to calculate present value.
 We monitor the performance of the loans underlying each excess cashflow
        certificate, and any changes in our estimates resulting in a change in fair
        value of the excess cashflow
        certificates is reflected as a change in fair value of excess cashflow
        certificates recorded in the statement of operations as a component of “other
        income” or “other expense” in the period in which we make the change in our
        estimate.
 
 In determining the fair value of each of the excess cashflow certificates,
        we
        make the following underlying assumptions regarding mortgage loan prepayments,
        mortgage loan default rates, the LIBOR forward curve and discount
        rates:
 
 *A.*  *Prepayments.* We base
        our prepayment rate assumptions on our ongoing analysis of the performance
        of
        the mortgage pools we previously securitized, and the performance of similar
        pools of mortgage loans securitized by others in the industry. We apply
        different prepayment speed assumptions to different loan product types based
        on
        our experience with different loan product types exhibiting different prepayment
        patterns. Generally, our loans can be grouped into two loan products -
        fixed-rate loans and adjustable-rate loans. With fixed-rate loans, an underlying
        borrower’s interest rate remains fixed throughout the life of the loan. Our
        adjustable-rate loans are a “hybrid” between fixed- and adjustable-rate loans,
        in that the interest rate generally remains fixed, typically for the first
        two
        or three years of the loan, and then adjusts, typically every six months
        thereafter. Within each product type, factors other than interest rates can
        affect our prepayment rate assumptions. These factors include:
  **28**
  ·
              whether
                  or not a loan contains a prepayment penalty, which is the amount
                  a
                  borrower must pay to a lender if the borrower prepays the loan
                  within a
                  certain time period after the loan was originated. Historically,
                  loans
                  containing a prepayment penalty typically are not repaid as quickly
                  as
                  those without a penalty; and·
              as
                  is customary in our industry with adjustable-rate mortgage loans,
                  the
                  introductory interest rate we charge to the borrower is lower,
                  between one
                  and two full percentage points, than the rate for which the borrower
                  would
                  have otherwise qualified. Generally, once the interest rate begins
                  to
                  adjust, the interest rate payable on that loan generally increases,
                  at
                  times at a fairly substantial rate. This interest rate increase
                  can be
                  exacerbated if there is an absolute increase in interest rates.
                  As a
                  result of these increases, and the potential for future increases,
                  adjustable rate mortgage loans typically are more susceptible to
                  early
                  prepayments.There
                  are several reasons why a loan may prepay prior to its maturity,
                  including
                  but not limited to:·
              a
                  decrease in interest rates;·
              improvement
                  in the borrower’s credit profile, which may allow the borrower to qualify
                  for a loan with a lower interest rate;·
              competition
                  in the mortgage market, which may result in lower interest rates
                  being
                  offered to the borrower;·
              the
                  borrower’s sale of the home securing the mortgage;·
              the
                  borrower’s need for additional funds; and·
              a
                  default by the borrower, resulting in foreclosure by the
                  lender.It
                  is unusual for a borrower to prepay a mortgage loan during the
                  first few
                  months because:·
              it
                  typically takes at least several months after the mortgage loans
                  are
                  originated for any of the above events to occur;·
              there
                  are costs involved with refinancing a loan; and·
              the
                  borrower does not want to incur prepayment penalties.
 We
        have
        found that the rate at which borrowers prepay their loans tends to fluctuate.
        In
        general, prepayment speeds are lowest in the first month after origination,
        as
        described above. Thereafter, prepayment speeds generally increase until a
        peak
        speed is reached. Generally, loans will continue to prepay at the peak speed
        for
        some period of time, and then prepayment speeds typically begin to decline.
        We
        use prepayment assumptions that reflect these tendencies. The following table
        shows our current assumptions regarding the percentage of loans that will
        be
        prepaid during the first month following the closing of a loan, and the peak
        speed.
 
 **Loan
                  Type**
              
              **Month
                  One**
              
              **Peak
                  Speed**Fixed
                  rate
              
              4.0%
              
              35.0%
                  to 40.0%Adjustable
                  rate
              
              4.0%
              
              75.0%
 
 If
        mortgage loans prepay faster than anticipated, we generally will earn less
        income in connection with the mortgage loans and receive less excess cash
        flow
        in the future because the mortgage loans have paid off. Conversely, if mortgage
        loans prepay at a slower rate than anticipated, we generally earn more income
        and more excess cash flow in the future, subject to other factors that can
        affect the cash flow from, and our valuation of, the excess cashflow
        certificates.
 
 B.  *Default
        Rate.* The
        default rate is the percentage of estimated total loss of principal, interest
        and related advances that will take place over the life of the mortgage loans
        within a loan pool to the total original principal balance of the mortgage
        loans
        in the pool. A default rate is determined for each securitization reflecting
        the
        overall credit scores, average loan sizes and layered risks on the fixed-
        and
        adjustable-rate loans comprising each securitization trust. We apply a default
        or loss rate to the excess cashflow certificate because it is the “first-loss”
        piece and is subordinated in right of payment to all other securities issued
        by
        the securitization trust. If defaults are higher than we anticipate, we will
        receive less income and less excess cash flow than expected in the future.
        Conversely, if defaults are lower than we expected, we will receive more
        income
        and more excess cash flow than expected in the future, subject to the other
        factors that can affect the cash flow from, and our valuation of, the excess
        cashflow certificates. The current default rates applied on the excess cashflow
        certificates range from 4.5% to 8.0%, with the majority ranging from 4.5%
        to
        5.0%.
 
 **29**
 C.  *LIBOR
        Forward Curve.* The
        LIBOR forward curve is used to project future interest rates, which affects
        both
        the rate to the floating rate asset-backed security investors (primarily
        indexed
        off the one-month LIBOR) and the adjustable rate mortgage loans sold to the
        securitization trust (a fixed-rate of interest for either the first 24 or
        36
        months and a variable rate of interest thereafter indexed off the six-month
        LIBOR). Most of our loans are fixed-rate mortgages, and a significant amount
        of
        the securities sold by the securitization trust are floating-rate securities
        (the interest rate adjusts based upon an index, such as one-month LIBOR).
        As
        such, our excess cashflow certificates are subject to significant basis risk
        and
        a change in LIBOR will impact our excess spread. If LIBOR is lower than
        anticipated, we will receive more income and more excess cash flow than expected
        in the future, subject to the other factors that can affect the cash flow
        from,
        and our valuation of, the excess cashflow certificates. Conversely, if LIBOR
        is
        higher than expected, we will receive less income and less excess cash flow
        than
        expected in the future. In each of our securitizations in which we sold NIM
        note(s), we purchased an interest rate cap, which helps mitigate the basis
        risk
        for the approximate time that the NIM notes are outstanding. We have adjusted
        the valuation of each excess cashflow certificate to use a forward interest
        rate
        curve that represents both today’s rates and the expectation for rates in the
        future. We use a forward LIBOR curve that we believe reflects the estimate
        of
        future LIBOR rates.
 
 D.  *Discount
        Rate.* We use a
        discount rate that we believe reflects the risks associated with our excess
        cashflow certificates. Due to the unavailability of quoted market prices
        on
        comparable excess cashflow certificates, we compare our valuation assumptions
        and performance experience to our competitors in the non-conforming mortgage
        industry. Our discount rate takes into account the asset quality and the
        performance of our securitized mortgage loans compared to that of the industry
        and other characteristics of our securitized loans. We quantify the risks
        associated with our excess cashflow certificates by comparing the asset quality
        and payment and loss performance experience of the underlying securitized
        mortgage pools to comparable industry performance. The discount rate we use
        to
        determine the present value of the cash flow from excess cashflow certificates
        reflects increased uncertainty surrounding current and future market conditions,
        including, without limitation, uncertainty concerning inflation, recession,
        home
        prices, interest rates and conditions in the equity markets.
 
 We
        utilized a discount rate of 15% at June 30, 2005 and December 31, 2004 on
        all
        excess cashflow certificates.
 
 Our
        valuation of retained excess cashflow certificates is highly dependent upon
        the
        reasonableness of our assumptions and the predictiveness of the relationships
        that drive the results of our valuation model. The assumptions we utilize,
        described above, are complex, as we must make judgments about the effects
        of
        matters that are inherently uncertain. As the number of variables and
        assumptions affecting the possible future resolution of the uncertainties
        increase, those judgments become even more complex.
 
 In
        volatile markets, like those we have experienced over the past several years,
        there is increased risk that our actual results may vary significantly from
        our
        assumed results. The longer the time period over which the uncertainties
        exist,
        the greater the potential for volatility in our valuation assumptions and
        thus
        impacting the fair value of our excess cashflow certificates.
 
 For
        example, assumptions regarding defaults and LIBOR rates are used in estimating
        the fair value of our excess cashflow certificates. If loan loss levels are
        higher than anticipated, or LIBOR is higher than anticipated, a reduction
        in the
        fair value of these certificates will be recorded in earnings. We believe
        that
        our assumptions are reasonable based upon the estimates using our historical
        loan performance and the performance of similar mortgage pools from other
        lenders - in addition to accessing other public information about market
        factors
        such as interest rates, inflation, recession, unemployment and real estate
        market values, among other things. However, these are just estimates and
        it is
        virtually impossible to predict the actual level of prepayments and losses,
        which are also driven by consumer behavior.
 **30**
 
 ***Accounting
        for Hedging Activities.*** We
        regularly issue securitization asset-backed securities, backed by fixed-
        and
        variable-rate mortgage loans. As a result of this activity, we are exposed
        to
        interest rate risk beginning when our mortgage loans close and are recorded
        as
        assets, until permanent financing is arranged, such as when the asset-backed
        securities are issued. Our strategy is to use interest rate swap contracts
        in an
        effort to lock in a pre-determined base interest rate on designated portions
        of
        our prospective future securitization financing. At times, we also use corridors
        that are designed to limit our financing costs within the securitization
        to
        maintain minimum margins, with the possibility of allowing us to increase
        margins in lower than anticipated interest rate environments. Both the interest
        rate swaps and corridors are derivative instruments that trade in liquid
        markets, and we do not use either of them for speculative purposes.
 
 In accordance with SFAS No. 133 ,
        “Accounting for Derivative Instruments and Hedging Activities,” we
        record
        all of our derivatives on our balance sheet at fair value. For derivative
        financial instruments not designated as hedging instruments, gains or losses
        resulting from a change in fair value are recognized in current period earnings.
        When derivatives are used as hedges, however, hedge accounting is permitted
        only
        if we document the hedging relationship and its effectiveness at the time
        we
        designate the derivative as a hedge instrument. If we meet certain requirements
        under SFAS No. 133, we may account for the hedge instrument as a cash flow
        hedge.
 
 Cash flow hedge accounting is appropriate for hedges of uncertain cash flows
        associated with future periods - whether as a consequence of interest to
        be
        received or paid on existing variable rate assets or liabilities or in
        connection with intended purchases or sales.
 
 Under cash flow hedge accounting treatment, the changes in the fair value
        of the
        derivative instruments are divided into two portions, “effective” and
“ineffective.” The effective portion of the derivative's gain or loss is
        initially reported as a component of OCI and subsequently reclassified into
        earnings when the forecasted transaction affects earnings. The ineffective
        portion of the gain or loss is reported in earnings immediately.
 
 To qualify for cash flow hedge accounting treatment:
 
 ·
              hedges
                  must be documented, with the objective and strategy stated, along
                  with an
                  explicit description of the methodology used to assess and measure
                  hedge
                  effectiveness;·
              dates
                  (or periods) for the expected forecasted events and the nature
                  of the
                  exposure involved (including quantitative measures of the size
                  of the
                  exposure) must be explicitly documented;·
              hedges
                  must be expected to be “highly effective,” both at the inception of the
                  hedge and on an ongoing basis. Effectiveness measures must relate
                  the
                  gains or losses of the derivative to changes in the cash flow associated
                  with the hedged item;·
              forecasted
                  transactions must be probable; and·
              forecasted
                  transactions must be made with different counterparties other than
                  the
                  reporting entity.
 
 If
        and
        when hedge accounting is discontinued, typically when it is determined that
        the
        hedge no longer qualifies for hedge accounting, the derivative will continue
        to
        be recorded on the balance sheet at its fair value, with gains or losses
        being
        recorded in earnings. Any amounts previously recorded in OCI related to the
        discontinued hedge are classified to earnings over the remaining duration
        of the
        debt as interest payments affect earnings.
 
 ***Accounting
        for Income Taxes.*** Significant management judgment is required in developing our provision for
        income taxes, including the determination of deferred tax assets and liabilities
        and any valuation allowances that might be required against the deferred
        tax
        asset. Management
        needs to consider the relative impact of negative and positive evidence related
        to the ability to recognize a deferred tax asset. This evaluation takes into
        consideration our recent earnings history, current tax position and estimates
        of
        taxable income in the near term. If actual results differ from these estimates,
        we may be required to record a valuation allowance on our deferred tax assets,
        which could negatively impact our consolidated financial position and results
        from operations. We recognize all of our deferred tax assets if we believe,
        on a
        more likely than not basis, that all of the benefits of the deferred tax
        assets
        will be realized. Management believes that, based upon on the currently
        available evidence, it is more likely than not that we will realize the benefit
        of our deferred tax asset. Therefore, at June 30, 2005 and December 31, 2004,
        we
        did not maintain a valuation allowance against our deferred tax
        assets.
 
 **31**
 ***Allowance
        for Loan Losses on Mortgage Loans Held for Investment.*** Commencing with our 2004 securitizations, which we structured to be accounted
        for as secured financings with the underlying mortgage loans held for
        investment, we established an allowance for loan losses based on an estimate
        of
        losses to be incurred in the foreseeable future. We will charge-off
        uncollectible loans at the time they are deemed not probable of
        collection.
 
 In
        order
        to estimate an appropriate allowance for losses on loans held for investment,
        we
        estimate losses using detailed analysis of historical loan performance data.
        This data is analyzed for loss performance and prepayment performance by
        product
        type, origination year and securitization issuance. The results of that analysis
        are then applied to the current long-term mortgage portfolio held for investment
        and an estimate is created. In accordance with SFAS No. 5, “ Accounting
        for Contingencies,” we
        believe that pooling of mortgages with similar characteristics is an appropriate
        methodology in which to evaluate the amount of the allowance for loan losses.
        A
        provision for loan losses is charged to our consolidated statement of
        operations. Losses incurred, if any, will be written-off against the
        allowance.
 
 While
        we
        will continually evaluate the adequacy of this allowance, we recognize that
        there are qualitative factors that must be taken into consideration when
        evaluating and measuring potential expected losses on mortgage loans. These
        items include, but are not limited to, current performance of the loans,
        economic indicators that may affect the borrower’s ability to pay, changes in
        the market value of the collateral, political factors and the general economic
        environment. As these estimates are influenced by factors outside of our
        control
        and as uncertainty is inherent in these estimates, it is reasonably possible
        that they could change. In particular, if conditions were such that we were
        required to increase the provision for loan losses, any increase in the
        provision for loan losses may negatively impact our results of
        operations.
 
 ***Amortization
        of Deferred Loan Origination Fees and Costs.*** Interest
        income is recorded on our mortgage loans held for investment portfolio based
        upon a combination of interest accruals based on the outstanding balance
        and
        contractual terms of the mortgage loans, adjusted by the amortization of
        net
        deferred origination fees or costs accounted for in accordance with SFAS
        No. 91, “ Accounting
        for Nonrefundable Fees and Costs Associated with Originating or Acquiring
        Loans
        and Initial Direct Costs of Leases - an amendment of FASB Statements No.
        13, 60,
        and 65 and a rescission of FASB Statement No. 17 .”
        Our
        net deferred origination fees/costs consist principally of origination fees,
        discount points, and payroll and commissions associated with originating
        our
        mortgage loans. For our loans held for investment, these net deferred fees
        or
        costs are accreted or amortized as adjustments to interest income over the
        estimated lives of the loans using the interest method. Our portfolio of
        mortgage loans held for investment is comprised of a large number of homogeneous
        loans for which we believe prepayments are probable. The periodic amortization
        of our deferred origination fees or costs is based on a model that considers
        actual prepayment experience to date as well as forecasted prepayments based
        on
        the contractual interest rate on the mortgage loans, loan age, loan type
        and
        prepayment fee coverage, among other factors. Mortgage prepayments are affected
        by the terms and credit grades of the loans, conditions in the housing and
        financial markets and general economic conditions. Prepayment assumptions
        are
        reviewed regularly to ensure that our actual experiences, as well as industry
        data, are supportive of the prepayment assumptions used in our model. Any
        changes to these estimates are applied as if the revised estimates had been
        in
        place since the origination of the loans, and current period amortization
        is
        adjusted to reflect the effect of the changes.
 
 ***Amortization
        of Deferred Debt Issue Discounts and Transaction
        Costs.*** Interest
        expense on our securitization financing is comprised of the accrual of interest
        based on the contractual terms, cash receipts and amortization related to
        our
        cash flow hedges (swaps and corridors), the amortization of deferred issue
        discounts and transaction costs. The deferred issue discounts and transaction
        costs are amortized as an adjustment to interest expense over the estimated
        lives of the related debt using the interest method and take into account
        the
        effect of estimated prepayments. Any changes made to these estimates are
        applied
        as if the revised estimates had been in place since the issuance of the related
        debt, and result in adjustments to the period amortization recorded to interest
        expense.
  **32**
  **Results
        of Operations**
 
 ***Three
        Months Ended June 30, 2005 Compared to the Three Months Ended June 30,
        2004***
 
 **General**
 
 Our
        net
        income for the three months ended June 30, 2005 was $3.6 million, or $0.18
        per
        share basic and $0.17 per share diluted, compared to net loss of $1.8 million,
        or $(0.11) per share basic and diluted, for the three months ended June 30,
        2004. The increase in net income during the three months ended June 30, 2005
        relates primarily to the growth in the net interest income we realized from
        our
        mortgage loans held for investment portfolio, which has grown each quarter
        since our
        change from gain-on-sale accounting to portfolio accounting in the first
        quarter
        of 2004. The change to portfolio accounting resulted in recording
        of interest income from the securitized loans and interest expense from the
        asset-backed securities issued in connection with the securitization over
        the
        life of the securitization. The loss recorded for the three months ended
        June
        30, 2004 reflected the effect of this change in accounting, offset by a $4.3
        million pre-tax gain related
        to the fair value changes on our corridors that were not accounted for as
        hedging instruments prior to May 2004.
 
 We
        recorded net interest income after provision for loan losses of $22.2 million
        during the three months ended June 30, 2005, an increase of $11.2 million
        from
        $11.0 million in the same period in 2004. The increase in net interest income
        after provision for loan losses primarily reflects the net effect of recognizing
        interest income on $3.5 billion of mortgage loans held for investment at
        June
        30, 2005 compared to $1.2 billion of these loans held at June 30, 2004.
        Similarly, the increase in interest expense primarily reflects the net effect
        of
        recognizing interest expense on $3.4 billion in financing on mortgage loans
        held
        for investment at June 30, 2005, compared to $1.1 billion of financing on
        mortgage loans held for investment at June 30, 2004. During the three months
        ended June 30, 2005, total non-interest income increased $7.6 million and
        total
        non-interest expense increased by $9.9 million, compared to the same period
        in
        2004. The increase in non-interest income primarily reflects the impact of
        increases in the net gain on the sale of mortgage loans and the fair value
        of
        our excess cashflow certificates we experienced during the three months ended
        June 30, 2005, while the increase in non-interest expense primarily reflects
        the
        expenses associated with increases in origination volume, personnel, and
        costs
        associated with our on-going Sarbanes-Oxley Act Section 404
        initiatives.
 
 We
        originated $881.1 million of mortgage loans during the three months ended
        June
        30, 2005, representing a $209.3 million, or 31.1%, increase from $671.9 million
        of mortgage loans originated during the three months ended June 30, 2004.
        We
        securitized and/or sold $884.3 million of loans during the three months ended
        June 30, 2005, compared to $678.6 million of loans during the same period
        in
        2004.
 
 **Net
        Interest Income**
 
 We
        recorded net interest income of $29.7 million during the three months ended
        June
        30, 2005, an increase of $16.5 million, from the $13.2 million recorded in
        the
        same period in 2004. The increase in net interest income primarily reflects
        the
        net effect of the increases in the average balance of mortgage loans held
        for
        investment and the related financing during the three months ended June 30,
        2005
        compared to the same period in 2004. Net interest income represents the
        difference between our interest income and our interest expense, each of
        which
        is described in the following paragraphs.
 
 ***Interest
        Income.*** **** Interest
        income increased $47.4 million to $66.2 million for the three months ended
        June
        30, 2005, from $18.8 million for the comparable period in 2004. The increase
        is
        primarily due to (1) the increase in interest income of $44.1 million on
        our
        loans held for investment - securitized, which totaled $3.5 billion at June
        30,
        2005 as compared to $1.1 billion at June 30, 2004; (2) the increase in interest
        income of $3.3 million related to the increase in the average amount of mortgage
        loans held for investment - pre-securitization during the three months ended
        June 30, 2005 compared to the interest income recorded on the average amount
        of
        mortgage loans held for sale during the same period in 2004; and (3) the
        increase in pass-through interest received from securitization trusts on
        fixed-rate asset-backed securities at the time of settlement - due to the
        increase in fixed-rate asset-backed securities issued during the three months
        ended June 30, 2005, compared to the asset-backed securities issued in the
        same
        period of 2004.
  **33**
  The
        following table is a summary of interest income:
 
 **For
                  the Three Months Ended June 30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Interest
                  income on mortgage loans held for sale, net
              
              $
              --
              
              $
              3,541Interest
                  income on mortgage loans held for investment - pre-securitization,
                  net
              
              
              6,869
              
              
              --Interest
                  income on mortgage loans held for investment - securitized, net(1)
              
              
              57,408
              
              
              13,320Interest
                  income on excess cashflow certificates
              
              
              406
              
              
              693Asset-backed
                  security interest
              
              
              1,464
              
              
              1,142Miscellaneous
                  interest income
              
              
              10
              
              
              63Total
                  interest income
              
              $
              66,157
              
              $
              18,759
 
 *(1)*  *The
        amount for the three months ended June 30, 2005 and 2004 includes $3.2 million
        and $108,000, respectively, of prepayment penalty fees.*
 
 ***Interest
        Expense.*** Interest
        expense increased by $31.0 million to $36.5 million for the three months
        ended
        June 30, 2005 from $5.5 million for the comparable period in 2004. The increase
        was primarily due to the increase in interest expense related to the
        securitization debt and, to a lesser extent, the increase in loans originated
        and financed during the three months ended June 30, 2005 on our warehouse
        facilities, compared to the same period in 2004. Additionally, contributing
        to
        the increase in interest expense was the higher warehouse financing costs
        due to
        a higher average one-month LIBOR rate, which is the benchmark index used
        to
        determine our cost of borrowed funds. The rate increased on average to 3.11%
        for
        the three months ended June 30, 2005, compared to an average of 1.15% for
        the
        same period in 2004.
 
 The
        following table presents the components of interest expense:
 
 **For
                  the Three Months Ended**
                **June
                  30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Interest
                  expense on warehouse financing
              
              $
              4,607
              
              $
              1,456Interest
                  expense on mortgage loans held for investment financing
              
              
              31,816
              
              
              3,981Interest
                  expense on other borrowings
              
              
              66
              
              
              73Total
                  interest expense
              
              $
              36,489
              
              $
              5,510
 
 **Provision
        for Loan Losses**
 
 A
        provision for loan losses on mortgage loans held for investment is recorded
        to
        maintain the related allowance for loan loss at an appropriate level for
        currently existing probable losses of principal. We recorded a provision
        for
        loan losses of $7.5 million and $2.2 million for the three months ended June
        30,
        2005 and 2004, respectively, related to mortgage loans held for investment.
        The
        amount of the provision for loan losses corresponds to the increase in and
        the
        seasoning of our mortgage loans held for investment during the respective
        quarter.
 
 **Non-Interest
        Income**
 
 Total
        non-interest income increased by $7.6 million to $9.2 million for the three
        months ended June 30, 2005, from $1.6 million for the comparable period in
        2004.
        The increase in non-interest income primarily resulted from the increase
        in the
        fair value of the excess cashflow certificates of $2.5 million recorded during
        the three months ended June 30, 2005, coupled with a $5.1 million increase
        in
        the net gain on sale of mortgage loans recorded quarter over quarter. During
        the
        three months ended June 30, 2005 and 2004, we recorded a net gain on the
        sale of
        mortgage loans of $6.6 million and $1.5 million, respectively, on the sale
        of
        $134.3 million and $23.8 million, respectively, of mortgage loans on a
        whole-loan basis.
 
 **34**
 ***Net
        Gain on Sale of Mortgage Loans.*** Net gain
        on sale of mortgage loans for the three months ended June 30, 2005 and 2004
        is
        comprised of the premium received from selling whole loans on a
        servicing-released basis, together with any deferred origination costs or
        fees
        associated with mortgage loans sold, less any premium recapture
        reserve.
 
 The
        following table is a summary of our net gain on sale of mortgage loans for
        the
        three months ended June 30, 2005 and 2004:
 
 **Three
                  Months Ended June 30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Net
                  Gain on Sale of Mortgage Loans:Loans
                  sold
              
              $
              134,306
              
              $
              23,773Gain
                  on whole-loan sales
              
              $
              5,421
              
              $
              1,183Premium
                  recapture reserve
              
              
              (219
              )
              
              (47
              )Net
                  loan origination fees
              
              
              1,390
              
              
              377Net
                  gain on sale recorded
              
              $
              6,592
              
              $
              1,513Net
                  gain on sale recorded as a percent of loans sold
              
              
              4.91
              %
              
              6.36
              %
 
 Net
        gain
        on sale of mortgage loans increased $5.1 million to $6.6 million for the
        three
        months ended June 30, 2005, from $1.5 million for the comparable period in
        2004.
        This increase was directly related to the volume of loan sales quarter over
        quarter. During the three months ended June 30, 2005, we sold $134.3 million
        (at
        a weighted average gross sales price of 4.04%) of mortgage loans on a whole-loan
        servicing-released basis, compared to $23.8 million (at a weighted average
        gross
        sales price of 4.98%) for the same period in the prior year.
 
 The weighted average net gain-on-sale ratio for the three months ended June
        30,
        2005 and 2004 was 4.91% and 6.36%, respectively. The weighted-average net
        gain
        on sale ratio is calculated by dividing the net gain-on-sale by the total
        amount
        of loans securitized and sold.
 
 ***Other
        Income.*** Other
        income increased $2.5 million to $2.6 million for the quarter ended June
        30,
        2005, from $108,000 for the three months ended June 30, 2004. The increase
        in
        other income primarily relates to a fair value adjustment on our excess cashflow
        certificates of $2.5 million for the three months ended June 30, 2005. The
        increase in the fair value of our excess cashflows for the three months ended
        June 30, 2005 was primarily driven by lower losses on the underlying loans. We
        did
        not record a fair value adjustment on our excess cashflow certificates during
        the second quarter of 2004.
 
 **Non-interest
        Expense**
 
 Total non-interest expense increased by $9.9 million, or 63.3%, to $25.5
        million
        for the three months ended June 30, 2005, from $15.6 million for the comparable
        period in 2004. The increase is primarily due to an increase in payroll and
        related costs associated with a 31.1% increase in our mortgage loan production
        and a 29.1% increase in personnel, coupled with an increase in other production
        related expenses, and associated costs for our on-going Sarbanes-Oxley Act
        Section 404 initiatives. Additionally contributing to the increase was the
        impact of the change from recording gains on derivative instruments during
        the
        three months ended June 30, 2004 to recording losses on derivative instruments
        during the three months ended June 30, 2005.
 
 ***Payroll
        and Related Costs.*** Payroll
        and related costs include salaries, benefits and payroll taxes for all non-loan
        production related employees and non-deferrable loan production related
        employees cost.
 
 Payroll and related costs increased by $2.4 million, or 19.3%, to $15.0 million
        for the three months ended June 30, 2005, from $12.6 million for the comparable
        period in 2004. The increase was primarily the result of higher compensation
        and
        related payroll cost associated with an increase in our staff. As of June
        30,
        2005, we employed 1,247 full- and part-time employees, an increase of 29.1%
        over
        our 966 full- and part-time employees as of June 30, 2004. Additionally,
        payroll
        and related costs were higher due to the higher loan commissions paid as
        a
        result of a 31.1% increase in loan production during the three months ended
        June
        30, 2005 compared to the same period in 2004.
 
 **35**
 ***General and Administrative Expenses.*** General
        and administrative expenses consist primarily of office rent, insurance,
        telephone, depreciation, legal reserves and fees, license fees, accounting
        fees,
        professional fees, travel and entertainment expenses, advertising and
        promotional expenses.
 
 General and administrative expenses increased $2.5 million, or 33.2%, to
        $10.1
        million for the three months ended June 30, 2005, from $7.6 million for the
        comparative period in 2004. The increase was primarily due to an increase
        in
        expenses associated with a 31.1% increase in loan production during the three
        months ended June 30, 2005 compared to the same period in 2004 (which includes
        higher advertising, promotional and marketing expenses), the consequent 29.1%
        increase in personnel and expenses related to our ongoing expansion of our
        wholesale and retail divisions (which includes rent and depreciation expenses).
        Also contributing to the increase in general and administrative expenses
        was an
        increase in legal, accounting and professional fees. The primary increase
        in
        accounting and professional fees relates to our on-going Sarbanes-Oxley Act
        Section 404 initiatives.
 
 ***Loss (Gain) on Derivative Instruments.*** The loss
        on derivative instruments recorded during the three months ended June 30,
        2005
        represents the realized loss on the interest rate swaps used to lock in a
        pre-determined interest rate on designated portions of our prospective future
        securitization financing and by the decline in the fair value of our corridors
        we use to protect the variable-rate financing.
 
 During the three months ended June 30, 2005, we recorded a net loss on
        derivative instruments of $334,000 as opposed to a net gain on derivatives
        of
        $4.6 million during the three months ended June 30, 2004. During the three
        months ended June 30, 2005 we recorded a loss of $334,000 on the ineffective
        portion of corridors and interest rate swaps, compared to a $238,000 gain
        recorded on the ineffective portion of certain corridors and interest rate
        swaps
        during the three months ended June 30, 2004. Additionally, during the three
        months ended June 30, 2004, we recorded a net gain of $4.3 million related
        to
        the fair value changes on our corridors that were not accounted for as hedging
        instruments prior to May 2004.
 
 **Income
        Taxes**
 
 Deferred
        tax assets and liabilities are recognized based upon the income reported
        in the
        financial statements regardless of when such taxes are paid. These deferred
        taxes are measured by applying current enacted tax rates.
 
 We recorded an income tax expense of $2.3 million for the three months ended
        June 30, 2005 due to the pretax income recorded for the period (utilizing
        an
        effective tax rate of approximately 39.4%). We recorded a tax benefit of
        $1.1
        million for the three months ended June 30, 2004 on a pre-tax loss of $3.0
        million (utilizing an effective tax rate of approximately 38.3%).
 
 ***Six
        Months Ended June 30, 2005 Compared to the Six Months Ended June 30,
        2004***
 
 **General**
 
 Our
        net
        income for the six months ended June 30, 2005 was $5.6 million, or $0.28
        per
        share basic and $0.27 per share diluted, compared to net loss of $7.7 million,
        or $(0.46) per share basic and diluted, for the six months ended June 30,
        2004.
        The increase in net income recorded during the six months ended June 30,
        2005
        relates primarily to the growth in the net interest income we realized from
        our
        mortgage loans held for investment portfolio, which has grown since our
        change from gain-on-sale accounting to portfolio accounting in the first
        quarter
        of 2004. The change to portfolio accounting resulted in recording
        of interest income from the securitized loans and interest expense from the
        asset-backed securities issued in connection with the securitization over
        the
        life of the securitization. The loss recorded for the six months ended June
        30,
        2004 reflects the effect of this change in accounting, coupled with the net
        impact of; (1) a $4.3
        million pre-tax loss we realized relating to the interest rate swaps used
        to
        hedge $542.3 million of the March 2004 securitization variable-rate debt
        that
        were not accounted for as hedge instruments; (2) a $4.2
        million pre-tax gain related
        to the fair value changes on our corridors that were not accounted for as
        hedging instruments prior to May 2004; and (3) a
        $6.8
        million pre-tax gain recorded upon the delivery
        of $113.9 million of mortgage loans in connection with our fourth quarter
        2003 securitization
        (which was structured to be accounted for as a sale), under a pre-funding
        feature.
 
 **36**
 We
        recorded net interest income after provision for loan losses of $42.4 million
        during the six months ended June 30, 2005, an increase of $26.5 million from
        $15.9 million in the same period in 2004. The increase in net interest income
        after provision for loan losses primarily reflects the net effect of recognizing
        interest income on $3.5 billion of mortgage loans held for investment at
        June
        30, 2005 compared to $1.2 billion of these loans held at June 30, 2004.
        Similarly, the increase in interest expense primarily reflects the net effect
        of
        recognizing interest expense on $3.4 billion of financing on mortgage loans
        held
        for investment at June 30, 2005, compared to $1.1 billion of financing on
        mortgage loans held for investment at June 30, 2004. During the six months
        ended
        June 30, 2005, total non-interest income increased $7.9 million and total
        non-interest expense increased by $12.4 million, compared to the same period
        in
        2004. The increase in non-interest income primarily reflects the impact of
        the
        increase in the fair value of our excess cashflow certificates we experienced
        during the six months ended June 30, 2005, while the increase in non-interest
        expense primarily reflects the expenses associated with increases in origination
        volume, personnel and costs related to our on-going Sarbanes-Oxley Act Section
        404 initiatives.
 
 We
        originated $1.7 billion of mortgage loans during the six months ended June
        30,
        2005, representing a $542.0 million, or 46.1%, increase from $1.2 billion
        of
        mortgage loans originated during the first six months ended June 30, 2004.
        We
        securitized and/or sold $1.7 billion of loans during the six months ended
        June
        30, 2005, compared to $1.2 million of loans (including $113.9 million of
        loans delivered
        in the first quarter of 2004 under a pre-funding feature in connection with
        our
        fourth quarter 2003 securitization accounted for as a sale) during
        the same period in 2004.
 
 **Net
        Interest Income**
 
 We
        recorded net interest income of $56.8 million during the six months ended
        June
        30, 2005, an increase of $38.2 million, from the $18.6 million recorded in
        the
        same period in 2004. The increase in net interest income primarily reflects
        the
        net effect of the increases in the average balance of mortgage loans held
        for
        investment and the related financing during the six months ended June 30,
        2005
        compared to the same period in 2004. Net interest income represents the
        difference between our interest income and our interest expense, each of
        which
        is described in the following paragraphs.
 
 ***Interest
        Income.*** Interest
        income increased $95.0 million to $121.0 million for the six months ended
        June
        30, 2005, from $26.0 million for the comparable period in 2004. The increase
        is
        primarily due to (1) the increase in interest income of $87.7 million on
        our
        loans held for investment - securitized, which totaled $3.3 billion at June
        30,
        2005 as compared to $1.1 billion at June 30, 2004; (2) the increase in interest
        income of $6.5 million related to the increase in the average amount of mortgage
        loans we originated and held pending securitization or sale during the six
        months ended June 30, 2005 compared to the same period in 2004; and (3) the
        increase in pass-through interest received from securitization trusts on
        fixed-rate asset-backed securities at the time of settlement - due to the
        increase in fixed-rate asset-backed securities issued during the six months
        ended June 30, 2005, compared to the asset-backed securities issued in the
        same
        period of 2004.
 
 The
        following table is a summary of interest income:
 
 **For
                  the Six Months Ended June 30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Interest
                  income on mortgage loans held for sale, net
              
              $
              --
              
              $
              7,185Interest
                  income on mortgage loans held for investment - pre-securitization,
                  net
              
              
              13,724
              
              
              --Interest
                  income on mortgage loans held for investment - securitized, net(1)
              
              
              103,332
              
              
              15,654Interest
                  income on excess cashflow certificates
              
              
              895
              
              
              1,399Asset-backed
                  security interest
              
              
              3,071
              
              
              1,691Miscellaneous
                  interest income
              
              
              11
              
              
              114Total
                  interest income
              
              $
              121,033
              
              $
              26,043
 
 *(1)
        The amount for the six months ended June 30, 2005 and 2004 includes $5.4
        million
        and $108,000, respectively, of prepayment penalty fees.*
 
 **37**
 ***Interest
        Expense.*** Interest
        expense increased by $56.9 million to $64.3 million for the six months ended
        June 30, 2005 from $7.4 million for the comparable period in 2004. The increase
        was primarily due to the increase in interest expense related to the
        securitization debt and, to a lesser extent, the increase in loans originated
        and financed during the six months ended June 30, 2005 on our warehouse
        facilities, compared to the same period in 2004. Additionally, contributing
        to
        the increase in interest expense was the slightly higher warehouse financing
        costs due to a higher average one-month LIBOR rate, which is the benchmark
        index
        used to determine our cost of borrowed funds. The rate increased on average
        to
        2.88% for the six months end June 30, 2005, compared to an average of 1.13%
        for
        the same period in 2004.
 
 The
        following table presents the components of interest expense:
 
 **For
                  the Six Months Ended**
                **June
                  30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Interest
                  expense on warehouse financing
              
              $
              8,652
              
              $
              2,936Interest
                  expense on mortgage loans held for investment financing
              
              
              55,484
              
              
              4,343Interest
                  expense on other borrowings
              
              
              136
              
              
              144Total
                  interest expense
              
              $
              64,272
              
              $
              7,423
 
 **Provision
        for Loan Losses**
 
 A
        provision for loan losses on mortgage loans held for investment is recorded
        to
        maintain the related allowance for loan loss at an appropriate level for
        currently existing probable losses of principal. We recorded a provision
        for
        loan losses of $14.3 million and $2.7 million for the six months ended June
        30,
        2005 and 2004, respectively, related to mortgage loans held for investment.
        The
        amount of the provision for loan losses corresponds to the increase in and
        the
        seasoning of our mortgage loans held for investment during the respective
        period.
 .
 **Non-Interest
        Income**
 
 Total
        non-interest income increased by $7.8 million to $17.3 million for the six
        months ended June 30, 2005, from $9.5 million for the comparable period in
        2004.
        The increase in non-interest income primarily resulted from a $2.7 million
        increase in the net gain on sale of mortgage loans recorded during the six
        months ended June 30, 2005 as compared to the same period in 2004 and a $5.2
        million increase in the fair value of our excess cashflow certificates recorded
        during the six months ended June 30, 2005. During the six months ended June
        30,
        2005, we recorded a net gain on the sale of mortgage loans of $11.9 million
        on
        the sale of $239.7 million of mortgage loans on a whole-loan basis as compared
        to a $9.3 million gain recorded during the same quarter in 2004 on the sale,
        on
        a whole-loan basis, or through a securitization structured to be accounted
        for
        as a sale, of $155.4 million of mortgage loans.
 
 ***Net
        Gain on Sale of Mortgage Loans.*** Net gain
        on sale of mortgage loans for the six months ended June 30, 2005 and 2004
        is
        comprised of the premium received from selling whole loans on a
        servicing-released basis, together with any deferred origination costs or
        fees
        associated with mortgage loans sold, less any premium recapture reserve.
        Additionally, the six months ended June 30, 2004 includes a $6.8 million
        gain
        recorded from the January 2004 delivery of $113.9 million of mortgage loans
        in
        connection with our fourth quarter 2003 securitization, which was structured
        to
        be accounted for as a sale under a pre-funding feature. Through the end of
        2003,
        our securitizations were structured to be accounted for as sales under SFAS
        No.
        140. Accordingly, we recorded gain-on-sale revenue upon the closing of each
        such
        securitization. For the six months ended June 30, 2004, net gain on sale
        of
        mortgage loans included the following in addition to the gains recorded from
        whole-loan sales:
  **38**
  
 (1)
              the
                  sum of:a)
              the
                  cash purchase price we received in connection with selling (i)
                  a NIM note,
                  net of overcollateralization amount and interest rate cap and (ii)
                  an
                  interest-only certificate;b)
              the
                  fair value of the excess cashflow certificates we
                  retained;c)
              the
                  premium received from selling mortgage servicing rights;
                  andd)
              the
                  difference between the selling price and the carrying value of
                  the related
                  mortgage loans sold;(2)
              less
                  the:a)
              costs
                  associated with the securitization structured as a
                  sale;b)
              any
                  hedge loss (gain) associated with such securitization accounted
                  for as a
                  sale;c)
              any
                  premium recapture reserve, andd)
              any
                  loss associated with loans sold at a discount, together with any
                  deferred
                  origination costs or fees associated with mortgage loans
                  sold.
 
 The
        following table is a summary of our net gain on sale of mortgage loans for
        the
        six months ended June 30, 2005 and 2004:
 
 **Six
                  Months Ended June 30,***(Dollars
                  in thousands)*
              
              **2005**
              
              **2004**Net
                  Gain on Sale of Mortgage Loans:Loans
                  sold(1)
              
              $
              239,725
              
              $
              155,351NIM
                  proceeds, net
              
              $
              --
              
              $
              4,712Interest-only
                  security proceeds
              
              
              --
              
              
              1,293Mortgage
                  servicing rights(2)
              
              
              --
              
              
              661Gain
                  on whole-loan sales
              
              
              9,619
              
              
              2,121Premium
                  recapture reserve
              
              
              (385
              )
              
              (85
              )Net
                  loan origination fees
              
              
              2,686
              
              
              1,035Less:
                  securitization transaction costs
              
              
              --
              
              
              (484
              )Net
                  gain on sale recorded
              
              $
              11,920
              
              $
              9,253Net
                  gain on sale recorded as a percent of loans sold
              
              
              4.97
              %
              
              5.96
              %
 
 *(1)*  *For
        the six months ended June 30, 2004, we delivered $113.9 million of mortgage
        loans under a pre-funding feature in our fourth quarter 2003 securitization
        and
        recorded gain-on-sale revenue related thereto during the six months ended
        June
        30, 2004. Because the fourth quarter 2003 securitization was structured as
        a
        sale, we recorded gain-on-sale revenue during the six months ended June 30,
        2004
        when we delivered the loans under the pre-funding feature to the securitization
        trust in January 2004.*
 
 *(2)*  *For
        the six months ended June 30, 2004, we recorded a $661,000 gain from the
        sale of
        mortgage servicing rights related to the mortgage loans collateralizing
        the* *fourth quarter 2003* *securitization.*
 
 Net
        gain
        on sale of mortgage loans increased $2.6 million to $11.9 million for the
        six
        months ended June 30, 2005, from $9.3 million for the comparable period in
        2004.
        During the six months ended June 30, 2005, we sold $239.7 million (at a weighted
        average gross sales price of 4.01%) of mortgage loans on a whole loan
        servicing-released basis, compared to $41.4 million (at a weighted average
        sales
        price of 5.12%) for the same period in the prior year. The gain on sale of
        mortgages recorded for the six months ended June 30, 2004 also reflects the
        impact of our delivery of $113.9 million of mortgage loans in connection
        with
        our fourth quarter 2003 securitization (which was structured to be accounted
        for
        as a sale), under a pre-funding feature during the six months ended June
        30,
        2004.
 
 **39**
 The
        weighted average net gain on sale ratio for the six months ended June 30,
        2005
        and 2004 was 4.97% and 5.96%, respectively. The weighted-average net gain
        on
        sale ratio is calculated by dividing the net gain on sale by the total amount
        of
        loans securitized and sold.
 
 ***Other
        Income.*** Other
        income increased $5.2 million to $5.4 million for the six months ended June
        30,
        2005, from $204,000 for the six months ended June 30, 2004. The increase
        in
        other income primarily relates to a fair value adjustment on our excess cashflow
        certificates of $5.2 million for the six months ended June 30, 2005. The
        increase in the fair value of our excess cashflow certificates for the six
        months ended June 30, 2005 was primarily driven by lower losses on the
        underlying loans. We
        did
        not record a fair value adjustment on our excess cashflow certificates during
        the six months ended June 30, 2004.
 
 **Non-interest
        Expense**
 
 Total non-interest expense increased by $12.4 million, or 32.6%, to $50.4
        million for the six months ended June 30, 2005, from $38.0 million for the
        comparable period in 2004. The increase is primarily due to an increase in
        payroll and related costs associated with a 46.1% increase in our mortgage
        loan
        production and a 29.1% increase in personnel, coupled with an increase in
        other
        production related expenses.
 
 ***Payroll and Related Costs.*** Payroll
        and related costs increased by $6.0 million, or 25.0%, to $30.2 million for
        the
        six months ended June 30, 2005, from $24.2 million for the comparable period
        in
        2004. The increase was primarily the result of higher compensation and related
        payroll cost associated with an increase in our staff. As of June 30, 2005,
        we
        employed 1,247 full- and part-time employees, an increase of 29.1% over our
        966
        full- and part-time employees as of June 30, 2004. Additionally, payroll
        and
        related costs were higher due to the higher loan commissions paid as a result
        of
        a 46.1% increase in loan production during the six months ended June 30,
        2005
        compared to the same period in 2004.
 
 ***General
        and Administrative Expenses.***  General
        and administrative expenses increased $6.2 million, or 45.1%, to $19.9 million
        for the six ended June 30, 2005, from $13.7 million for the six months ended
        June 30, 2004. The increase was primarily due to an increase in expenses
        associated with a 46.1% increase in loan production during the six months
        ended
        June 30, 2005 compared to the same period in 2004 (which includes higher
        advertising, promotional and marketing expenses), the consequent 29.1% increase
        in personnel and expenses related to our ongoing expansion of our wholesale
        and
        retail divisions. Also contributing to the increase in general and
        administrative expenses was an increase in legal, accounting and professional
        fees. The primary increase in accounting and professional fees relates to
        our
        on-going Sarbanes-Oxley Act Section 404 initiatives.
 
 ***Loss (Gain) on Derivative Instruments.*** The loss
        on derivative instruments recorded during the six months ended June 30, 2005
        represents the realized loss on the interest rate swaps used to lock in a
        pre-determined interest rate on designated portions of our prospective future
        securitization financing and by the decline in the fair value of our corridors
        we use to protect the variable-rate financing.
 
 During the six months ended June 30, 2005, we recorded a net loss on derivative
        instruments of $318,000 as opposed to a net loss on derivatives of $139,000
        during the six months ended June 30, 2004. During the six months ended June
        30,
        2005 we recorded a loss of $318,000 on the ineffective portion of caps and
        interest rate swaps, compared to a $238,000 gain recorded on the ineffective
        portion of caps and interest rate swaps during the six months ended June
        30,
        2004. Additionally, during the six months ended June 30, 2004, we recorded
        (1) a
        $4.5 million loss relating to the interest rate swaps used to hedge
        approximately $542.3 million of securitization variable-rate debt that were
        not
        accounted for as hedge instruments;  and (2) a $4.2 million gain related
        to
        the fair value changes on our corridors that were not accounted for as hedging
        instruments prior to May 2004.
  **40**
 **Income
        Taxes**
 
 We
        recorded an income tax expense of $3.7 million for the six months ended June
        30,
        2005 due to the pre-tax income recorded for the period (utilizing an effective
        tax rate of approximately 39.7%). We recorded a tax benefit of $4.9 million
        for
        the six months ended June 30, 2004 on a pre-tax loss of $12.6 million (utilizing
        an effective tax rate of approximately 38.5%).
 
 **Financial
        Condition**
 
 ***June
        30, 2005 Compared to December 31, 2004***
 
 ***Cash and Cash Equivalents*** *.* Cash and
        cash equivalents decreased $811,000, or 15.6%, to $4.4 million at June 30,
        2005,
        from $5.2 million at December 31, 2004. This increase was primarily related
        to
        timing of cash received and disbursed from normal operations.
 
 ***Mortgage
        Loans Held for Investment, Net*** .
        Mortgage loans held for investment, net increased $1.1 billion, or 46.9%,
        to
        $3.4 billion at June 30, 2005, from $2.3 billion at December 31, 2004. This
        account represents our basis in the mortgage loans that were either delivered
        to
        the securitization trusts (denoted as mortgage loans held for investment
        -
        securitized) or are pending delivery into future securitizations or sale
        on a
        whole-loan basis (denoted as mortgage loans held for investment -
        pre-securitization), net of discounts, deferred fees and allowance for loan
        losses.
 
 The
        following table sets forth a summary of mortgage loans held for investment,
        net:
 
 *(Dollars
                  in thousands)*
              
              **At
                  June 30,**
                **2005**
              
              **At
                  December 31, 2004**Mortgage
                  loans held for investment - securitized
              
              $
              3,311,652
              
              $
              2,165,353Mortgage
                  loans held for investment - pre-securitization
              
              
              179,587
              
              
              206,289Discounts
                  (MSR related)
              
              
              (21,452
              )
              
              (14,570
              )Net
                  deferred origination fees
              
              
              (7,136
              )
              
              (5,800
              )Allowance
                  for loan losses
              
              
              (23,983
              )
              
              (10,278
              )Mortgage
                  loans held for investment, net
              
              $
              3,438,668
              
              $
              2,340,994
 
 We
        maintain an allowance for loan losses based on our estimate of losses to
        be
        incurred in the foreseeable future (generally an 18-month period) on our
        mortgage loans held for investment. At June 30, 2005 and December 31, 2004,
        we
        established an allowance for loan losses totaling $24.0 million and $10.3
        million, respectively. The increase in the allowance for loan losses is
        primarily driven by the growth in our mortgage loans held for investment
        portfolio.
 
 The
        following table sets forth a summary of the activity in the allowance for
        loan
        losses for the six months ended June 30, 2005 and the year ended December
        31,
        2004:
 
 *(Dollars
                  in thousands)*
              
              **Six
                  Months Ended June 30,**
                **2005**
              
              **Year
                  Ended December 31,**
                **2004**Allowance
                  for loan losses - beginning of period
              
              $
              10,278
              
              $
              --Provision
                  for loan losses
              
              
              14,342
              
              
              10,443Charge-offs
              
              
              (637
              )
              
              (165
              )Allowance
                  for loan losses - end of period
              
              $
              23,983
              
              $
              10,278
 
 ***Trustee
        Receivable.*** Trustee
        receivable principally represents any un-remitted principal payments collected
        by the securitization trust’s third-party loan servicer subsequent to the
        monthly remittance cut-off date. The unscheduled principal payments and prepaid
        loan payments received after the remittance cut-off date as of June 30, 2005
        and
        December 31, 2004 totaled $45.5 million and $30.2 million, respectively,
        relating to the securitizations accounted for as secured financings. The
        trustee
        is expected to remit these amounts on the following month’s scheduled remittance
        date, at which time they principally will be used to pay down principal on
        the
        related mortgage loans held for investment, net.
 
 **41**
 ***Accrued
        Interest Receivable.*** Accrued
        interest receivable increased $6.8 million, or 55.7%, to $19.1 million at
        June
        30, 2005, from $12.3 million at December 31, 2004. The increase is due to
        the
        52.9% increase in mortgage loans held for investment - securitized from December
        31, 2004, offset slightly by the 12.9% decrease in mortgage loans held for
        investment - pre-securitization during the same period.
 
 ***Excess
        Cashflow Certificates*** .
        The
        following table presents the activity related to our excess cashflow
        certificates for the six months ended June 30, 2005 and the year ended December
        31, 2004:
 
 *(Dollars
                  in thousands)*
              
              **Six
                  Months Ended June 30,**
                **2005**
              
              **Year
                  Ended December 31,**
                **2004**Balance,
                  beginning of period
              
              $
              14,933
              
              $
              19,853Accretion
              
              
              895
              
              
              2,073Cash
                  receipts
              
              
              (9,997
              )
              
              (8,359
              )Net
                  change in fair value
              
              
              5,193
              
              
              1,366Balance,
                  end of period
              
              $
              11,024
              
              $
              14,933
 
 Since we began structuring our securitizations in 2004 to be accounted for
        as
        secured financings, we no longer record excess cashflow certificates (but
        rather
        the underlying mortgage loans) on newly issued securitizations on the
        consolidated balance sheet. We did not sell any excess cashflow certificates
        during the six months ended June 30, 2005 or during the year ended December
        31,
        2004.
 
 ***Equipment, Net*** .
        Equipment, net, increased $665,000, or 15.5%, to $5.0 million at June 30,
        2005,
        from $4.3 million at December 31, 2004. This increase is primarily due to
        increased purchases of computer equipment and office furnishings during the
        six
        months ended June 30, 2005, which reflects the 29.1% increase in employees
        over
        December 31, 2004 and the effect of our office expansions.
 
 ***Accounts
        Receivable.***  Accounts
        receivable increased $1.6 million, or 24.8%, to $8.1 million at June 30,
        2005,
        from $6.5 million at December 31, 2004. This
        increase is primarily due to an increase in amounts due from the third-party
        servicer. The increase in servicer receivables relates to the increase in
        our
        mortgage loans held for investment portfolio during the six months ended
        June
        30, 2005. The servicer receivables are generally comprised of the interest
        portion of mortgage payments collected by our loan servicing provider during
        the
        month which are remitted to us one month after collection ( *i.e.* ,
        interest collected by the third-party servicer after our June 2005 remittance
        cut-off date will be remitted to us in July 2005).
 
 ***Prepaid
        and Other Assets.*** Prepaid
        and other assets increased $3.3 million, or 12.5%, to $29.4 million at June
        30,
        2005, from $26.1 million at December 31, 2004. The increase is primarily
        due to
        (1) a $867,000 increase in prepaid securitization transaction costs, net,
        which
        will be recognized as a yield adjustment to interest expense over the estimated
        life of the secured financing; (2) a $973,000 increase in prepaid insurance
        and
        computer related items and (3) a $1.4 million increase in REO.
 
 At
        June
        30, 2005 and December 31, 2004, we held $2.0 million and $578,000, respectively,
        of REO, which we carry at the lower of cost or fair value, less estimated
        selling costs. We
        did
        not experience additional declines in the fair value of the REO properties
        held
        during the six months ended June 30, 2005 and, therefore, no provision was
        necessary. We had no REO properties as of June 30, 2004.
 
 ***Deferred
        Tax Asset.***  The
        deferred tax asset increased by $3.5 million, or 6.9%, to $53.8 million at
        June
        30, 2005, from $50.3 million at December 31, 2004. The increase is primarily
        due
        to temporary differences related to (1) securitizations entered into prior
        to
        2004, related to gain-on-sale accounting versus Real Estate Mortgage Investment
        Conduit ("REMIC") tax accounting; (2) a $773,000 increase in deferred taxes
        related to the fair value of the hedge instruments within accumulated other
        comprehensive income; and (3) book allowance for loan losses. The increase
        was
        partially offset by a decrease in the deferred taxes related to our 2004
        securitizations, which were accounted for as secured financings; and which
        for
        tax purposes were accounted for as REMIC transactions and are treated as
        sales.
 
 **42**
 Commencing
        in the first quarter of 2005, we began issuing our securitizations from a
        newly
        created subsidiary that we elected to treat as a REIT (also referred to as
        a
“Captive REIT”) under the Code. The securitization was structured as a
“debt-for-tax” transaction. Our prior securitizations were all structured as
“sale-for-tax” transactions. The tax structure was changed to more closely
        conform to the GAAP accounting treatment.
 
 ***Bank
        Payable.*** Bank
        payable decreased $138,000, or 12.4%, to $1.0 million at June 30, 2005, from
        $1.1 million at December 31, 2004. Bank payable represents the amount of
        checks
        written against our operating account which are subsequently covered as they
        are
        presented to the bank for payment by either drawing down our lines of credit
        or
        from subsequent deposits of operating cash.
 
 ***Warehouse Financing.*** Our
        warehouse financing decreased $16.5 million, or 12.2%, to $119.1 million
        at June
        30, 2005, from $135.7 million at December 31, 2004. The decrease was primarily
        due to a $26.7 million decrease in the amount of mortgage loans held for
        investment - pre-securitization. Additionally impacting the amount of
        outstanding borrowings under our warehouse credit facilities was the decrease
        in
        the amount of self-funded loans from December 31, 2004 to June 30, 2005.
        At June
        30, 2005, we self-funded $60.5 million of these mortgage loans, as compared
        to
        $70.6 million at December 31, 2004.
 
 ***Financing
        on Mortgage Loans Held for Investment, Net.*** Financing on mortgage loans held for investment, net increased $1.1 billion,
        or
        50.7%, to $3.4 billion at June 30, 2005, from $2.2 billion at December 31,
        2004.
        This increase in securitization asset-backed securities corresponds to the
        increase in loans held for investment - securitized during the six months
        ended
        June 30, 2005. The balance of this account will generally increase in proportion
        to the increase in mortgage loans held for investment -
        securitized.
 
 ***Other
        Borrowings.***  Other
        borrowings decreased $780,000, or 23.4%, to $2.6 million at June 30, 2005,
        from
        $3.3 million at December 31, 2004. The decrease was due to a decrease in
        the
        amount of financed equipment during the six months ended June 30,
        2005.
 
 The
        following table summarizes certain information regarding other borrowings
        at the
        respective dates:
 
 *(Dollars
        in thousands)*
 **Capital
                  Leases**
              
              **Range
                  of Interest Rates**
              
              **Balance**
              
              **Range
                  of Expiration Dates**At
                  June 30, 2005
              
              3.29%
                  to 12.45%
              
              $
                  2,550
              
              October
                  2005 to December 2007At
                  December 31, 2004
              
              3.29%
                  to 12.45%
              
              $
                  3,330
              
              October
                  2005 to December 2007
 
 ***Accrued
        Interest Payable.*** Accrued
        interest payable increased $3.3 million, or 76.2%, to $7.5 million at June
        30,
        2005, from $4.3 million at December 31, 2004. This increase was directly
        related
        to the accrued interest on the securitization debt issued during the six
        months
        ended June 30, 2005. Accrued interest payable related to warehouse borrowings
        represented $98,000 and $101,000 of the balance at June 30, 2005 and December
        31, 2004, respectively.
 
 ***Accounts
        Payable and Other Liabilities.*** Accounts
        payable and other liabilities increased $2.9 million, or 12.3%, to $25.9
        million
        at June 30, 2005, from $23.0 million at December 31, 2004. The increase was
        primarily due to (1) a $3.1 million increase in accrued servicer payables
        related primarily to our accounting for loan securitizations as secured
        financings in 2004, (2) a $2.4 million increase in payroll accruals for payroll
        related items ( *i.e.* ,
        salary
        and commissions) due to a combination of the 29.1% increase in personnel
        and
        timing of commission payments, (3) an $362,000 increase in deferred hedge
        liabilities, and (4) a $1.4 million increase in accrued professional fees,
        primarily related to Sarbanes-Oxley Section 404 initiatives. These increases
        were partially offset by a $5.1 million decrease in current taxes payable
        during
        the same period.
 
 **43**
 ***Stockholders’
        Equity.*** Stockholders’ equity increased $2.7 million, or 3.2%, to $89.9 million at June
        30, 2005 from $87.2 million at December 31, 2004. This increase is primarily
        due
        to the recording of $5.6 million in net income for the six months ended June
        30,
        2005 and the $366,000 of proceeds (and tax benefits) we received from the
        exercise of 75,800 stock options from authorized but unissued shares during
        the
        same period, offset by the payment of $1.0 million in common stock dividends
        and
        the accrual of $1.0 million in common stock dividends that were declared
        on June
        20, 2005 and paid on July 6, 2005.
 
 Additionally
        decreasing stockholders’ equity was a $1.2 million increase in the cumulative
        other comprehensive loss related to the net unrealized losses from derivatives,
        net of tax. The cumulative other comprehensive income, net of tax, recorded
        at
        June 30, 2005 denotes the changes in fair value of our hedges, net of
        reclassification to earnings for the six months ended June 30, 2005. The
        deferred loss amounts will be recognized as a yield adjustment to interest
        expense over the life of the previously hedged variable-rate debt.
 
 **Contractual
        Obligations**
 
 The
        following table summarizes our material contractual obligations as of June
        30,
        2005:
 
 *(Dollars
                  in thousands)*
              
              **Total**
              
              **Less
                  than**
                **One
                  Year**
              
              **One
                  to**
                **Three
                  Years**
              
              **Three
                  to**
                **Five
                  Years**
              
              **More
                  than**
                **Five
                  Years**Securitization
                  asset-backedsecurities(1)
              
              $
              3,368,929
              
              $
              1,034,858
              
              $
              1,348,990
              
              $
              524,166
              
              $
              460,915Operating
                  leases
              
              $
              19,637
              
              $
              5,609
              
              $
              10,446
              
              $
              3,235
              
              $
              347Capital
                  leases
              
              $
              2,550
              
              $
              1,494
              
              $
              1,056
              
              $
              --
              
              $
              --
 
 *(1)*  *Amounts
        shown above reflect estimated repayments based on anticipated receipt of
        principal and interest on underlying mortgage loan collateral using the same
        prepayment speed assumptions we use to value our excess cashflow
        certificates.*
 
 **Loan
        Commitments**
 
 We
        provide commitments to fund mortgage loans to customers as long as all of
        the
        proper conditions are met. Our commitments have fixed expiration dates. We
        quote
        interest rates to customers, which are generally subject to change by us.
        Although we typically honor these interest rate quotes, the quotes do not
        constitute future cash requirements, minimizing the potential interest rate
        risk
        exposure. We do not believe these non-conforming mortgage loan commitments
        meet
        the definition of a derivative under GAAP. Accordingly, they are not recorded
        in
        the consolidated financial statements. At June 30, 2005, and December 31,
        2004,
        we had outstanding origination commitments to fund approximately $110.3 million
        and $92.2 million, respectively, in mortgage loans.
  **44**
  
 **Off-Balance
        Sheet Trusts**
 
 Substantially
        our entire off-balance sheet arrangements relate to securitizations structured
        as sales prior to 2004. In connection with our securitization transactions
        that
        were structured as sales (and where we have recorded an economic interest, *i.e.* the
        excess cashflow certificates), there is $1.1 billion in collateral (primarily
        mortgage loans) owned by off-balance sheet trusts as of June 30, 2005. These
        trusts have issued asset-backed securities secured by these mortgage loans.
        We
        have no obligation to provide funding support to either the third party
        investors or the off-balance sheet trusts. The third-party investors or the
        trusts have no recourse to our assets or us and have no ability to require
        us to
        repurchase their loans other than for non-credit-related recourse that can
        arise
        under standard representations and warranties. See “ - Securitizations” for
        additional information regarding these transactions.
 
 **Liquidity
        and Capital Resources**
 
 The
        term
“liquidity” refers to our ability to generate adequate amounts of cash to fund
        our operations, including our loan originations, loan purchases, operating
        expenses and planned dividend payments. We
        require substantial amounts of cash to fund our loan originations,
        securitization activities and operations. We generate working capital primarily
        from the cash proceeds from our quarterly securitizations, including the
        sale of
        MSRs. Our current cost structure has many embedded fixed costs, which are
        not
        likely to be significantly affected by a relatively substantial change in
        our
        loan origination volume. If we can continue to originate a sufficient amount
        of
        mortgage loans and continue our practice of securitizations, we expect to
        generate sufficient cash proceeds from our securitization financings, whole
        loan
        sales and the cash flows from our growing portfolio of mortgage loans held
        for
        investment to offset our current cost structure and cash uses. However, we
        may
        choose to not sell MSRs or reduce the amount of securitization debt we issue,
        which will negatively impact our cash flow in any period we do so.
 
 We
        believe we must generate sufficient cash from the following in order to sustain
        our current level of working capital:
 
 ·
              the
                  proceeds we receive from selling or financing asset-backed securities
                  in
                  connection with our securitizations;·
              the
                  proceeds from the sale of MSRs to a third-party mortgage
                  servicer;·
              the
                  premiums we receive from selling whole loans on a servicing released
                  basis;·
              origination
                  fees collected on newly closed loans;·
              the
                  cash flow from caps;·
              excess
                  cashflow certificates we retained in connection with our securitizations
                  prior to 2004; and·
              principal
                  and interest payments we receive on our loans held for
                  investment.Currently,
                  our primary uses of cash requirements include the funding
                  of:·
              mortgage
                  loans held for investment - pre-securitization which are not
                  financed;·
              interest
                  expense on warehouse lines of credit, financing of mortgage loans
                  held for
                  investment, and other financings;·
              scheduled
                  principal pay-downs on financing of mortgage loans held for investment
                  and
                  other financings;·
              transaction
                  costs, derivative costs and credit enhancement (O/C) in connection
                  with
                  our securitization program;·
              general
                  ongoing administrative and operating expenses, including the cost
                  to
                  originate loans;·
              tax
                  payments, including those on excess inclusion income generated
                  from our
                  excess cashflow certificates; and·
              common
                  stock dividends.
 
 **45**
  Historically, we have financed our operations utilizing securitization
        financings, various secured credit financing facilities, issuances of corporate
        debt, issuances of equity, and MSRs sold in conjunction with each of our
        securitizations to support our originations, securitizations, and general
        operating expenses. Currently, our primary sources of liquidity, subject
        to
        market conditions, continue to be:
 
 ·
              warehouse
                  financing and other secured financing facilities;·
              financing
                  related to the securitization of mortgage loans;·
              sales
                  of whole loans and MSRs;·
              cash
                  flows from our mortgage loans held for investment;·
              origination
                  fees, interest income and other cash revenues; and·
              cash
                  flows from retained excess cashflow certificates.
 We have repurchase agreements with several of the institutions that have
        purchased mortgage loans from us in the past. Some of the agreements provide
        for
        the repurchase by us of any of the mortgage loans that go to foreclosure
        sale.
        At the foreclosure sale, we will repurchase the mortgage, if necessary, and
        make
        the institution whole. The dollar amount of loans that were sold with recourse
        and are still outstanding totaled $878,000 and $1.1 million at June 30, 2005
        and
        December 31, 2004, respectively. Included in “accounts payable and other
        liabilities” is an allowance for recourse loans related to those loans sold with
        recourse of $490,000 and $837,000 at June 30, 2005 and December 31,
        2004.
  Subject
        to our ability to execute our business strategy and the various uncertainties
        described above (and described in more detail in “- Forward Looking Statements
        and Risk Factors”), we anticipate that we will have sufficient cash flows from
        operations, short-term funding and capital resources to meet our liquidity
        obligations for at least the next twelve months, however, there can be no
        assurance that we will be successful in this regard.
 
 **Financing
        Facilities**
 
 We
        need
        to borrow substantial sums of money each quarter to originate mortgage loans.
        We
        have relied upon a limited number of counterparties to provide us with the
        financing facilities to fund our loan originations. Our ability to fund current
        operations and accumulate loans for securitization depends to a large extent
        upon our ability to secure short-term financing on acceptable terms. There
        can
        be no assurance that we will be able to either renew or replace our warehouse
        facilities at their maturities at terms satisfactory to us or at all. If
        we are
        not able to obtain financing, we will not be able to originate new loans
        and our
        business and results of operations will be negatively impacted.
 
 To
        originate and accumulate loans for securitization, we borrow money on a
        short-term basis through committed secured warehouse lines of credit. The
        material terms and features of our financing facilities in place at June
        30,
        2005 are as follows:
 
 ***RBS
        Greenwich Capital Warehouse Line of Credit*** *.* We have
        a $350.0 million facility with RBS Greenwich Capital Financial Products,
        Inc.,
        which bears interest based upon a fixed margin over the one-month LIBOR.
        This
        facility provides us with the ability to borrow against first and second
        lien
        loans and “wet” collateral, which are loans that have closed and have been
        funded, but for which we have not yet received the loan documents from the
        closing agent. The facility provides the ability to borrow at the lesser
        of 98%
        of fair market value or 100% of the par amount of the mortgage loans between
        0-59 days delinquent. Mortgage loans between 60-89 days delinquent may be
        financed at lower borrowing percentages. This facility expires in October
        2005.
        As of June 30, 2005, the outstanding balance under the facility was $97.4
        million.
 
 ***Citigroup
        Warehouse Line of Credit.*** We have
        a $350.0 million facility with Citigroup Global Markets Realty Corp., which
        bears interest based upon a fixed margin over the one-month LIBOR. This facility
        provides the ability to borrow against first and second lien loans and wet
        collateral. The facility provides us with the ability to borrow at the lesser
        of
        98% of fair market value or 100% of the par amount of the mortgage loans
        between
        0-59 days delinquent. Mortgage loans between 60-89 days delinquent may be
        financed at lower borrowing percentages. This facility expires in March 2006.
        As
        of June 30, 2005, the outstanding balance under the facility was $21.7
        million.
 
 **46**
 ***Friedman,
        Billings, Ramsey Line of Credit.***  We
        have a
        $200.0 million multi-seller asset-backed commercial paper facility with FBR, which
        bears interest based upon a fixed margin over the one-month LIBOR .
        This
        facility allows for the funding and aggregation of mortgage loans using funds
        raised through the sale of short-term commercial paper. This facility will
        expire in November 2005. As of June 30, 2005, we had no outstanding balance under the facility .
 
 Our
        warehouse agreements require us to comply with various operating and financial
        covenants. The continued availability of funds provided to us under these
        agreements is subject to, among other conditions, our continued compliance
        with
        these covenants. We believe we were in compliance with these covenants as
        of
        June 30, 2005.
 
 **Interest
        Rate Risk**
 
 Our
        primary market risk exposure is interest rate risk. Our results of operations
        may be significantly affected by the level of and fluctuation in interest
        rates.
        (See “- Item 3. Quantitative and Qualitative Disclosures About Market Risk -
        Interest Rate Risk”).
 
 **Valuation
        Risk**
 
 In
        connection with the securitizations structured as sales, we have retained
        certain assets for which the market is limited and illiquid. As a result,
        valuations are derived using complex modeling and significant assumptions
        and
        judgments, in the absence of active market quotations or sale information
        to
        value such assets. These retained assets are primarily comprised of excess
        cashflow certificates. The fair value of these assets could vary significantly
        as market conditions change. (See “- Item 2. Management’s Discussion and
        Analysis of Financial Condition and Results of Operations - Summary of Critical
        Accounting Policies - Excess Cashflow Certificates”).
 
 **Credit
        Risk**
 
 A
        significant portion of our loans held for investment have been made to non-prime
        credit borrowers and are secured by residential property. There is no guarantee
        that, in the event of borrower default, we will be able to recoup the full
        principal amount and interest due on a loan. We have adopted underwriting
        and
        loan quality monitoring systems, procedures and credit policies, including
        the
        establishment and review of the allowance for loan losses, that management
        believe are prudent and appropriate to minimize this risk by tracking loan
        performance, assessing the likelihood of nonperformance and diversifying
        our
        loan portfolio. Such policies and procedures, however, may not prevent
        unexpected losses that could adversely affect our results.
 
 We
        also
        sell loans on a whole-loan basis to banks and other financial institutions. When
        we
        sell mortgage loans on a whole-loan basis we are normally subjected to standard
        mortgage industry representations and warranties, which may require us to
        repurchase one or more of the mortgage loans. These representations and
        warranties include provisions requiring us to repurchase a mortgage loan
        if a
        borrower fails to make one or more of the first loan payments due on the
        mortgage loan. In
        these
        instances, we are subject to repurchase risk in the event of a breach of
        standard representations or warranties we make in connection with these
        whole-loan sales.
 
 **Geographical
        Concentration**
 
 Properties
        securing our mortgage loans held for investment are geographically dispersed
        throughout the United States. For the three months ended June 30, 2005,
        approximately 26% and 12%, based upon principal balance, of the mortgage
        loans
        we originated were on properties located in New York and Florida, respectively,
        with no other state representing more than 6% of the originations.
 
 **Environmental
        Matters**
 
 To
        date,
        we have not been required to perform any environmental investigation or clean-up
        activities, nor have we been subject to any environmental claims. There can
        be
        no assurance, however, that this will remain the case in the future. Although
        we
        primarily lend to owners of residential properties, in the course of our
        business, we may acquire properties securing loans that are in default. There
        is
        a risk that we could be required to investigate and clean-up hazardous or
        toxic
        substances or chemical releases at these properties, and may be held liable
        to a
        governmental entity or to third parties for property damage, personal injury
        and
        investigation and clean-up costs incurred in connection with the contamination.
        In addition, the owner or former owners of a contaminated site may be subject
        to
        common law claims by third parties based on damages and costs resulting from
        environmental contamination emanating from the property.
 
 **47**
 **Inflation**
 
 Inflation most significantly affects our loan originations and values of
        our
        excess cashflow certificates, because of the substantial effect inflation
        can
        have on interest rates. Interest rates normally increase during periods of
        high
        inflation and decrease during periods of low inflation. (See “- Item 3.
        Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
        Risk”).
 
 **Impact
        of New Accounting Standards**
 
 *Accounting
        Changes and Error Corrections* .
        In May
        2005, the FASB issued SFAS No. 154, which provides guidance on the accounting
        for and reporting of accounting changes and error corrections. SFAS No. 154
        establishes, unless impracticable, retrospective application as the required
        method for reporting a change in accounting principle in the absence of explicit
        transition requirements specific to the newly adopted accounting principle.
        It
        also provides guidance for determining whether retrospective application
        of a
        change in accounting principle is impracticable and for reporting a change
        when
        retrospective application is impracticable. The correction of an error in
        previously issued financial statements is not an accounting change. However,
        the
        reporting of an error correction involves adjustments to previously issued
        financial statements similar to those generally applicable to reporting an
        accounting change retrospectively. Therefore, the reporting of a correction
        of
        an error by restating previously issued financial statements is also addressed
        by SFAS No. 154. SFAS
        No.
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005. Early adoption is permitted for
        accounting changes and corrections of errors made in fiscal years beginning
        after the date SFAS No. 154 was issued. SFAS No. 154 does not change the
        transition provisions of any existing accounting pronouncements, including
        those
        that are in a transition phase as of the effective date of SFAS No.
        154.
 
 *Share-Based
        Payment.* In
        December 2004, the FASB published SFAS No. 123(R). ** SFAS No.
        123(R) replaces SFAS No. 123, and supersedes APB Opinion No. 25. ** SFAS
        No.
        123(R) also amends SFAS No. 95 to require that excess tax benefits be reported
        as a financing cash inflow rather than as a reduction of taxes
        paid.
 
 SFAS
        No.
        123(R) is intended to provide investors and other users of financial statements
        with more complete and neutral financial information by requiring that the
        compensation cost relating to share-based payment transactions be recognized
        in
        financial statements. The cost will be measured based on the fair value of
        the
        equity or liability instruments issued. We will be required to apply SFAS
        No.
        123(R), as amended by the SEC on April 14, 2005, as of the annual reporting
        period that begins after June 15, 2005 (or January 1, 2006). SFAS No. 123(R)
        applies to all awards granted after the required effective date and will
        not be
        applied to awards granted in periods before the required effective date except
        to the extent that prior periods’ awards are modified, repurchased or cancelled
        after the required effective date. The cumulative effect of initially applying
        SFAS No. 123(R), if any, will be recognized as of the required effective
        date.
        We are currently evaluating pricing models and the transition provisions
        of this
        standard and will begin expensing stock options in the first quarter of
        2006.
 
 SFAS
        No.
        123(R) provides two alternatives for adoption: (1) a "modified prospective"
        method in which compensation cost is recognized for all awards granted
        subsequent to the effective date of SFAS No. 123(R) as well as for the unvested
        portion of awards outstanding as of the effective date; or (2) a "modified
        retrospective" method which follows the approach in the "modified prospective"
        method, but also permits the restatement of prior periods to record compensation
        costs calculated under SFAS No. 123 for the pro forma disclosure. We plan
        to
        adopt SFAS No. 123(R) using the modified retrospective method. Since we
        currently account for stock options granted to employees in accordance with
        the
        intrinsic value method permitted under APB Opinion No. 25, no compensation
        expense is recognized. The impact of adopting SFAS No. 123(R) cannot be
        accurately estimated at this time, as it will depend on the market value
        and the
        amount of share based awards granted in future periods. However, had we adopted
        SFAS No. 123(R) in a prior period, the impact would approximate the impact
        as
        described in the disclosure of pro forma net income and earnings per share
        under
        SFAS No. 123 in Note 5 to our consolidated financial statements “- Stock-Based
        Compensation.” SFAS No. 123(R) also requires that tax benefits received in
        excess of compensation cost be reclassified from operating cash flows to
        financing cash flows in the consolidated statement of cash flows. This change
        in
        classification will reduce net operating cash flows and increase net financing
        cash flows in the periods after adoption.
 
 **48**
 **Forward-Looking
        Statements and Risk Factors**
 
 Except
        for historical information contained in the report, certain matters discussed
        in
        this Form 10-Q are “forward-looking statements” as defined in the Private
        Securities Litigation Reform Act of 1995 (“PSLRA”), which involve risk and
        uncertainties that exist in our operations and business environment and are
        subject to change on a variety of important factors. A forward-looking statement
        may contain words such as “anticipate that,”“believes,”“continue
        to,”“estimates,”“expects to,”“hopes,”“intends,”“plans,”“to be,”“will be,”“will
        continue to be,” or similar words. These statements include, but are not limited
        to, the anticipated impact to our financial statements of our change to our
        accounting for securitizations, our future profitability, our future cash
        flows
        and liquidity requirements, the impact of changes in interest rates, our
        plans
        to securitize the loans we originate, our future hedging strategy, and our
        ability to realize benefits from our deferred tax asset. Such statements
        are
        subject to the “safe harbor” provisions of the PSLRA. We caution readers that
        numerous important factors discussed below, among others, could cause our
        actual
        results to differ materially from those expressed in any forward-looking
        statements made in this report. The following include some, but not all,
        of the
        factors or uncertainties that could cause our actual results to differ from
        our
        projections:
 
 ·
              Our
                  ability or inability to earn a sufficient spread between our cost
                  of funds
                  and our average mortgage rates to generate sufficient revenues
                  and cash
                  flows to offset our current cost structure and cash
                  uses;
  ·
              Our
                  ability or inability to originate a sufficient amount of mortgage
                  loans,
                  and subsequent sale or securitization of such loans, to offset
                  our current
                  cost structure and cash uses;
  ·
              Our
                  ability or inability to continue our practice of securitizing mortgage
                  loans, as well as our ability to utilize optimal securitization
                  structures
                  (including the sale of MSRs, at the time of securitization) at
                  terms
                  favorable to us to generate sufficient cash proceeds to offset
                  our current
                  cost structure;
  ·
              The
                  impact of changes in our accounting policies, including our change
                  to
                  on-balance sheet treatment of our
                  securitizations;
  ·
              Our
                  ability or inability to continue to employ on-balance sheet
                  securitizations to generate cash flows and earnings from net interest
                  spread income;
  ·
              Our
                  ability or inability to continue to access lines of credit at favorable
                  terms and conditions, including without limitation, warehouse and
                  other
                  credit facilities used to finance newly-originated mortgage loans
                  held for
                  sale and our ability or inability to comply with covenants contained
                  in
                  these lines of credit;
  ·
              The
                  effects of interest rate fluctuations and our ability or inability
                  to
                  hedge effectively against these fluctuations in interest rates,
                  the effect
                  of changes in monetary and fiscal policies, social and economic
                  conditions, unforeseen inflationary pressures and monetary
                  fluctuation;
  ·
              Increased
                  competition within our markets, particularly in the wholesale loan
                  channel, where an increasing number of lenders are competing for
                  business
                  from independent mortgage brokers;
  ·
              The
                  potential effect that possible conflicts with other sovereign nations,
                  including the conflict in Iraq, or terrorist acts and/or threats,
                  may have
                  on the U.S. economy and capital markets, and in particular the
                  asset-backed market;
  ·
              Our
                  loan products may require payment adjustments during the term of
                  the
                  mortgage loan that may result in increased payment defaults by
                  borrowers
                  and higher losses to us.****Some
                  of our loan products require payment adjustments during the term
                  of the
                  mortgage loan. This can result in payment defaults by borrowers
                  who are
                  unprepared or unable to meet higher payment requirements. In addition,
                  some of our loan products do not amortize evenly and generally
                  enable the
                  borrower to either pay only interest for several years before the
                  loan
                  begins amortizing or pay a reduced principal and interest payment
                  for the
                  first 10 years. These loan products, in addition to possibly having
                  increased payment defaults, may also result in higher losses to
                  us due to
                  higher principal balances outstanding at the time of a borrower
                  default
                  than would be the case for loan that amortizes evenly throughout
                  its
                  term.
 
 **49**
 ·
              The
                  effect that the adoption of new, or amendments in, federal, state
                  or local
                  lending laws and regulations and the application of these laws
                  and
                  regulations may have on our ability to originate loans within a
                  particular
                  area, or to ultimately sell those loans through securitization
                  or on a
                  whole-loan basis. In some instances, we may choose or be forced
                  to
                  severely limit, or even cease our lending activities in a particular
                  area.
                  Many states and local municipalities have adopted and/or are considering
                  adopting laws that are intended to further regulate our industry.
                  Many of
                  these laws and regulations seek to impose broad restrictions on
                  certain
                  commonly accepted lending practices, including some of our practices.
                  In
                  addition, enacted federal, state and local laws could impact
                  overcollateralization requirements set by the rating agencies,
                  which could
                  decrease the cash proceeds we may receive from our
                  securitizations;
  ·
              Costs
                  associated with litigation and rapid or unforeseen escalation of
                  the cost
                  of regulatory compliance, generally including but not limited to,
                  the
                  adoption of new, or changes in, federal, state or local lending
                  laws and
                  regulations and the application of such laws and regulations, licenses,
                  environmental compliance, the adoption of new, or changes in accounting
                  policies and practices and the application of such policies and
                  practices.
                  Failure to comply with various federal, state and local regulations,
                  accounting policies and/or environmental compliance can lead to
                  the loss
                  of approved status, rights of rescission for mortgage loans, class
                  action
                  lawsuits, demands for indemnification or loan repurchases by purchasers
                  of
                  our loans and administrative enforcement action again
                  us;
  ·
              Our
                  ability or inability to find alternative methods of generating
                  retail
                  leads and originating retail loans in light of the Federal Trade
                  Commission (“FTC”) “do not call” registries, which were implemented in
                  2003 and may limit our ability to utilize telemarketing to generate
                  retail
                  leads and originate retail loans. Our marketing operations are
                  or may
                  become subject to various federal and state “do not call” list
                  requirements. Under the FTC’s regulations, consumers may have their phone
                  numbers added to the national “do not call” registry. Generally, we are
                  prohibited from cold calling anyone on that registry. These regulations
                  may restrict our ability to market effectively our products and
                  services
                  to new customers. Furthermore, compliance with these regulations
                  may prove
                  costly and difficult, and we may incur penalties for improperly
                  conducting
                  our marketing activities;
  ·
              The
                  risk that we will be subject to claims under environmental
                  laws;
  ·
              The
                  risk that using Insured AVMs in lieu of appraisals could increase
                  our
                  losses. An AVM may be considered a less accurate measure to value
                  a
                  property and a full appraisal with an interior inspection performed
                  by a
                  licensed appraiser. If the values received from the AVM are higher
                  than
                  the actual property values, we may incur higher losses. While we
                  obtain an
                  insurance policy on the AVM value at the time of origination, there
                  can be
                  no assurance that we will recover claims from this policy in the
                  event of
                  a loss.
  ·
              Our
                  ability or inability to detect misrepresentations, fraudulent information
                  or negligent acts on the part of loan applicants, mortgage brokers,
                  other
                  vendors or our employees in our loan originations prior to funding
                  and the
                  effect it may have on our business, including potentially harming
                  our
                  reputation or resulting in poorer performing
                  loans;
  ·
              The
                  risks of defaults on the loans that we make to non-prime credit
                  borrowers,
                  and that our underwriting and loan quality monitoring systems will
                  not be
                  sufficient to minimize the impact from these
                  defaults;
  ·
              The
                  risk that we may need to repurchase loans securitized or sold on
                  a
                  whole-loan basis if we breach the representations and warranties
                  that we
                  make in connection with the sales;
  ·
              Our
                  ability or inability to continue monetizing our existing excess
                  cashflow
                  certificates, including without limitation, selling, financing
                  or
                  securitizing such assets;
  ·
              The
                  accuracy of our estimates of the value of our excess cashflow
                  certificates;
  ·
              Periods
                  of general economic slowdown or recession may be accompanied by
                  decreased
                  demand for consumer credit and declining real estate values. Because
                  of
                  our focus on credit-impaired borrowers, the actual rate of delinquencies,
                  foreclosures and losses on loans affected by the borrowers’ reduced
                  ability to use home equity to support borrowings could be higher
                  than
                  those generally experienced in the mortgage lending industry. We
                  are
                  particularly subject to economic conditions in the northeastern
                  U.S.,
                  where approximately 47% of our loans were originated during the
                  six months
                  ended June 30, 2005. Any sustained period of increased delinquencies,
                  foreclosure, losses or increased costs could adversely affect our
                  ability
                  to securitize or sell loans in the secondary
                  market;
  **50**
 ·
              The
                  effect that poor servicing or collections by third-party servicers
                  that
                  service the loans we originate, and/or regulatory actions and class
                  action
                  lawsuits against these servicers, could have on the value of our
                  excess
                  cashflow certificates, the net interest spread we earn, and/or
                  our ability
                  to sell or securitize loans in the
                  future;
  ·
              A
                  decline in the quality of servicing and/or a degradation in the
                  financial
                  condition of the entity servicing our mortgage loans could lower
                  the value
                  of our excess cashflow certificates and our securitized loan portfolio,
                  as
                  well as our ability to sell or securitize loans. In May 2001, we
                  transferred our servicing portfolio to Ocwen Financial Corporation
                  (“Ocwen”), which is currently a non-investment grade company. Poor
                  servicing by Ocwen or any other third party servicer who services
                  the
                  loans we originate could harm the value of securitized mortgage
                  loans (and
                  our excess cashflow certificates in pre-2004 securitizations) and
                  our
                  ability to sell or securitize loans. Additionally, regulatory actions
                  and
                  class action lawsuits against these servicers could harm the value
                  of our
                  securitized loans (and our excess cash flow certificates in pre-2004
                  securitizations) and our ability to sell or securitize loans. Ocwen
                  and
                  several of its affiliates have been named as defendants in a number
                  of
                  purported class action lawsuits that challenge its servicing practices
                  under applicable federal and state laws. In addition, according
                  to its
                  public filings, Ocwen and its affiliates maintain high levels of
                  indebtedness, Ocwen is a non-investment grade company and has recently
                  terminated its status as a federal savings bank under supervision
                  of the
                  Office of Thrift Supervision ("OTS") and Federal Deposit Insurance
                  Corporation and has obtained, or is in the process of obtaining,
                  necessary
                  licensing at the state and territorial level. If Ocwen's operations
                  are
                  impaired as a result of litigation, governmental investigations,
                  its
                  inability to repay its indebtedness when due, or further degradation
                  of
                  its capitalization or credit rating, our profitability and operations
                  may
                  be harmed.
 
 ·
              The
                  effect that an interruption in, or breach of, our information systems
                  could have on our business;
 
 ·
              Our
                  ability or inability to adapt to an implement technological changes
                  to
                  become and/or remain competitive and/or
                  efficient;
  ·
              Unpredictable
                  delays or difficulties in the development of new product
                  programs;
  ·
              Regulatory
                  actions, which may have an adverse impact on our
                  lending;
  ·
              Changes
                  in regulations issued by the OTS have limited our ability to charge
                  prepayment penalties on some of the mortgage loans we originate.
                  These
                  changes do not affect our competitors that are federally regulated
                  institutions, which could have an adverse impact on ability to
                  compete in
                  these states. In addition, the absence of prepayment penalties
                  on some of
                  our loans could also adversely impact our securitizations and related
                  profitability;
  ·
              The
                  unanticipated expenses of assimilating newly-acquired business,
                  if any,
                  into our structure, as well as the impact of unusual expenses from
                  ongoing
                  evaluations of business strategies, asset valuations, acquisitions,
                  divestitures and organizational structures;
                  and
  ·
              Our
                  inability to comply with REIT qualification tests for our REIT
                  subsidiary
                  on a continuous basis would subject our securitization trusts issued
                  by
                  our REIT subsidiary to federal income tax as a corporation and
                  not allow
                  it to be filed as part of consolidated income tax return with any
                  other
                  corporation. The REIT rules require compliance with asset, income,
                  distribution and ownership tests. The ownership test prohibits
                  five or
                  fewer stockholders from owning more than 50% of our common stock.
                  As of
                  June 30, 2005, members of the Miller family (considered one stockholder
                  under the ownership test) own approximately 48% of the common stock
                  (including employee stock options as calculated under the Code
                  and related
                  rules and regulations). There can be no assurance that we will
                  be able to
                  comply with these tests, or remain compliant. In such an event,
                  a tax
                  imposed upon these securitization trusts would reduce cash flow
                  that would
                  otherwise be available to make payments on the offered asset-backed
                  securities and reduce the amount that we would receive from the
                  securitization trusts. In such event, this would significantly
                  affect our
                  access to the securitization markets and warehouse and other credit
                  facilities, and reduce our
                  profitability.
 
 **51**
 **Item
        3. Quantitative and QualitativeDisclosures About Market
        Risk.**
 
 We
        originate mortgage loans and then securitize the mortgage loans or sell them
        through whole loan sales. As a result, our primary market risk is interest
        rate
        risk. In turn, interest rates are highly sensitive to many factors,
        including:
  · Governmental
        monetary and tax policies;
  · Domestic
        and international economic and political considerations; and
  · Other
        factors that are also beyond our control.
 
 Changes
        in the general interest rate levels between the time we originate mortgage
        loans
        and the time we securitize or sell the mortgage loans can affect their value
        and, consequently, our net interest income revenue by affecting the “excess
        spread” between the interest rate on the mortgage loans and the interest paid on
        the asset-backed securities issued by the securitization trusts. If interest
        rates rise between the time we originate the loans and the time we securitize
        or
        sell the loans, the excess spread generally narrows, resulting in a loss
        in
        value of the loans and lower net interest income for us on mortgage loans
        we
        securitize and a lower net gain on sale for us on whole loan sales. Since
        we
        close and fund mortgage loans at a specified interest rate with an expected
        spread to be earned over their life in the case of securitizations and an
        expected gain on sale to be booked at the time of their sale, our exposure
        to
        decreases in the fair value of the mortgage loans arises when moving from
        a
        lower to a higher interest rate environment. A higher interest rate environment
        results in our having a higher cost of funds. This decreases both the fair
        value
        of the mortgage loans and the net spread we earn between the mortgage interest
        rate on each mortgage loan and our cost of funds under available warehouse
        lines
        of credit used to finance the loans prior to their securitization or sale.
        As a
        result, we may experience lower spreads on securitized loans and a lower
        gain on
        whole-loan sales.
 
 The
        following table demonstrates the sensitivity, at June 30, 2005, of the estimated
        fair value of our excess cashflow certificates caused by an immediate 10%
        and
        20%, respectively, adverse change in the key assumptions we use to estimate
        fair
        value:
 
 *(Dollars
                  in thousands)*
              
              **Fair
                  Value of**
                **Excess
                  Cashflow**
                **Certificates**
              
              **Decrease
                  (Increase)**
                **To
                  Earnings**
                **(Pre-tax
                  basis)**Fair
                  value as of June 30, 2005
              
              $
              11,02410%
                  increase in prepayment speed
              
              
              11,539
              
              $
              (515
              )20%
                  increase in prepayment speed
              
              
              12,107
              
              
              (1,083
              )10%
                  increase in credit losses
              
              
              8,990
              
              
              2,03420%
                  increase in credit losses
              
              
              7,206
              
              
              3,81810%
                  increase in discount rates
              
              
              10,874
              
              
              15020%
                  increase in discount rates
              
              
              10,729
              
              
              29510%
                  increase in one and six-month LIBOR
              
              
              9,526
              
              
              1,49820%
                  increase in one and six-month LIBOR
              
              
              8,279
              
              
              2,745
 
 The
        sensitivities are hypothetical and are presented for illustrative purposes
        only.
        Changes in the fair value resulting from a change in assumptions generally
        cannot be extrapolated because the relationship of the change in assumption
        to
        the resulting change in fair value may not be linear. Each change in assumptions
        presented above was calculated independently, without changing any other
        assumption. However, in reality, changes in one assumption may result in
        changes
        in another assumption, which may magnify or counteract the sensitivities.
        For
        example, a change in market interest rates may simultaneously impact prepayment
        speeds, credit losses and the discount rate. It is impossible to predict
        how one
        change in a particular assumption may impact other assumptions.
 
 **52**
 To
        reduce
        our financial exposure to changes in interest rates, we may hedge our mortgage
        loans held for investment through hedging products that are correlated to
        the
        asset-backed securities issued in connection with the securitization of our
        mortgage loans ( *e.g* .,
        interest rate swaps). (See “- Item 2. - Management’s Discussion and Analysis of
        Financial Condition and results of Operations - Summary of Critical Accounting
        Policies - Accounting for Hedging Activities”). Changes in interest rates also
        could adversely affect our ability to originate loans and/or could affect
        the
        level of loan prepayments, impacting the amount of mortgage loans held for
        investment and/or the size of the loan portfolio underlying our excess cashflow
        certificates and, consequently, the value of our excess cashflow certificates.
        (See “- Interest Rate Risk/Market Risk” and “- Item 2. - Management’s Discussion
        and Analysis of Financial Condition and results of Operations - Forward Looking
        Statements and Risk Factors”).
 
 **Interest
        Rate/Market Risk**
 
 Our
        general investment policy is to maintain the net interest margin between
        assets
        and liabilities.
 
 ***Loan Price Volatility*** *.* Under
        our current mode of operation, we depend heavily on the market for wholesale
        non-conforming mortgage loans. To conserve capital, we may sell loans we
        originate. Our financial results will depend, in part, on our ability to
        find
        purchasers for our loans at prices that cover origination expenses. Exposure
        to
        loan price volatility is reduced as we acquire and retain mortgage
        loans.
 
 ***Interest
        Rate Risk*** *.* Interest
        rates affect our ability to earn a spread between interest received on our
        loans
        and the cost of our borrowings, including the cost of corridors, if any,
        that
        are tied to various interest rate swap maturities, LIBOR, and other interest
        rate spread products, such as mortgage, auto and credit card backed receivable
        securities. Our profitability is likely to be negatively impacted during
        any
        period of unexpected or rapid changes in interest rates. A substantial and
        sustained increase in interest rates could impact our ability to originate
        loans. A significant decline in interest rates could increase the level of
        loan
        prepayments, which would decrease the size of the loan servicing portfolio
        underlying our securitizations. To the extent excess cashflow certificates
        have
        been capitalized on our financial statements, higher than anticipated rates
        of
        loan prepayments or losses could require us to write down the value of these
        excess cashflow certificates, which adversely impact our earnings. In an
        effort
        to mitigate the effect of interest rate risk, we periodically review our
        various
        mortgage products and identify and modify those that have proven historically
        more susceptible to prepayments. However, there can be no assurance that
        these
        modifications to our product line will mitigate effectively any interest
        rate
        risk in the future.
 
 Periods
        of unexpected or rapid changes in interest rates, and/or other volatility
        or
        uncertainty regarding interest rates, also can harm us by increasing the
        likelihood that asset-backed investors will demand higher spreads than normal
        to
        offset the volatility and/or uncertainty, which decreases the value of the
        excess cashflow certificates we receive in connection with a
        securitization.
 
 Fluctuating
        interest rates may also affect the net interest income we earn, resulting
        from
        the difference between the yield we receive on the loans held pending sale
        and
        the interest paid by us for funds borrowed under our warehouse facilities.
        In
        the past, from time to time, we have undertaken certain measures to hedge
        our
        exposure to this risk by using various hedging strategies, including Fannie
        Mae
        mortgage securities, treasury rate lock contracts and/or interest rate swaps.
        See “- Item 2. - Summary of Critical Accounting Policies - Accounting for
        Hedging Activities.” Fluctuating interest rates also may significantly affect
        the excess cash flows from our excess cashflow certificates, as the interest
        rate on some of our asset-backed securities change monthly based on one-month
        LIBOR, but the collateral that backs such securities are comprised of mortgage
        loans with either fixed interest rates or “hybrid” interest rates (fixed for the
        initial two or three years of the mortgage loan, and adjusting thereafter
        every
        six month) which creates basis risk. See “- Item 2. - Summary of Critical
        Accounting Policies - Excess Cashflow Certificates.” With our transition to
        on-balance sheet portfolio securitizations in 2004, we may undertake to hedge
        our exposure to interest rate risk as described above in “- Item 2. - Summary of
        Critical Accounting Policies - Accounting for Hedging Activities.”
 
 **53**
 When
        interest rates on our assets do not adjust at the same rates as our liabilities
        or when the assets have fixed-rates and the liabilities are adjusting, our
        future earnings potential is affected. We express this interest rate risk
        as the
        risk that the market value of assets will increase or decrease at different
        rates than that of the liabilities. Expressed another way, this is the risk
        that
        net asset value will experience an adverse change when interest rates change.
        We
        assess the risk based on the change in market values given increases and
        decreases in interest rates. We also assess the risk based on the impact
        to net
        income in changing interest rate environments.
 
 Management
        primarily uses financing sources where the interest rate resets frequently.
        As
        of June 30, 2005, borrowings under all of our financing arrangements adjust
        daily or monthly. On the other hand, very few of the mortgage assets we own
        adjust on a monthly or daily basis. Most of the mortgage loans are fixed-rate;
        the remainder contains features where their rates are fixed for some period
        of
        time and then adjust frequently thereafter. For example, one of our loan
        products is the “2/28” loan. This 30-year loan is fixed for its first two years
        and then adjusts every six months thereafter.
 
 While
        short-term borrowing rates are low and long-term asset rates are high, this
        portfolio structure enhances our net interest income during the relevant
        period.
        However, if short-term interest rates rise rapidly, the earnings potential
        is
        significantly affected, as the asset rate resets would lag behind the borrowing
        rate resets.
 
 ***Interest
        Rate Sensitivity Analysis.*** To
        assess interest sensitivity as an indication of exposure to interest rate
        risk,
        management relies on models of financial information in a variety of interest
        rate scenarios. Using these models, the fair value and interest rate sensitivity
        of each financial instrument, or groups of similar instruments, is estimated
        and
        then aggregated to form a comprehensive picture of the risk characteristics
        of
        the balance sheet.
 
 We
        measure the sensitivity of our net interest income to changes in interest
        rates
        affecting interest sensitive assets and liabilities using various interest
        rate
        simulations. These simulations take into consideration changes that may occur
        in
        the forward LIBOR curve and changes in mortgage prepayment speeds.
 
 As
        part
        of various interest rate simulations, we calculate the effect of potential
        changes in interest rates on our interest-earning assets and interest-bearing
        liabilities and their affect on overall earnings. The simulations assume
        instantaneous and parallel shifts in interest rates and to what degree those
        shifts affect net interest income. First, we project our net interest income
        for
        the next 12 months and 36 months using current period end data along with
        a
        forward LIBOR curve and the prepayment speed assumptions we used to estimate
        the
        fair value of our excess cashflow certificates.
 
 We
        refer
        to the one-year and the three-year projections of net interest income as
        the
“base case.” Once the base case has been established, we “shock” the base case
        with instantaneous and parallel shifts in interest rates in 100 basis point
        increments upward and downward. Calculations are made for each of the defined
        instantaneous and parallel shifts in interest rates over or under the forward
        LIBOR curve used to determine the base and including any associated changes
        in
        projected mortgage prepayment speeds. The following tables present the results
        of each 100 basis point change in interest rates compared against the base
        case
        to determine the estimated dollar and percentage change to net interest income
        at June 30, 2005:
 
 *(Dollars
                  in thousands)*
              
              **Base
                  Case**
              
              **Up
                  100 Basis Points**
              
              **Up
                  200 Basis Points**
              
              **Down
                  100 Basis Points**
              
              **Down
                  200 Basis Points*****One
                  Year Projection:***Net
                  interest income(1)(2)
              
              $
              104,328
              
              $
              103,224
              
              $
              102,253
              
              $
              107,757
              
              $
              114,808Percentage
                  change from base
              
              
              
              
              
              (1.06
              )%
              
              (1.99
              )%
              
              3.29
              %
              
              10.05
              %***Three
                  Year Projection:***Net
                  interest income(1)(2)
              
              $
              193,024
              
              $
              185,403
              
              $
              179,600
              
              $
              202,487
              
              $
              215,846Percentage
                  change from base
              
              
              
              
              
              (3.95
              )%
              
              (6.95
              )%
              
              4.90
              %
              
              11.82
              %
 
 *(1)*  *Net
        interest income from assets (income from mortgage loans held for sale, mortgage
        loans held for investment and interest rate caps) less expense from liabilities
        (financing on mortgage loans held for investment and warehouse interest expense)
        in a parallel shift in the yield curve, up and down 1% and 2%.*
 
 *(2)*  *Assumes
        warehouse interest expense through September 30, 2005.*
 
 **54**
 ***Hedging*** *.* From an
        interest rate risk management perspective, we use interest rate swaps and
        corridors in an effort to offset the potential adverse effects of our exposure
        during a period of rising rates. In this way, management intends generally
        to
        hedge as much of the interest rate risk as determined to be in our best
        interest, given the cost of hedging transactions.
 
 We
        seek
        to build a balance sheet and undertake an interest risk management program
        that
        is likely, in management’s view, to enable us to maintain an equity liquidation
        value sufficient to maintain operations given a variety of potentially adverse
        circumstances. Accordingly, the hedging program addresses income preservation,
        as discussed in the first part of this section.
 
 Corridors
        are legal contracts between us and a third party firm or “counterparty.” The
        counterparty agrees to make payments to us in the future (net of the
        in-the-money interest rate cap sold as part of the corridor) should the one-
        or
        three-month LIBOR interest rate rise above the strike rate specified in the
        contract. We have pay the premiums to the counterparties at the beginning
        of
        each contract. Each contract has both a fixed or amortizing notional face
        amount
        on which the interest is computed, and a set term to maturity. When the
        referenced LIBOR interest rate rises above the contractual strike rate, we
        earn
        corridor income (net of the in-the-money interest rate cap sold as part of
        the
        corridor). Payments on an annualized basis equal the difference between actual
        LIBOR and the strike rate. Interest rate swaps have similar characteristics.
        However, interest rate swap agreements allow us to pay a fixed-rate of interest
        while receiving a rate that adjusts with one-month LIBOR.
 
 **Maturity
        and Repricing Information**
 
 The
        following table summarizes the notional amount, expected maturities and weighted
        average strike rates for corridors that we held as of June 30,
        2005:
 
 *(Dollars
                  in thousands,**except
                  strike price)*
              
              **Total**
              
              **One
                  Year**
              
              **Two
                  Years**
              
              **Three
                  Years**
              
              **Four
                  Years**
              
              **Five
                  Years & Thereafter**Caps
                  bought - notional
              
              $
              2,698,082
              
              $
              1,685,722
              
              $
              645,815
              
              $
              195,053
              
              $
              42,721
              
              $
              128,771Weighted
                  average strikeprice
              
              $
              5.35
              
              $
              4.48
              
              $
              6.32
              
              $
              7.86
              
              $
              7.43
              
              $
              7.44Caps
                  sold - notional
              
              $
              2,698,082
              
              $
              1,685,722
              
              $
              645,815
              
              $
              195,053
              
              $
              42,721
              
              $
              128,771Weighted
                  average strikeprice
              
              $
              8.08
              
              $
              7.55
              
              $
              8.73
              
              $
              9.48
              
              $
              9.27
              
              $
              9.29
 
 **Item
        4. Controls and Procedures.**
 
 Prior
        to
        the filing of this report, management, including the Chief Executive Officer
        and
        Chief Financial Officer, evaluated the effectiveness and operation of our
        disclosure controls and procedures. Our Chief Executive Officer and Chief
        Financial Officer concluded that, as of June 30, 2005, these disclosure controls
        and procedures were effective to ensure that information required to be
        disclosed in the reports we file and submit under the Securities Exchange
        Act of
        1934 is recorded, processed, summarized and reported as and when required.
        Our
        Chief Executive Officer and Chief Financial Officer have concluded that our
        disclosure controls and procedures are also effective to ensure that the
        information required to be disclosed in the reports that we file or submit
        under
        the Exchange Act is accumulated and communicated to management, including
        our
        Chief Executive Officer and Chief Financial Officer, as appropriate to allow
        timely decisions regarding required disclosure. There have not been any changes
        in our internal controls over financial reporting that occurred during the
        six
        months ended June 30, 2005 that materially affected, or are reasonably likely
        to
        materially affect, our internal controls over financial reporting. There
        were no
        significant deficiencies or material weaknesses identified during the course
        of
        this evaluation.
 
 **55**
 **Part
        II - OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings.**
 
 Because
        the nature of our business involves the collection of numerous accounts,
        the
        validity of liens and compliance with various state and federal lending laws,
        we
        are subject, in the normal course of business, to numerous claims and legal
        proceedings, including class actions. The current status of the pending class
        actions and other material litigation is summarized below:
 
 ·
              In
                  or about November 1998, we received notice that we had been named
                  in a
                  lawsuit filed in the United States District Court for the Eastern
                  District
                  of New York. In December 1998, the plaintiffs filed an amended
                  complaint
                  alleging that we had violated theHome
                  Ownership and Equity Protection Act of 1994,
                  theTruth-in-Lending
                  Act,
                  and Section 349 of the New York State General Business Law, which
                  relates
                  to consumer protection for deceptive practices. The complaint sought:
                  (a)
                  certification of a class of plaintiffs, (b) declaratory judgment
                  permitting rescission, (c) unspecified actual, statutory, treble
                  and
                  punitive damages, including attorneys’ fees, (d) injunctive relief and (e)
                  declaratory judgment declaring the loan transactions as void and
                  unconscionable. On December 7, 1998, plaintiff filed a motion seeking
                  a
                  temporary restraining order and preliminary injunction, enjoining
                  us from
                  conducting foreclosure sales on 11 properties. The District Court
                  Judge
                  ruled that in order to consider the motion, plaintiff must move
                  to
                  intervene on behalf of these 11 borrowers. Thereafter, plaintiff
                  moved to
                  intervene on behalf of three of these 11 borrowers and sought injunctive
                  relief on their behalf. We opposed the motions. On December 14,
                  1998, the
                  District Court Judge granted the motion to intervene and on December
                  23,
                  1998, the District Court Judge issued a preliminary injunction
                  that
                  enjoined us from proceeding with the foreclosure sales of the three
                  interveners’ properties. We filed a motion for reconsideration of the
                  December 23, 1998 order. In January 1999, we filed an answer to
                  plaintiffs’ first amended complaint. In July 1999, the plaintiffs were
                  granted leave, on consent, to file a second amended complaint.
                  In August
                  1999, the plaintiffs filed a second amended complaint that, among
                  other
                  things, added additional parties but contained the same causes
                  of action
                  alleged in the first amended complaint. In September 1999, we filed
                  a
                  motion to dismiss the complaint, which was opposed by plaintiffs
                  and, in
                  June 2000, was denied in part and granted in part by the District
                  Court.
                  In or about October 1999, plaintiffs filed a motion seeking an
                  order
                  preventing us, our attorneys and/or the New York State Banking
                  Department
                  (“NYSBD”) from issuing notices to a number of our borrowers, in accordance
                  with the settlement agreement entered into by and between the NYSBD
                  and
                  us. In the fourth quarter of 1999, we and the NYSBD submitted opposition
                  to the plaintiffs’ motion. In March 2000, the District Court issued an
                  order that permitted us to issue an approved form of the notice.
                  In
                  September 1999, the plaintiffs filed a motion for class certification,
                  which we opposed in February 2000, and which was ultimately withdrawn
                  without prejudice by the plaintiffs in January 2001. In February
                  2002, we
                  executed a settlement agreement with the plaintiffs, under which
                  we denied
                  all wrongdoing, but agreed to resolve the litigation on a class-wide
                  basis. The District Court preliminarily approved the settlement
                  and a
                  fairness hearing was held in May 2002. We submitted supplemental
                  briefing
                  at the Court’s request in or about April 2004. In August 2004, the
                  District Court conditionally approved the settlement, subject to
                  our
                  submitting supplemental documentation regarding a change in the
                  settlement
                  agreement and proposed supplemental notices to be sent to those
                  borrowers
                  who either opted out or objected. We, plaintiffs and certain objectors
                  submitted our respective supplemental submissions in August 2004
                  and the
                  District Court granted its final approval to the settlement in
                  January
                  2005. In February 2005, certain objectors filed a notice of appeal.
                  We
                  believe the Appellate Court will uphold the settlement, but if
                  it does
                  not, we believe we have meritorious defenses and intend to vigorously
                  defend this suit, but cannot estimate with any certainty our ultimate
                  legal or financial liability, if any, with respect to the alleged
                  claims.
  ·
              In
                  or about March 1999, we received notice that we and certain of
                  our
                  officers and directors had been named in a lawsuit filed in the
                  Supreme
                  Court of the State of New York, New York County, alleging that
                  we had
                  improperly charged certain borrowers processing fees. The complaint
                  sought: (a) certification of a class of plaintiffs, (b) an accounting
                  and
                  (c) unspecified compensatory and punitive damages, including attorneys’
                  fees, based upon alleged (i) unjust enrichment, (ii) fraud and
                  (iii)
                  deceptive trade practices. In April 1999, we filed an answer to
                  the
                  complaint. In September 1999, we filed a motion to dismiss the
                  complaint,
                  which was opposed by the plaintiffs, and in February 2000, the
                  Court
                  denied the motion to dismiss. In April 1999, we filed a motion
                  to change
                  venue and the plaintiffs opposed the motion. In July 1999, the
                  Court
                  denied the motion. We appealed, and in March 2000, the Appellate
                  Court
                  granted our appeal to change venue from New York County to Nassau
                  County.
                  In August 1999, the plaintiffs filed a motion for class certification,
                  which we opposed in July 2000. In or about September 2000, the
                  Appellate
                  Court granted the plaintiffs’ motion for class certification, from which
                  we appealed. The Appellate Court denied our appeal in December
                  2001. In or
                  about June 2001, we filed a motion for summary judgment to dismiss
                  the
                  complaint, which was denied by the Court in October 2001. We appealed
                  that
                  decision, but the Appellate Court denied our appeal in November
                  2002. We
                  filed a motion to reargue in December 2002, which was denied by
                  the
                  Appellate Court in January 2003. Discovery is continuing in the
                  lower
                  Court. We believe that we have meritorious defenses and intend
                  to
                  vigorously defend this suit, but cannot estimate with any certainty
                  our
                  ultimate legal or financial liability, if any, with respect to
                  the alleged
                  claims.
  **56**
 ·
              In
                  July 2003, we commenced a lawsuit in the Supreme Court of the State
                  of New
                  York, Nassau County, against the LLC, Delta Funding Residual Management,
                  Inc. (“DFRM”), and James E. Morrison, President of the LLC and DFRM,
                  alleging that (1) the LLC breached its contractual duties by failing
                  to
                  pay approximately $142,000 due to us in June 2003, and (2) that
                  Mr.
                  Morrison and DFRM knowingly and intentionally caused the default,
                  thereby
                  breaching their respective fiduciary duties to the LLC. The complaint
                  seeks: (a) payment of amounts past due under our agreement with
                  the LLC,
                  plus interest; (b) specific performance of the LLC’s obligations to us in
                  the future; and (c) monetary damages for breach of fiduciary duty,
                  in an
                  amount to be determined by the Court. In September 2003, Mr. Morrison,
                  the
                  LLC and DFRM filed a motion to dismiss our complaint and the LLC
                  and DFRM
                  filed a countersuit in the Supreme Court of the State of New York,
                  New
                  York County, against several of our directors and officers and
                  us seeking,
                  among other things, damages of not less than $110 million. The
                  countersuit
                  alleges misrepresentation, negligence and/or fraud by defendants
                  in that
                  case relating to our August 2001 exchange offer. In October 2003,
                  we filed
                  our opposition to the motion to dismiss and cross-moved to consolidate
                  the
                  two actions in Nassau County. In November 2003, we answered the
                  New York
                  County action. In February 2004, the Nassau County Supreme Court
                  denied
                  Mr. Morrison’s motion to dismiss our causes of action seeking (a) payment
                  of amounts due under our agreements with the LLC and (b) monetary
                  damages
                  for breach of fiduciary duty, and granted Mr. Morrison’s motion to dismiss
                  our cause of action seeking specific performance to preclude future
                  defaults by Morrison and the LLC. The Supreme Court also granted
                  our
                  motion to consolidate the cases in Nassau County. In April 2004,
                  we filed
                  a motion to dismiss Mr. Morrison’s countersuit, which the Supreme Court
                  denied in September 2004. Discovery is proceeding. We believe we
                  have
                  meritorious claims in our lawsuit and meritorious defenses in the
                  countersuit. We intend to vigorously prosecute our claims and vigorously
                  defend ourselves against the countersuit. We cannot estimate with
                  any
                  certainty our ultimate legal or financial recovery and/or liability,
                  if
                  any, with respect to the alleged claims in the
                  countersuit.
  ·
              In
                  or about December 2003, we received a notice that we had been named
                  in two
                  lawsuits filed by the same plaintiff in the Circuit Court, Third
                  Judicial
                  Circuit in Madison County, Illinois. One alleged that we had improperly
                  charged certain borrowers fax fees, and one alleged that we improperly
                  retained extra per diem interest when loans were satisfied. The
                  complaints
                  seek: (a) certification of a class of plaintiffs, (b) direction
                  to return
                  fax fees charged to borrowers, and (c) unspecified compensatory
                  and
                  statutory damages, including prejudgment and post judgment interest
                  and
                  attorneys’ fees, based upon alleged: (1) breach of contract, (2) statutory
                  fraud and (3) unjust enrichment. In February 2004, we filed a motion
                  to
                  dismiss the case pertaining to fax fees claims. The plaintiff was
                  granted
                  leave to file a motion to amend his complaint in the fax fee case,
                  which
                  rendered our February 2004 motion to dismiss moot. The plaintiff
                  filed an
                  amended complaint in July 2004 and we filed a new motion to dismiss
                  in
                  August 2004, which the court denied in January 2005, and we have
                  since
                  filed an answer in that case. In March 2004, we filed a motion
                  to dismiss
                  the case pertaining to per diem interest claims, which the court
                  denied in
                  September 2004. We have since filed an answer in that case and
                  plaintiffs
                  filed a motion to dismiss our affirmative defenses, which the Circuit
                  Court granted, permitting us leave to replead the defenses with
                  more
                  particularity, which we have done. Discovery has commenced in both
                  cases.
                  In June 2005, we filed opposition papers to the plaintiff’s motion for
                  class certification in the case pertaining to fax fee claims. We
                  believe
                  that we have meritorious defenses and intend to vigorously defend
                  these
                  suits, but cannot estimate with any certainty our ultimate legal
                  or
                  financial liability, if any, with respect to the alleged
                  claims.
  **57**
 ·
              In
                  our about November 2004, we received notice that we have been named
                  in a
                  lawsuit styled as a collective action filed in the United States
                  District
                  Court of the Western District of Pennsylvania, alleging that our
                  subsidiary, Fidelity Mortgage Inc. (“Fidelity”), did not pay its loan
                  officers overtime compensation and/or minimum wage in violation
                  of the
                  Federal Fair Labor Standards Act. The complaint seeks: (1) an amount
                  equal
                  to the unpaid wages at the applicable overtime rate, (2) an amount
                  equal
                  to the minimum wages at the applicable minimum wage, (3) an equal
                  amount
                  as liquidated damages, (4) costs and attorneys’ fees, (5) leave to add
                  additional plaintiffs and (6) leave to amend to add claims under
                  applicable state laws. We filed an answer and discovery has commenced.
                  In
                  April 2005, the plaintiff filed his motion for conditional class
                  certification and in May 2005, Fidelity filed its opposition to
                  that
                  motion. In June 2005, the Magistrate Judge issued a Report and
                  Recommendation, recommending that the plaintiff’s motion for conditional
                  class certification be granted, and that plaintiff’s motion to authorize
                  judicial notice be granted (subject to revision and final approval
                  by the
                  District Court). In July 2005, Fidelity filed with the District
                  Court its
                  objections to the Magistrate Judge’s Report and Recommendation and the
                  plaintiff filed its opposition to our objections. In July 2005,
                  the
                  District Court upheld the Magistrate Judge’s Report and Recommendation.
                  Discovery will now continue. We believe that we have meritorious
                  defenses
                  and intend to vigorously defend this suit, but cannot estimate
                  with any
                  certainty our ultimate legal or financial liability, if any, with
                  respect
                  to the alleged claims.
 
 **Item
        2. Unregistered Sales of EquitySecurities and Use of
        Proceeds.**
 
 None.
 
 **Item
        3. Defaults UponSenior Securities.**
 
 None.
 
 **Item
        4. Submission of Mattersto a Vote of Security
        Holders.**
  Our annual meeting of stockholders was held on May 24, 2005. At the meeting,
        Hugh Miller and Margaret A. Williams were re-elected as Class III Directors
        for
        a term of three years. Sidney A. Miller and Martin D. Payson continue to
        serve
        as Class II Directors and Arnold B. Pollard continues to serve as a Class
        I
        Director.
 ·
                Votes
                    cast in favor of Mr. Hugh Miller’s selection totaled 18,794,343; while
                    412,815 votes were withheld.·
                Votes
                    cast in favor of Ms. Margaret A. Williams’ selection totaled 18,290,128;
                    while 917,030 votes were
                    withheld.
  The
          stockholders also voted to:
 ·
                Ratify
                    the appointment of KPMG LLP as our independent registered public
                    accounting firm for the fiscal year ending December 31, 2005.
                    Votes cast
                    in favor of this ratification were 18,899,422; while votes cast
                    against
                    were 152,683 and abstentions totaled 155,053.·
                Approve
                    the Corporation’s 2005 Stock Incentive Plan. Votes cast in favor of
                    approval were 10,829,683; while votes cast against were 2,194,247,
                    abstentions totaled 135,981 and broker non-votes totaled
                    6,047,247.·
                Approve
                    the Corporation’s 2005 Senior Executive Bonus Plan. Votes cast in favor of
                    approval were 12,560,710; while votes cast against were 425,985,
                    abstentions totaled 173,216 and broker non-votes totaled
                    6,047,247.
 **Item
        5. Other Information.**
 
 Pursuant
        to Section 202 of the Sarbanes-Oxley Act of 2002, our Audit Committee has
        approved all auditing and non-audit services performed to date and currently
        planned to be provided in 2005 by our independent registered public accounting
        firm, KPMG LLP. The services include the annual audit, quarterly reviews,
        issuances of consents related to SEC filings, and certain tax compliance
        services.
  **58**
  **Item
        6. Exhibits.**
 
 **Exhibit
                  No.**
              
              **Filed**
              
              **Description**31.1
              
              (a)
              
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Executive
                  Officer31.2
              
              (a)
              
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Financial
                  Officer32.1
              
              (a)
              
              Section
                  1350 Certification of the Chief Executive Officer32.2
              
              (a)
              
              Section
                  1350 Certification of the Chief Financial
                  Officer
 _______________
 (a)
              Filed
                  herewith.
  **59**
  
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, as amended, the
        Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
        by the undersigned, thereunto duly authorized.
  **DELTA
                  FINANCIAL CORPORATION** (Registrant)Date: 
                August 5, 2005
              By:
              /s/ **Hugh
                Miller**Title: 
                President and Chief Executive Officer
 By:
              /s/ **Richard
                Blass**Title: 
                Executive Vice President and Chief Financial
                Officer
 
  60