**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 endedSeptember 30,
                2007





**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 principal executive
      offices)





**(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 a large accelerated filer, an accelerated filer, or a
      non-accelerated filer.  See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
      one):





Large
      accelerated filer
      [   ]                                                           Accelerated filer [ x
      ]                                                      Non-accelerated filer
      [   ]





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




Yes
      [   ]                                No [ x ]





As
      of November 6, 2007, 23,611,861
      shares of the registrant’s common stock, par value $0.01 per share, were
      outstanding.









**INDEX
      TO FORM 10-Q**








**PART
                I - FINANCIAL INFORMATION****Page
                No.**Item
                1.
            Financial
                StatementsConsolidated
                Balance Sheets as of September 30, 2007
                (unaudited) and December 31, 2006
            1Consolidated
                Statements of Operations for the
                Three and Nine Months Ended September 30, 2007 and 2006
                (unaudited)
            2Consolidated
                Statement of Changes in
                Stockholders’ Equity for the Nine Months Ended  September 30,
                2007 (unaudited)
            3Consolidated
                Statements of Cash Flows for the Nine Months Ended  September
                30, 2007 and 2006 (unaudited)
            4Notes
                to
                Consolidated Financial Statements (unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of
                Financial Condition and Results of Operations
            28Item
                3.
            Quantitative
                and
                Qualitative Disclosures About Market Risk
            61Item
                4.
            Controls
                and
                Procedures
            64**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            65Item
                1A.
            Risk
                Factors
            67Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            76Item
                6.
            Exhibits
            76Signatures
            77








**PART
      I – FINANCIAL
      INFORMATION**





**Item
      1. – Financial
      Statements**





**DELTA
      FINANCIAL CORPORATION AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE
      SHEETS** *(Unaudited)*


*(Dollars
      in thousands, except for share
      data)*





**At**
              **September
                30,**
              **2007**
            
            
            **At**
              **December
                31,
                2006****Assets:**Cash
                and cash
                equivalents
            
            $
            4,207
            
            
            $
            5,741Mortgage
                loans held for
                investment, net of discounts and deferredorigination
                fees
            
            
            7,046,272
            
            
            
            6,413,687Less:  Allowance
                for loan losses
            
            
            (75,878
            )
            
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            
            6,970,394
            
            
            
            6,358,377Trustee
                receivable
            
            
            32,152
            
            
            
            73,361Accrued
                interest
                receivable
            
            
            52,823
            
            
            
            41,684Excess
                cashflow
                certificates
            
            
            --
            
            
            
            1,209Equipment,
                net
            
            
            7,212
            
            
            
            8,287Accounts
                receivable
            
            
            17,792
            
            
            
            4,872Prepaid
                and other
                assets
            
            
            79,609
            
            
            
            49,836Deferred
                tax
                asset
            
            
            59,339
            
            
            
            45,760Total
                assets
            
            $
            7,223,528
            
            
            $
            6,589,127**Liabilities
                and Stockholders’
                Equity****Liabilities:**Bank
                payable
            
            $
            1,797
            
            
            $
            1,557Warehouse
                financing
            
            
            406,675
            
            
            
            335,865Financing
                on mortgage loans held
                for investment, net
            
            
            6,514,154
            
            
            
            6,017,947Other
                borrowings
            
            
            68,582
            
            
            
            5,970Accrued
                interest
                payable
            
            
            28,701
            
            
            
            25,052Accounts
                payable and other
                liabilities
            
            
            88,323
            
            
            
            53,160Total
                liabilities
            
            
            7,108,232
            
            
            
            6,439,551**Stockholders’
                Equity:**Common
                stock, $.01 par value.
                Authorized 49,000,000 shares;23,725,661and
                23,607,611 shares
                issued and 23,608,861 and
              23,490,811
                shares
                outstanding at September 30, 2007 and December 31,2006,
                respectively
            
            
            235
            
            
            
            234Additional
                paid-in
                capital
            
            
            148,289
            
            
            
            141,984(Accumulated
                deficit)retained
                earnings
            
            
            (26,125
            )
            
            
            10,180Accumulated
                other comprehensive
                loss
            
            
            (5,785
            )
            
            
            (1,504
            )Treasury
                stock, at cost (116,800
                shares)
            
            
            (1,318
            )
            
            
            (1,318
            )Total
                stockholders’ equity
            
            
            115,296
            
            
            
            149,576Total
                liabilities and
                stockholders’ equity
            
            $
            7,223,528
            
            
            $
            6,589,127








The
      accompanying notes are an integral
      part of these consolidated financial statements.


**1**


**DELTA
      FINANCIAL CORPORATION AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**(Unaudited)


*(Dollars
      in thousands, except share and
      per share data)*








**For
                the Three
                Months**
              **Ended
                September
                30,**
            
            
            **For
                the Nine
                Months**
              **Ended
                September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Interest
                income
            
            $
            154,744
            
            
            $
            122,313
            
            
            $
            444,359
            
            
            $
            337,022Interest
                expense
            
            
            117,041
            
            
            
            84,734
            
            
            
            327,201
            
            
            
            228,294Net
                interest income
            
            
            37,703
            
            
            
            37,579
            
            
            
            117,158
            
            
            
            108,728Provision
                for loan
                losses
            
            
            21,471
            
            
            
            6,874
            
            
            
            45,392
            
            
            
            20,276Net
                interest income after provision for loan losses
            
            
            16,232
            
            
            
            30,705
            
            
            
            71,766
            
            
            
            88,452Non-interest
                income:Net
                (loss)
                gain on sale of mortgage loans
            
            
            (48,343
            )
            
            
            9,501
            
            
            
            (32,476
            )
            
            
            23,601Other
                income
            
            
            23
            
            
            
            1,815
            
            
            
            2,108
            
            
            
            9,447Totalnon-interestincome
            
            
            (48,320
            )
            
            
            11,316
            
            
            
            (30,368
            )
            
            
            33,048Non-interest
                expense:Payroll
                and related costs
            
            
            14,467
            
            
            
            16,505
            
            
            
            49,249
            
            
            
            50,098General
                and administrative
            
            
            17,908
            
            
            
            12,390
            
            
            
            46,825
            
            
            
            35,974Loss
                (gain) on derivative instruments
            
            
            197
            
            
            
            262
            
            
            
            210
            
            
            
            (161
            )Total
                non-interest expense
            
            
            32,572
            
            
            
            29,157
            
            
            
            96,284
            
            
            
            85,911(Loss)
                income before income tax
                (benefit) expense
            
            
            (64,660
            )
            
            
            12,864
            
            
            
            (54,886
            )
            
            
            35,589Provision
                for income tax (benefit) expense
            
            
            (25,024
            )
            
            
            4,904
            
            
            
            (20,914
            )
            
            
            13,802Net
                (loss)
                income
            
            $
            (39,636
            )
            
            $
            7,960
            
            
            $
            (33,972
            )
            
            $
            21,787**Comprehensive
                (Loss)
                Income**:Other
                comprehensive loss
            
            
            (4,522
            )
            
            
            (7,649
            )
            
            
            (4,281
            )
            
            
            (2,570
            )Comprehensive
                (loss) income
            
            $
            (44,158
            )
            
            $
            311
            
            
            $
            (38,253
            )
            
            $
            19,217**Per
                Share
                Data:**Basic
                -
                weighted average number of sharesoutstanding
            
            
            23,347,304
            
            
            
            23,213,262
            
            
            
            23,324,493
            
            
            
            22,214,538Diluted
                -
                weighted average number of sharesoutstanding
            
            
            23,347,304
            
            
            
            23,978,901
            
            
            
            23,324,493
            
            
            
            23,021,825Net
                (loss)
                income applicable to common shares
            
            $
            (39,636
            )
            
            $
            7,960
            
            
            $
            (33,972
            )
            
            $
            21,787Basic
                earnings per share – net (loss) income
            
            $
            (1.70
            )
            
            $
            0.34
            
            
            $
            (1.46
            )
            
            $
            0.98Diluted
                earnings per share – net (loss) income
            
            $
            (1.70
            )
            
            $
            0.33
            
            
            $
            (1.46
            )
            
            $
            0.95







The
      accompanying notes are an integral
      part of these consolidated financial statements.


**2**


**DELTA
      FINANCIAL CORPORATION AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF
      CHANGES IN STOCKHOLDERS’ EQUITY**(Unaudited)


**For
      the Nine Months Ended September 30,
      2007**


*(Dollars
      in
      thousands)*





**Common
                Stock**
            
            
            **Additional**
              **Paid-in
                Capital**
            
            
            **(Accumulated
                Deficit) Retained
                Earnings**
            
            
            **Accumulated
                Other Comprehensive
                Loss**
            
            
            **Treasury
                Stock**
            
            
            **Total**Balance
                at December 31,
                2006
            
            $
            234
            
            
            $
            141,984
            
            
            $
            10,180
            
            
            $
            (1,504
            )
            
            $
            (1,318
            )
            
            $
            149,576Stock
                options
                exercised
            
            
            1
            
            
            
            136
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            137Excess
                tax benefit related to
                share-based compensation
            
            
            --
            
            
            
            121
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            121Share-based
                compensationexpense
            
            
            --
            
            
            
            998
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            998Cash
                dividend
                paid
            
            
            --
            
            
            
            --
            
            
            
            (2,333
            )
            
            
            --
            
            
            
            --
            
            
            
            (2,333
            )Change
                in net unrealized
                lossesfrom
                derivatives, net of
                tax
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (4,281
            )
            
            
            --
            
            
            
            (4,281
            )Issuance
                of warrants,
                net
            
            
            --
            
            
            
            5,050
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            5,050Net
                loss
            
            
            --
            
            
            
            --
            
            
            
            (33,972
            )
            
            
            --
            
            
            
            --
            
            
            
            (33,972
            )Balance
                at September 30,
                2007
            
            $
            235
            
            
            $
            148,289
            
            
            $
            (26,125
            )
            
            $
            (5,785
            )
            
            $
            (1,318
            )
            
            $
            115,296





The
      accompanying notes are an integral
      part of these consolidated financial statements.


**3**


**DELTA
      FINANCIAL CORPORATION AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**(Unaudited)


*(Dollars
      in
      thousands)*





**Nine
                Months Ended****September
                30,****2007**
            
            
            **2006**Cash
                flows from operating
                activities:Net
                (loss)
                income
            
            $
            (33,972
            )
            
            $
            21,787Adjustments
                to reconcile net
                (loss) income to net cash provided by operating
                activities:Provision
                for loan
                losses
            
            
            45,392
            
            
            
            20,276Provision
                for recourse loans,
                premium recapture and secondary marketing losses
            
            
            1,475
            
            
            
            1,118Depreciation
                and
                amortization
            
            
            2,801
            
            
            
            2,518Deferred
                tax (benefit)
                expense
            
            
            (10,881
            )
            
            
            6,760Deferred
                origination
                income
            
            
            (16,852
            )
            
            
            (11,836
            )Gain
                on change in fair value of
                excess cashflow certificates
            
            
            (1,560
            )
            
            
            (9,184
            )Loss
                (gain) on sale of mortgage
                loans
            
            
            42,074
            
            
            
            (18,543
            )Gain
                on sale of mortgage servicing
                rights
            
            
            (491
            )
            
            
            (144
            )Amortization
                of deferred debt
                issuance costs and premiums
            
            
            (337
            )
            
            
            (8,878
            )Cash
                flows received from excess
                cashflow certificates, net of accretion
            
            
            1,719
            
            
            
            15,016Proceeds
                from sale of excess
                cashflow certificates
            
            
            1,050
            
            
            
            1,500Proceeds
                from sale of mortgage
                servicing rights, net
            
            
            16,285
            
            
            
            19,092Stock-based
                compensation
                expense
            
            
            998
            
            
            
            615Changes
                in operating assets and
                liabilities:Increase
                in accrued interest
                receivable
            
            
            (11,078
            )
            
            
            (11,174
            )Decrease
                (increase) in trustee
                receivable
            
            
            41,209
            
            
            
            (8,627
            )(Increase)
                decrease in accounts
                receivable
            
            
            (12,920
            )
            
            
            440Increase
                in prepaid and other
                assets
            
            
            (36,001
            )
            
            
            (13,221
            )Increase
                in accrued interest
                payable
            
            
            3,649
            
            
            
            8,990Increase
                in accounts payable and
                other liabilities
            
            
            30,201
            
            
            
            12,076Net
                cash provided by operating
                activities
            
            
            62,761
            
            
            
            28,581Cash
                flows from investing
                activities:Origination
                of mortgage loans held
                for investment
            
            
            (3,402,604
            )
            
            
            (2,910,193
            )Repayment
                of mortgage loans held
                for investment
            
            
            1,228,315
            
            
            
            1,093,207Proceeds
                from sale of mortgage
                loans (securitized)
            
            
            839,870
            
            
            
            --Proceeds
                from sale of mortgage
                loans (whole-loan)
            
            
            645,026
            
            
            
            534,005Purchase
                of
                equipment
            
            
            (1,726
            )
            
            
            (3,851
            )Net
                cash used in investing
                activities
            
            
            (691,119
            )
            
            
            (1,286,832
            )Cash
                flows from financing
                activities:Proceeds
                from warehouse
                financing
            
            
            3,423,364
            
            
            
            2,842,118Repayment
                of warehouse
                financing
            
            
            (3,352,554
            )
            
            
            (3,009,664
            )Proceeds
                from financing on
                mortgage loans held for investment, net
            
            
            1,783,985
            
            
            
            2,545,813Repayment
                of financing on mortgage
                loans held for investment
            
            
            (1,291,203
            )
            
            
            (1,136,936
            )Proceeds
                from equipment financing,
                net of repayments
            
            
            118
            
            
            
            322Increase
                (decrease) in bank
                payable
            
            
            240
            
            
            
            (231
            )Proceeds
                from residual financing,
                net
            
            
            54,225
            
            
            
            --Repayment
                of residual
                financing
            
            
            (2,962
            )
            
            
            --Proceeds
                from issuance of
                convertible notes, net
            
            
            9,800
            
            
            
            --Proceeds
                from issuance of
                warrants, net
            
            
            5,050
            
            
            
            --Cash
                dividends paid on common
                stock
            
            
            (3,497
            )
            
            
            (3,236
            )Excess
                tax benefit related to
                stock-based compensation
            
            
            121
            
            
            
            872Proceeds
                from issuance of common
                stock in secondary offering, net
            
            
            --
            
            
            
            19,329Proceeds
                from exercise of stock
                options
            
            
            137
            
            
            
            298Net
                cash provided by financing
                activities
            
            
            626,824
            
            
            
            1,258,685Net
                (decrease) increase in cash
                and cash equivalents
            
            
            (1,534
            )
            
            
            434Cash
                and cash equivalents at
                beginning of period
            
            
            5,741
            
            
            
            4,673Cash
                and cash equivalents at end
                of period
            
            $
            4,207
            
            
            $
            5,107










**4**




**Nine
                  Months Ended****September
                  30,****2007**
              
              
              **2006**Supplemental
                  Information:Cash
                  paid during the
                  period for:Interest
              
              $
              316,555
              
              
              $
              219,322Income
                  taxes
              
              $
              2,712
              
              
              $
              9,975Non-cash
                  transactions:Transfer
                  of mortgage loans held
                  for investment to REO, net
              
              $
              61,753
              
              
              $
              21,364Dividends
                  payable
              
              $
              --
              
              
              $
              1,169






The
        accompanying notes are an integral
        part of these consolidated financial statements.




**5**




**DELTA
      FINANCIAL CORPORATION AND
      SUBSIDIARIES**


**NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)





**(1)    Basis
      of
      Presentation**





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      Delta Financial Corporation and its 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 2007
      presentation.





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with United States generally accepted accounting
      principles (“GAAP”) have been condensed or omitted in accordance with the rules
      and regulations of the U.S. Securities and Exchange Commission
      (“SEC”).  The accompanying unaudited consolidated financial statements
      have been prepared in conformity with the instructions to Quarterly Report
      on
      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





The
      preparation of consolidated financial statements in conformity with GAAP
      requires our management to make estimates and assumptions that affect the
      reported amounts of assets, liabilities and stockholders’ equity and disclosure
      of contingent assets and liabilities at the date of the consolidated 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 for the year ended December 31, 2006.  The
      results of operations for the three and nine months ended September 30, 2007
      are
      not necessarily indicative of the results that should be expected for the entire
      year.





**(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
      subsidiaries.  All 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 include 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 $3.7 million and $5.1 million of interest-bearing
      deposits with select financial institutions at September 30, 2007 and December
      31, 2006, respectively.





Additionally, cash and cash equivalents as of September 30, 2007 and December
      31, 2006 included restricted cash held for various reserve accounts totaling
      $98,000 and $604,000, respectively.





**(b) Mortgage Loans, Net**





*Mortgage
      loans held for sale* - Mortgage loans held for sale represents mortgage
      loans that have a contractual maturity of up to 30 years that we originate
      specifically with the intent to sell.  These mortgage loans are
      secured by residential properties and are recorded at the lower of amortized
      cost or market value.  We typically hold our mortgage loans held for
      sale for no more than 30 days before they are sold in the secondary
      market.  During the period in which the loans are held for sale, we
      earn the coupon rate of interest paid by the borrower and pay interest to the
      lenders that provide our warehouse credit facilities, to the extent that we
      utilize such financing.  We also pay a sub-servicing fee to a
      third-party servicer during the period in which the loans are held for
      sale.  Loan origination fees, discount points and certain direct
      origination costs associated with loans held for sale (as more fully described
      below) are initially recorded as an adjustment of the cost of the
      loan.  Gains or losses on sales of mortgage loans are recognized based
      upon the difference between the selling price and the carrying value of the
      related mortgage loans being sold.





**6**


During
      the three months ended September
      30, 2007 we closed a securitization transaction totaling $846.5
      million.  The securitization was accounted for as a sale and
      collateralized by $900.0 million of mortgage loans.  The mortgage
      loans sold in this transaction were reclassified from mortgage loans held for
      investment at the lower of their amortized cost or market value on the date
      we
      determined that the securitization would be structured as a
      sale.For the
      three and nine months ended September 30, 2007, we recorded interest income
      related to ourmortgage
      loans held for saleof $2.0
      million.  For the three and nine months ended September 30, 2006, we
      did not record any interest income, as we did not have any mortgage loans held
      for sale during that period.We held no mortgage loans
      classified as held for sale at September 30, 2007 or December 31,
      2006.





*Mortgage loans held for investment -* Mortgage loans held for investment
      represents mortgage loans that have a contractual maturity of up to 30 years
      that are securitized through transactions structured and accounted for as
      secured financings (mortgage loans held for investment – securitized) or held
      pending securitization (mortgage loans held for investment –
pre-securitization).  Mortgage loans held for investment are primarily
      secured by residential properties and 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
      secured financing related to the mortgage loans held for investment -
      securitized is included in our consolidated balance sheets as financing on
      mortgage loans held for investment, net.  Once the mortgage loans are
      securitized, we earn the net pass-through rate of interest and pay interest
      on
      our financing on mortgage loans held for investment, net.





We typically hold our mortgage loans held for investment – pre-securitization
      for no more than 120 days, and for 60 days on average, before they are
      securitized, and from time-to-time sold on a whole-loan basis, in the secondary
      market.  During the period in which the loans were held pending
      securitization or whole-loan sale, we earn the coupon rate of interest paid
      by
      the borrower and pay interest to the lenders that provide our warehouse
      financing, to the extent that we utilized such financing.  We also pay
      a sub-servicing fee to a third-party during the period the loans are held
      pending securitization or whole-loan sale.





*Mortgage loan related discounts, deferred fees and costs*- In accordance with Statement
      of
      Financial Accounting Standards (“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 interest income on a level-yield basis over
      the
      estimated life of the related loans, on a homogeneous 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, including the cost of loan origination
      personnel in the performance of specific activities, directly related to the
      origination of funded mortgage loans for that period.  These
      activities include evaluating the prospective borrowers’ 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.  Management periodically reviews
      its time and cost estimates to determine if updates and refinements to the
      deferral amounts are necessary.





Discounts related to mortgage loans held for investment are recorded from the
      creation of mortgage servicing assets.  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 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 estimated life of the related loans, on a per
      securitization basis, using the interest method calculation.





**7**


**(c)
      Allowance and Provision for Loan
      Losses**





In connection with our mortgage loans held for investment, excluding those
      loans
      which meet the criteria for specific review under SFAS No. 114, “Accounting by
      Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5
      and
      15,” we established an allowance for loan losses based on our estimate of losses
      that we expect will arise within the next 18 to 24 months following the analysis
      date of September 30, 2007.  Provisions for loan losses are made for
      loans to the extent that we bear probable losses on these
      loans.  Provision amounts are charged as a current period expense to
      operations.  We charge-off uncollectible loans at the time we deem
      they are not probable of being collected.  In order to estimate an
      appropriate allowance for loan losses on mortgage loans held for investment
      (both securitized and pre-securitization), we estimate losses using a detailed
      analysis of historical loan performance by product type, origination year and
      securitization issuance, which is updated each quarter.  We stratify
      the mortgage loans held for investment into separately identified loan pools
      based upon seasoning criteria.  In accordance with SFAS No. 5,
“Accounting for Contingencies,” we believe that pooling of mortgages with
      similar characteristics is an appropriate methodology by which to calculate
      or
      estimate the allowance for loan losses.  The results of that analysis
      are then applied to the current long-term mortgage portfolio, and an allowance
      for loan losses estimate is created to take into account both known and inherent
      losses in the loan portfolio.  Losses incurred are written-off against
      the allowance for loan losses.





In analyzing the adequacy of this allowance, there are qualitative factors
      and
      estimates 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 borrowers’ 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 our
      estimates.  Accordingly, it is reasonably possible that they could
      change.  In particular, if conditions required us to increase the
      provision for loan losses, our income for that period would
      decrease.  Management considers the current allowance for loan losses
      to be adequate.





In accordance with SFAS No. 114, as amended by SFAS No. 118, “Accounting by
      Creditors for Impairment of a Loan/Income Recognition and Disclosures,” a loan
      is impaired when, based on current information and events, it is probable that
      a
      creditor will be unable to collect all amounts due according to the contractual
      terms of the mortgage loan agreement.  Based upon the analysis
      performed, we identified certain mortgage loans in which the borrowers’ ability
      to repay the loans in accordance with their contractual terms was
      impaired.  At September 30, 2007, we have a specific reserve of
      $306,000 on impaired loans.  As additional information is obtained and
      processed over the coming months and quarters, we will continue to assess the
      need for any adjustments to our estimates and the specific reserves related
      to
      the impaired mortgage loans.





**(d)
      Trustee
      Receivable**





Trustee receivable principally represents any un-remitted principal and interest
      payments collected by the securitization trust’s third-party loan servicer
      subsequent to the monthly remittance cut-off date on our mortgage loans held
      for
      investment – securitized portfolio.  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 generally
      received through a mid-month cut-off date.  We record unscheduled
      principal and interest payments and prepaid principal loan payments received
      after the cut-off date for the current month as a trustee receivable on our
      consolidated balance sheets.  The trustee or third-party loan servicer
      retains these unscheduled principal and interest payments until the following
      month’s scheduled remittance date, at which time they primarily will be used to
      pay down financing on mortgage loans held for investment, net.


**8**


**(e)
      Excess Cashflow
      Certificates**





Prior to 2004, we structured our securitization transactions to be accounted
      for
      as sales.  In these transactions, the excess cashflow certificates
      represented one or more 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 were 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 then allocated estimated fair
      value.  The amount recorded for the excess cashflow certificates was
      reduced for cash distributions received, and adjusted for income accretion
      and
      subsequent changes in the fair value.  Any changes in fair value were
      recorded as a component of “other income” in our consolidated statements of
      operations.  During the three months ended March 31, 2007, we sold all
      of our remaining excess cashflow certificates, and consequently, we no longer
      record any interest income or other income related to changes in fair value
      of
      the excess cashflow certificates.  For the three months ended
      September 30, 2006, we recorded $1.7 million of other income due to an increase
      in the fair value of excess cashflow certificates.  For the nine
      months ended September 30, 2007 and 2006, we recorded $1.6 million and $9.2
      million, respectively, of other income due to an increase in the fair value
      of
      excess cashflow certificates.





**(f)
      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 “non-interest expense - general and
      administrative” in our consolidated statements of operations, and amounted to
      approximately $923,000 and $892,000 for the three months ended September 30,
      2007 and 2006, respectively, and $2.8 million and $2.5 million for the nine
      months ended September 30, 2007 and 2006, respectively.  Accumulated
      depreciation and amortization totaled $18.4 million and $16.0 million at
      September 30, 2007 and December 31, 2006, respectively.





**(g)
      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.  The fair value of an REO property
      is determined based upon values (*i.e*., appraisal or broker price
      opinion) obtained by the third-party servicer.  REO properties are
      evaluated periodically for recoverability and any subsequent declines in value
      are reserved for through a provision.  Any costs incurred to maintain
      the REO properties are expensed as incurred.  Gains or losses on the
      sale of REO properties are recognized upon disposition.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” we classify our REO as “held for sale” at the date of
      foreclosure.  The REO properties held are actively marketed for sale
      by our third-party servicer at a price that is deemed reasonable in relation
      to
      the properties’ current fair value.  We generally expect the REO
      properties to be disposed of within six months to one year after being
      acquired.





Included
      in “prepaid and other assets”
on our consolidated balance sheets are $62.9 million and $29.6 million of REO
      properties as of September 30, 2007 and December 31, 2006,
      respectively.  Included in“general and administrative
      expenses” on our statements of operations areprovisions for the decrease
      in the fair
      value of the REO properties of $4.1 million and $240,000 recognized during
      the
      three months ended September 30, 2007 and 2006, respectively.  During
      the nine months ended September 30, 2007 and 2006, we recorded a provision
      for
      the decrease in fair value of REO properties of $8.8 million and $786,000,
      respectively.During the nine months ended September 30, 2007
      and the year ended December 31, 2006, we sold $20.2 million and $8.8 million,
      respectively, of REO properties.





**9**


**(h)
      Warehouse Financing**





Warehouse
      financing represents the outstanding balance of our borrowings collateralized
      by
      mortgage loans held prior to securitization or sale.  Generally,
      warehouse financing facilities are used as short-term financing and bear
      interest at a fixed margin over the one-month London Inter-Bank Offered Rate
      (“LIBOR”).  The outstanding balance of our warehouse financings
      will fluctuate based on our lending volume, cash flows from operations,
      whole-loan sales activity, other financing activities and equity
      transactions.  Any commitment fees paid to obtain the warehouse
      financing are capitalized and amortized to expense as a component of
“non-interest expense – general and administrative” over the term of the
      warehouse agreement, which is normally a 12-month period.





**(i)
      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, and the notes issued in connection with the issuance
      of interest-only certificates and NIM securities, 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 held by the securitization trust, which
      are recorded as mortgage loans held for investment – securitized within our
      consolidated balance sheets.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.





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, such as interest rate swap contracts and corridors (corresponding
      purchases and sales of interest rate caps with similar notional balances at
      different strike prices), as cash flow hedges as defined in SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” 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).  (See – Note 3(o) – “Derivative
      Instruments” and Note 11 – “Derivative Instruments” for further information
      regarding hedging securitization financing).





All
      of our securitizations, including
      those structured as sales under SFAS No. 140, are structured legally as sales,
      and 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 that
      securitization.





Under
      SFAS No. 140, the securitizations we completed from the first quarter of 2004
      through the second quarter of 2007 are accounted for as
      financings.  The securitization trusts do not meet the qualifying
      special purpose entity (“QSPE”) criteria under SFAS No. 140 and related
      interpretations, because, after the loans are securitized, we have the option
      to
      either contribute a derivative instrument into the trust or purchase
      up to 1% of
      the mortgage loans contained in the securitization mortgage pool.Our
      pre-2004 securitizations and the third quarter of 2007 securitization met the
      sales criteria of SFAS No. 140, which required the securitizations to be
      accounted for as a sale of mortgage loans.





**(j)****Interest
      Income**





Interest
      income primarily represents the
      sum of (a) the gross interest, net of servicing fees, we earn on mortgage loans
      held for investment - securitized; (b) the gross interest we earn on mortgage
      loans held for investment - pre-securitization; (c) the gross interest we earn
      on mortgage loans held for sale; (d) securitization accrued bond interest
      (income received from the securitization trust for fixed-rate asset-backed
      securities at the time of securitization settlement); (e) excess cashflow
      certificate income (through the first quarter of 2007); (f) interest earned
      on
      bank accounts; (g) prepayment penalty fees; and (h) amortized discounts,
      deferred costs and fees recognized on a level-yield basis.





**10**


Interest
      on mortgage loans is recognized as revenue when earned according to the
      contractual 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 (*i.e.,* an
      impaired loan), in accordance with the contractual terms of the
      mortgage.  A non-accrual loan will be returned to accrual status when
      loan payments are no longer three months past due, and the loan is anticipated
      to be fully collectible.  Cash receipts on non-accrual loans,
      including impaired loans, are generally applied to principal and interest in
      accordance with the contractual terms of the loan.





**(k)
      Interest
      Expense**





Interest expense primarily represents the borrowing costs under (a) our
      warehouse credit facilities to finance loan originations; (b) securitization
      debt; (c) residual financing facility; (d) convertible notes; and (e) equipment
      financing.  Interest expense also reflects the impact of hedge
      amortization and the amortization of discounts and deferred costs on a
      level-yield basis.





**(l)
      (Loss) Gain on Sale of Mortgage Loans**





Gains
      and
      losses on the sale of mortgage loans, on a whole-loan or securitization basis,
      are recognized at settlement date and are determined by the difference between
      the selling price (net of selling expenses) and the carrying value of the loans
      sold.  These transactions are treated as sales in accordance with SFAS
      No. 140. Any unamortized deferred origination fees or costs at the date of
      sale are reflected as an adjustment to loss or gain on sale.





We generally sell whole-loans on a servicing-released basis and as such, the
      risk of loss or default by the borrower has generally been assumed by the
      purchaser.  During the quarter ended September 30, 2007, we
      securitized loans and accounted for the securitization transaction on a sale
      basis.  Both our whole-loan sales and our securitizations (whether
      accounted for as a financing or as a sale) are transacted on a non-recourse
      basis.  However, we are generally required to make certain
      representations and warranties to 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 on whole-loans sold, we may be required to repurchase loans or
      indemnify these purchasers for any losses from borrower defaults.





During
      the three and nine months ended September 30, 2007 we securitized $900.0 million
      of loans (in September 2007), which we accounted for as a
      sale.  During the three and nine months ended September 30, 2006, we
      did not securitize any loans which we accounted for as a sale.  During
      the three months ended September 30, 2007 and 2006, we sold $244.5 million
      and
      $196.7 million, respectively, of whole-loans on a non-recourse
      basis.  During the nine months ended September 30, 2007 and 2006, we
      sold $627.0 million and $515.5 million, respectively, of whole-loans on a
      non-recourse basis.





Additionally,
      when we sell loans on a whole-loan basis, we establish premium recapture and
      secondary marketing (indemnification) reserves.  We establish a
      premium recapture 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 (generally a 3 to 12 month period).  We also establish a
      secondary marketing (indemnification) reserve based upon our estimated exposure
      to
      losses arising from loan repurchases, or net settlements, related to
      representation and warranty claims made by whole-loan sale investors.The
      premium recapture and secondary marketing (indemnification) reserves are
      recorded as liabilities on our consolidated balance sheets when the mortgage
      loans are sold, based on our
      historical experience,coupled with our analysis
      of current
      market conditions.The provisions
      recorded for the premium recapture and secondary marketing (indemnification)
      reserves are recognized at the date of sale and are included in the consolidated
      statements of operations as a reduction of gain on sale of mortgage
      loans.  The premium recapture reserve totaled $386,000 and $958,000 at
      September 30, 2007 and December 31, 2006, respectively.  The secondary
      marketing (indemnification) reserve totaled $744,000 and $512,000 at September
      30, 2007 and December 31, 2006, respectively.


**11**


**(m)
      Mortgage Servicing Rights
      Sales**





We generally sell the MSRs to a third-party as of the securitization
      date.  Upon the sale of the MSRs, we allocate a portion of the
      accounting basis of the mortgage loans to the MSRs based upon the relative
      fair
      values of the mortgage loans and the MSRs, which results in a discount to the
      mortgage loans.  That discount is either (a) accreted as an adjustment
      to yield on the mortgage loans held for investment – securitized over the
      estimated life of the related loans, on a pool-by-pool basis, using the interest
      rate method, or (b) becomes a component of the calculated gain or loss on sale
      of mortgage loans.  For the three months ended September 30, 2006, we
      received $6.4 million from a third-party servicer for the right to service
      the
      mortgage loans collateralizing the securitization that we structured to be
      accounted for as a secured financing.  Due to the structure of third
      quarter 2007 securitization, we had no separately identifiable residual
      interests (i.e., MSRs) and therefore had no sales of MSRs during the three
      months ended September 30, 2007.  For the nine months ended September
      30, 2007 and 2006, we received $16.3 million and $19.1 million, respectively,
      from a third-party servicer for the right to service the mortgage loans
      collateralizing our securitizations structured as financings.





**(n)
      Stock-Based Compensation**





We
      have
      various stock-based compensation plans for employees and outside directors,
      which are described more fully in Note 5, “Stock-Based
      Compensation.”  We apply the fair value recognition provisions of SFAS
      No. 123(R), “Share-Based Payment,” using the modified-prospective adoption
      method.  Under that method of adoption, the provisions of SFAS No.
      123(R) generally are applied only to share-based awards granted subsequent
      to
      adoption.  Additionally, under this method, compensation cost
      recognized for the three and nine months ended September 30, 2007 and 2006
      includes compensation cost for all options granted prior to, but not yet vested
      as of January 1, 2006, and all options granted subsequent to January 1, 2006,
      based on the grant date fair value estimated in accordance with the provisions
      of SFAS No. 123(R).





For
      purposes of calculating the pool of
      excess tax benefits available to absorb tax deficiencies recognized subsequent
      to the adoption of SFAS No. 123(R) (“APIC Pool”), we determined the net excess
      tax benefits that would have qualified as such had we adopted SFAS No. 123
      for
      recognition purposes for all of our stock-based award grants made after December
      31, 1994.





**(o)
      Derivative
      Instruments**





Our
      hedging strategy revolves around two
      principal activities: (a) the issuance of our prospective securitization
      financing which is collateralized by the origination of mortgage loans, and
      (b)
      the issuance of variable-rate securitization debt (financing).  As a
      result of these activities, 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.  We
      utilize derivative instruments as hedges to mitigate our interest rate
      exposure.  After we originate mortgage loans, our strategy is to
      generally use a series of duration matched interest rate swap contracts (i.e.,
      two, three and five-year contracts) in an effort to lock in a pre-determined
      base interest rate on designated portions of our prospective future
      securitization financing (i.e., the asset-backed securities that we expect
      to
      issue).  We also use corridors (corresponding purchases and
      sales of interest rate caps with similar notional balances at different strike
      prices) and/or amortizing notional
      balance interest rate swaps that are designed to limit our financing costs
      on
      the variable portion of the debt issued in the securitization.  The
      purpose of the hedge within the securitization is to maintain minimum margins
      over specific periods of time, with the possibility of allowing us to increase
      margins during periods in which prevailing interest rates are lower than
      anticipated.  Both the interest rate swaps (which generally have an
      expected life of 36 months) and corridors (which have a range of expected lives)
      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, all
      derivatives are recorded on the balance sheet at fair value.  When
      derivatives are used as hedges, certain criteria must be met 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.





**12**


Cash
      flow hedge accounting is
      appropriate for hedges of forecasted interest payments associated with future
      periods – whether as a consequence of interest to be paid on existing
      variable-rate debt or in connection with future debt
      issuances.





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 “other
      comprehensive income or loss” (“OCI”) and subsequently reclassified into
      earnings when the forecasted interest payments affect earnings or until the
      sale
      is consummated.  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 contemporaneously
                documented, with the objective and strategy stated, along with an
                explicit
                description of the methodology used to assess effectiveness and measure
                ineffectiveness;





·
            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 counterparties other than the reporting entity.





If and when a derivative no longer qualifies for hedge accounting because it
      fails the test of hedge effectiveness (the ratio of the changes in the value
      of
      the hedging instrument to the changes in the value of the hedged item exceeds
      125% or falls below 80%, and therefore the hedge is no longer “highly
      effective”), hedge accounting is discontinued and any amounts previously
      recorded in OCI are amortized into earnings over the remaining life of the
      hedged asset or liability.  As permitted by SFAS No. 133, when a hedge
      relationship is discontinued for this reason, we will analyze the derivative
      to
      determine whether all or a portion of the derivative may be designated as a
      hedge of a different transaction or item.  If all or a portion of the
      derivative qualifies for a new hedging relationship, hedge accounting is applied
      to future changes in the fair value of that portion of the
      derivative.  The future changes for any portion of the derivative that
      does not qualify for a new hedge relationship are included in income as they
      occur.





The “new hedge relationship” is determined by re-aligning the hedge with the
      projected remaining securitization debt as of the date the original hedge became
      retrospectively ineffective.  The ratio of the outstanding balance of
      the debt to notional size of the revised hedge will then be 100% as of the
      re-alignment date.  The expected repayment pattern of the debt
      associated to the original hedge is used as the basis to establish the “new
      hedge relationship” future repayment pattern.  The difference between
      the fair value of the original hedge and the “new hedge relationship” hedge on
      the re-alignment date is classified as a trading security.  Once
      classified as a trading security, any changes in the fair value are recorded
      directly to the income statement as a component of “gain or loss on derivative
      instruments.”





**(p)
      Earnings Per Share**





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


**13**


**(q)
      Income Taxes**





On
      January 1, 2007, we adopted FIN No. 48, “Accounting for Uncertainty in Income
      Taxes - an interpretation of FASB Statement No. 109.”  FIN No. 48
      provides guidance on financial statement recognition and measurement of tax
      positions taken, or expected to be taken, in tax returns.  The initial
      adoption of FIN No. 48 did not have an impact on our consolidated financial
      statements.  As of January 1, 2007, the amount of gross unrecognized
      tax benefits was approximately $2.5 million, including approximately $1.5
      million of related accrued interest and penalties.  The total amount
      of unrecognized tax benefits that, if recognized, would affect the effective
      tax
      rate was $780,000 as of January 1, 2007.  We do not anticipate that
      the total amount of unrecognized tax benefits will significantly increase or
      decrease within the next twelve months.





The
      amount of unrecognized tax benefits may increase or decrease in the future
      for
      various reasons, including adding amounts for current tax year positions,
      expiration of open income tax returns due to statutes of limitation, changes
      in
      management's judgment about the level of uncertainty, status of tax
      examinations, litigation and legislative activity and the addition or
      elimination of uncertain tax positions.





Our
      policy is to report interest and penalties as a component of loss or income
      before taxes.  Penalties are recorded in “general and administrative
      expense” and interest paid or received is recorded in “interest expense” or
“interest income” in the consolidated statements of
      operations.  During the three and nine months ended September 30,
      2007, we recorded approximately $70,000 and $200,000, respectively, in interest
      expense related to current audits.  We have accrued interest and
      penalties totaling approximately $1.7 million at September 30,
      2007.  During the nine months ended September 30, 2007, the
      unrecognized tax benefit remained unchanged, except for the aforementioned
      accrued interest.





Our
      federal income tax returns are open and subject to examination from the 2004
      tax
      return year and forward.  Our various state income tax returns are
      generally open from the 2004 and subsequent tax return years, except for New
      York State, which is open from the 1999 tax return year forward, based on
      individual state statute of limitations.





**(4)   Recent
      Accounting
      Developments**


*Fair
        Value Measurement of Loan Commitments.*  On November 5, 2007, the
        SEC issued staff accounting bulletin ("SAB") No. 109, which provides guidance
        regarding written loan commitments that are accounted for at fair value through
        earnings under GAAP.  The SEC had previously issued SAB No. 105,
        "Application of Accounting Principles to Loan Commitments," which stated
        that in
        measuring the fair value of a derivative loan commitment, it would be
        inappropriate to incorporate the expected net future cash flows related to
        the
        associated servicing of the loan.  SAB No. 109 supersedes SAB No. 105
        and expresses the current view of the SEC that, consistent with the guidance
        in
        SFAS No. 156, "Accounting for Servicing of Financial Assets," and SFAS No.
        159,
“The Fair Value Option for Financial Assets and Financial Liabilities -
        Including an amendment of FASB Statement No. 115,” the expected net future
        cash flows related to the associated servicing of the loan should be included
        in
        the measurement of all written loan commitments that are accounted for at
        fair
        value through earnings.  We will apply SAB No. 109 on a prospective
        basis to derivative loan commitments issued or modified in fiscal quarters
        beginning after December 15, 2007.  We are currently evaluating SAB
        No. 109, and have not yet determined the effect it will have on our consolidated
        financial statements.





*Offsetting
      of Amounts Related to
      Certain Contracts.***In
      April 2007, the FASB issued FASB
      Staff Position (“FSP”) No. FIN 39-1,“Amendment of FASB Interpretation
      No.
      39,”which amends FIN No.
      39,“Offsetting of Amounts
      Related to Certain Contracts,”to permit a reporting
      entity to offset
      fair value amounts recognized for the right to reclaim cash collateral (a
      receivable) or the obligation to return cash collateral (a payable) against
      fair
      value amounts recognized for derivative instruments executed with the same
      counterparty under the same master netting arrangement that have been offset
      in
      accordance with FIN No. 39.  FSP No. FIN 39-1 also amends FIN No. 39
      for certain terminology modifications.  FSP No. FIN 39-1 is effective
      for fiscal years beginning after November 15, 2007, with early application
      permitted, and is applied retrospectively as a change in accounting principle
      for all financial statements presented.  Upon adoption of FSP No. FIN
      39-1, we are permitted to change our accounting policy to offset or not offset
      fair value amounts recognized for derivative instruments under master netting
      arrangements.  We are currently evaluating FSP No. FIN 39-1, and have
      not yet determined the effect the adoption of FSP No. FIN 39-1 will have on
      our
      consolidated financial statements.





*Fair
      Value Option for Financial Assets and Financial Liabilities*.  In
      February 2007,**FASB issued SFAS No. 159, which permits entities to
      elect to measure many financial instruments and certain other items at fair
      value that are not currently required to be so measured.  The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently, without having to apply complex
      hedge accounting provisions.  SFAS No. 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between entities that choose different measurement attributes for similar types
      of assets and liabilities.  SFAS No. 159 does not affect any existing
      accounting literature that requires certain assets and liabilities to be carried
      at fair value, and does not eliminate disclosure requirements included in other
      accounting standards, including requirements for disclosures about fair value
      measurements included in SFAS No. 157, “Fair Value Measurements,” and SFAS No.
      107, “Disclosures about Fair Value of Financial Instruments.”**SFAS
      No. 159 is effective for our fiscal year beginning after November 15,
      2007.  We are currently
      assessing the impact that the adoption of SFAS No. 159 will have on our
      consolidated financial statements, but we do not expect that the adoption
      during the first quarter of 2008 will have a material impact on our financial
      condition or results of operations.





**14**


*Fair
      Value Measurements.*In September 2006, FASB issued SFAS No. 157,
      which defines fair value, establishes a framework for measuring fair value
      in
      GAAP, and expands disclosures about fair value measurements.  SFAS No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal
      years.  We are currently
      assessing the impact that the adoption of SFAS No. 157 will have on our
      consolidated financial statements, but we do not expect that the adoption
      during the first quarter of 2008 will have a material impact on our financial
      condition or results of operations.





**(5)    Stock-Based
      Compensation**





*Stock
        Options*- In accordance
        with SFAS No. 123(R),
        our loss before income tax benefit and net loss for the three months ended
        September 30, 2007 included stock option compensation cost of $91,000 and
        $56,000, respectively, which had no impact on basic and diluted earnings
        per
        share for the three-month period.  Our income before income tax
        expense and net income for the three months ended September 30, 2006 included
        stock option compensation cost of $119,000 and $73,000, respectively, which
        had
        no impact on basic and diluted earnings per share for the three-month
        period.  Our loss before income tax benefit and net loss for the nine
        months ended September 30, 2007 included stock option compensation cost of
        $301,000 and $185,000, respectively, which had a $0.01 impact on basic and
        diluted loss per share for the nine month period.  Our income before
        income tax expense and net income for the nine months ended September 30,
        2006
        included stock option compensation cost of $373,000 and $228,000, respectively,
        which had a $0.01 impact on basic and diluted earnings per share for the
        nine
        month period.





No
        stock options were granted during the
        three or nine months ended September 30, 2007.  When stock options are
        awarded, the fair value of each option award is estimated on the date of
        grant
        using the Black Scholes Merton option pricing model.  Under the Black
        Scholes Merton option pricing model, the expected term of the options is
        estimated based on historical option exercise activity and represents the
        period
        of time that options granted are expected to be outstanding.  The
        expected volatility is based on the historical volatility of our common
        stock.  The risk-free interest rate for periods within the contractual
        life of the option is based on the U.S. Treasury yield curve in effect at
        the
        time of grant.  The weighted-average assumptions used in the
        valuations of the grants made during the nine months ended September 30,
        2006
        are summarized as follows:





**For
                the Nine Months
                Ended**
              **September
                30,
                2006**Expected
                dividend
                yield
            
            
            2.2%Expected
                volatility
            
            
            53.6%Risk-free
                interest
                rate
            
            
            4.9%Expected
                term
            
            
            3.7
                yearsAnnual
                forfeiture
                rate
            
            
            7.9%





The
        average grant date fair value of the
        stock options granted during the three and nine months ended September 30,
        2006
        was $3.51 and $3.64, respectively.


**15**


The
      following table summarizes the option activity regarding our stock-benefit
      plans
      for the nine months ended September 30, 2007:





(*Dollars
                in thousands, except
                weighted-average exercise price*)
            
            **Number
                of
                Options**
            
            
            **Weighted-Average
                Exercise
                Price**
            
            **Weighted-Average
                Remaining
                Contractual Term**
            
            **Aggregate
                Intrinsic
                Value**January
                1, 2007
                balance
            
            
            1,781,750
            
            
            $
            3.23Options
                granted
            
            
            --
            
            
            
            --Options
                exercised
            
            
            49,050
            
            
            
            2.80Options
                expired
            
            
            800
            
            
            
            1.99Options
                forfeited
            
            
            19,300
            
            
            
            7.80September
                30, 2007
                balance
            
            
            1,713,400
            
            
            $
            3.20
            
            2.0
                years
            
            $
            4,546Options
                fully vested and
                exercisable
            
            
            1,470,950
            
            
            $
            2.40
            
            1.6
                years
            
            $
            4,546





The
        intrinsic value of a stock option is the amount by which the fair value of
        the
        underlying stock exceeds the exercise price of the option.  The total
        intrinsic value of the stock options exercised during the three months ended
        September 30, 2007 and 2006 was $55,000 and $259,000,
        respectively.  The total intrinsic value of the stock options
        exercised during the nine months ended September 30, 2007 and 2006 was $366,000
        and $2.2 million, respectively.  As of September 30, 2007 and
        2006, there
        was $511,000 and $863,000, respectively, of total unrecognized compensation
        cost, net of estimated forfeitures, related to non-vested options under our
        stock-benefit plans.  The unrecognized compensation cost at September
        30, 2007 is expected to be recognized over a weighted-average period of 1.3
        years.





Cash
        received from option exercises
        under our stock-benefit plans for the three months ended September 30, 2007
        and
        2006 was $21,000 and $51,000, respectively.  Cash received from option
        exercises under our stock-benefit plans for the nine months ended September
        30,
        2007 and 2006 was $137,000 and $298,000, respectively.  The actual tax
        benefit for the tax deductions from option exercises totaled $19,000 and
        $101,000, respectively, for the three months ended September 30, 2007 and
        2006.  The actual tax benefit for the tax deductions from option
        exercises totaled $121,000 and $872,000, respectively, for the nine months
        ended
        September 30, 2007 and 2006.  The fair value of the shares that vested
        during the three months ended September 30, 2007 and 2006, totaled $130,000
        and
        $119,000, respectively.  The fair value of the shares that vested
        during the nine months ended September 30, 2007 and 2006 totaled $393,000
        and
        $431,000, respectively.





*Restricted
      Stock*- Our loss before
      income tax benefit
      and net loss for the three months ended September 30, 2007 included a restricted
      stock award compensation cost (recorded as a component of non-interest expense
–
payroll and related costs) of $188,000 and $115,000, respectively, which had
      no
      impact on basic loss per share and diluted loss per share for the three-month
      period.  Our income before income tax expense and net income for the
      three months ended September 30, 2006 included a restricted stock award
      compensation cost of $80,000 and $48,000, respectively, which had no impact
      on
      basic and diluted earnings per share for the quarter.  Our loss before
      income tax benefit and net loss for the nine months ended September 30, 2007
      included restricted stock award compensation cost of $661,000 and $405,000,
      respectively, which increased by $0.02 our basic and diluted loss per share
      for
      the nine-month period.  Our income before income tax expense and net
      income for the nine months ended September 30, 2006 included restricted stock
      award compensation cost of $242,000 and $147,000, respectively, which had a
      $0.01 impact on basic earnings per share and diluted earnings per share for
      the
      nine-month period.  The actual tax benefit for the tax deductions from
      vested restricted stock awards totaled $60,000 for the nine months ended
      September 30, 2007.  We had no tax benefit for the three months ended
      September 30, 2007 and the three and nine months ended September 30, 2006,
      as we
      had no restricted stock awards vesting during those periods.





**16**


The
      status of our non-vested restricted
      stock awards as of September 30, 2007, and the changes during the nine months
      ended September 30, 2007, is set forth in the following
      table:





**Number
                of
                Shares**
            
            
            **Weighted-Average
                Grant Date Fair
                Value Per Share**Non-vested
                restricted stock awards
                at January 1, 2007
            
            
            203,775
            
            
            $
            8.05Granted
            
            
            77,500
            
            
            
            8.72Vested
            
            
            18,125
            
            
            
            8.53Forfeited
            
            
            8,500
            
            
            
            8.02Non-vested
                restricted stock awards
                at September 30, 2007
            
            
            254,650
            
            
            $
            8.22





As
      of
      September 30, 2007 and 2006, there was $1.2 million and $869,000, respectively,
      of total unrecognized compensation costs related to non-vested restricted stock
      awards granted under our stock-benefit plans.  The unrecognized
      compensation cost at September 30, 2007 is expected to be recognized over a
      weighted-average period of 2.1 years.





*Restricted
      Stock
      Units*– During the
      three months ended September 30, 2007, we issued 8,600 restricted stock units
      to
      our outside directors.  Prior to the July 6, 2007 grant, we had no
      outstanding restricted stock units.  Our loss before income tax
      benefit and net loss for the three months ended September 30, 2007 included
      a
      restricted stock unit compensation cost (recorded as a component of non-interest
      expense – general and administrative expenses) of $36,000 and $22,000,
      respectively, which had no impact on our basic and diluted loss per share for
      the three-month period.  Our loss before income tax benefit and net
      loss for the nine months ended September 30, 2007 included a restricted stock
      unit compensation cost of $36,000 and $22,000, respectively, which had no impact
      on basic and diluted loss per share for the nine-month period.  We had
      no tax benefit for the three and nine months ended September 30, 2007, as we
      did
      not issue the vested restricted stock to the holders during those
      periods.





The
      status of our non-vested and vested
      restricted stock units as of September 30, 2007, and the changes during the
      nine
      months ended September 30, 2007, is set forth in the following
      table:





**Number
                of
                Shares**
            
            
            **Weighted-Average
                Grant Date Fair
                Value Per Share**Non-vested
                restricted stock units
                at January 1, 2007
            
            
            --
            
            
            $
            --Granted
            
            
            8,600
            
            
            
            11.58Vested
            
            
            2,150
            
            
            
            11.58Forfeited
            
            
            --
            
            
            
            --Non-vested
                restricted stock units
                at September 30, 2007
            
            
            6,450
            
            
            $
            11.58Vested
                restricted stock units at
                September 30, 2007 (not issued)
            
            
            2,150
            
            
            $
            11.58





As
      of
      September 30, 2007 there was $64,000 of total unrecognized compensation costs
      related to non-vested restricted stock units granted under our stock-benefit
      plans.  The unrecognized compensation cost at September 30, 2007 is
      expected to be recognized over a weighted-average period of 1.0
      year.


**17**


**(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 either were delivered to
      securitization trusts (recorded as mortgage loans held for investment –
securitized) or are pending delivery into future securitizations (recorded
      as
      mortgage loans held for investment – pre-securitization), net of discounts,
      deferred origination fees and allowance for loan losses.  Mortgage
      loans held for investment – securitized had a weighted-average interest rate of
      8.31% and 8.19% per annum at September 30, 2007 and December 31, 2006,
      respectively.  Mortgage loans held for investment – pre-securitization
      had a weighted-average interest rate of 9.81% and 8.73% per annum at September
      30, 2007 and December 31, 2006, respectively.Included in ourmortgage
      loans held for investment –
pre-securitization at September 30, 2007 and December 31, 2006, was
      approximately $433.9 million and $335.9 million, respectively, of mortgage
      loans
      that were pledged as collateral for our warehouse financings at those same
      respective dates.





The
      following table presents a summary
      of mortgage loans held for investment, net at September 30, 2007 and December
      31, 2006:





*(Dollars
                in
                thousands)*
            
            **At
                September
                30,**
              **2007**
            
            
            **At
                December 31,
                2006**Mortgage
                loans held for investment
                – securitized(1)
            
            $
            6,629,892
            
            
            $
            6,051,996Mortgage
                loans held for investment
                – pre-securitization(2)
            
            
            480,514
            
            
            
            417,818Discounts
                (MSR
                related)
            
            
            (43,412
            )
            
            
            (36,933
            )Net
                deferred origination
                fees
            
            
            (20,722
            )
            
            
            (19,194
            )Allowance
                for loan
                losses
            
            
            (75,878
            )
            
            
            (55,310
            )Mortgage
                loans
                held for investment, net
            
            $
            6,970,394
            
            
            $
            6,358,377





*(1)*  *Included
      in the outstanding
      balance of the mortgage loans held for investment - securitized at September
      30,
      2007 and December 31, 2006 were $460,000 and $1.1 million, respectively, of
      impaired loans.*





*(2)*  *Included
      in the outstanding
      balance of the mortgage loans held for investment - pre-securitized at September
      30, 2007 and December 31, 2006 were $433,000 and $1.5 million, respectively,
      of
      impaired loans.*





For
      the three months ended September 30,
      2007 and 2006, we recorded interest income related to ourmortgage loans held for
      investment –
securitizedof $128.1
      million and $110.2 million, respectively.  For the nine months ended
      September 30, 2007 and 2006, we recorded interest income related to ourmortgage loans held for
      investment – securitizedof
      $377.6 million and $300.4 million, respectively.  For the three months
      ended September 30, 2007 and 2006, we recorded interest income related to ourmortgage loans held for
      investment – pre-securitizationof $24.3 million and
      $9.0 million,
      respectively.  For the nine months ended September 30, 2007 and 2006,
      we recorded interest income related to ourmortgage loans held for
      investment –
pre-securitizationof $58.3
      million and $26.7 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 andnine months ended September
      30, 2007 and
      2006:





**For
                the Three
                Months**
              **Ended
                September
                30,**
            
            
            **For
                the Nine
                Months**
              **Ended
                September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Beginning
                balance
            
            $
            66,864
            
            
            $
            46,326
            
            
            $
            55,310
            
            
            $
            36,832Provision(1)
            
            
            21,471
            
            
            
            6,874
            
            
            
            45,392
            
            
            
            20,276Charge-offs
            
            
            (12,457
            )
            
            
            (2,367
            )
            
            
            (24,824
            )
            
            
            (6,275
            )Ending
                balance
            
            $
            75,878
            
            
            $
            50,833
            
            
            $
            75,878
            
            
            $
            50,833





*(1)*  *The
      provision for loan losses for the
      three months ended September 30, 2007 and 2006 includes a specific provision
      of
      $19,000 and $61,000, respectively,related to probable losses
      attributable to impaired loans.  The provision for loan losses
      for the
      nine months ended September 30, 2007 and 2006 includes a recovery of specific
      provision of $333,000 and $351,000, respectively,related to probable
      losses attributable to impaired loans.*





**18**


The
      allowance for loan losses at September 30, 2007 and December 31, 2006 contains
      $306,000 and $1.0 million, respectively, of specific reserves related to
      impaired loans.  Our recorded investment in impaired loans at
      September 30, 2007 and December 31, 2006 was $893,000 and $2.5 million,
      respectively.  Additionally, the average recorded investment in
      impaired loans for the three months ended September 30, 2007 and 2006 was $2.1
      million and $3.2 million, respectively.  The average recorded
      investment in impaired loans for the nine months ended September 30, 2007 and
      2006 was $2.7 million and $3.4 million, respectively.  We recorded
      $65,000 and $66,000 of interest income, based upon the cash received on the
      loans classified as impaired during the three months ended September 30, 2007
      and 2006, respectively.  We recorded $104,000 and $187,000 of interest
      income, based upon the cash received on the loans classified as impaired during
      the nine months ended September 30, 2007 and 2006, respectively.





The
      mortgage loans held for investment
      portfolio at September 30, 2007 and December 31, 2006 are seasoned approximately
      16.6 months and 12.2 months, respectively, on average.  The
      significant increase in seasoning is primarily due to the $900.0 million
      securitization which we accounted for as a sale during the quarter ended
      September 30, 2007. Seasoning refers to the length of time the loans have been
      outstanding from their origination date.  Historically,as the
      loan portfolio ages (becomes more seasoned), the delinquencies generally grow
      until peaking at some point, generally within the 24th to 60th
      month, of the loan
      pool’s life.





The
      following table presents the
      delinquency status of our mortgage loan held for investment portfolio
      (securitized and pre-securitization) at September 30, 2007 and December 31,
      2006:





**At
                September 30,
                2007**
            
            
            **At
                December 31,
                2006***(Dollars
                in
                thousands)*
            
            **Amount**
            
            
            **%**
            
            
            **Amount**
            
            
            **%**Delinquency
                status:0
                - 29
                days
            
            $
            5,903,604
            
            
            
            83.0
            %
            
            $
            5,792,563
            
            
            
            89.5
            %30
                - 59
                days
            
            
            363,482
            
            
            
            5.1
            
            
            
            237,059
            
            
            
            3.760
                - 89
                days
            
            
            197,978
            
            
            
            2.8
            
            
            
            116,332
            
            
            
            1.890+
                days
            
            
            645,342
            
            
            
            9.1
            
            
            
            323,860
            
            
            
            5.0Total
            
            $
            7,110,406
            
            
            
            100.0
            %
            
            $
            6,469,814
            
            
            
            100.0
            %





As
      of
      September 30, 2007, December 31, 2006 and September 30, 2006, we had $645.9
      million (including $533,000 of impaired loans that are less than 90 days
      delinquent but on non-accrual status), $324.1 million (including $937,000 of
      impaired loans that are less than 90 days delinquent but on non-accrual status)
      and $255.2 million (including $1.3 million of impaired loans that are less
      than
      90 days delinquent but on non-accrual status), 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 the non-accrual
      mortgage loans held for investment at September 30, 2007 and 2006 performed
      in
      accordance with their contractual loan terms, we would have recognized an
      additional $10.1 million and $3.6 million of interest income during the three
      months ended September 30, 2007 and 2006, respectively, and an additional $22.1
      million and $7.8 million of interest income during the nine months ended
      September 30, 2007 and 2006, respectively.  We expect the amounts of non-accrual
      mortgage loans to change over time depending on a number of factors, such as
      the
      growth or decline in the size of our mortgage loans held for investment
      portfolio, the maturity of the loan portfolio, the number and dollar value
      of
      problem loans that are recognized and resolved through collection efforts made
      by our third-party servicer, and the amount of
      charge-offs.  Additionally, the performance of our mortgage loans can
      be affected by external factors, such as economic and employment conditions,
      or
      other factors related to the individual borrower.


**19**


**(7) 
Excess
      Cashflow
      Certificates**





The following table presents
      the
      activity related to our excess cashflow certificates for the nine months ended
      September 30, 2007 and the year ended December 31, 2006:





*(Dollars
                in
                thousands)*
            
            **For
                the
                Nine**
              **Months
                Ended**
              **September
                30,
                2007**
            
            
            **For
                the**
              **Year
                Ended**
              **December
                31,
                2006**Balance,
                beginning of
                year
            
            $
            1,209
            
            
            $
            7,789Excess
                cashflow certificates
                sold
            
            
            (1,050
            )
            
            
            (1,500
            )Accretion
            
            
            17
            
            
            
            452Cash
                receipts
            
            
            (1,736
            )
            
            
            (16,198
            )Net
                change in fair
                value
            
            
            1,560
            
            
            
            10,666Balance,
                end of
                period
            
            $
            --
            
            
            $
            1,209





In
      accordance with Emerging Issues Task
      Force (“EITF”) 99-20, “Recognition of Interest and Impairment on Purchased and
      Retained Beneficial Interests in Securitized Financial Assets,” we have
      regularly analyzed and reviewed our assumptions to determine whether the actual
      rate of return (interest income) on our excess cashflow certificates was within
      our expected rate of return.  The expected rate of return was recorded
      as a component of interest income.  Any return that either was greater
      than or less than the expected rate of return was reflected as a fair value
      adjustment and was recorded as a component of “other income” in the consolidated
      statements of operations.  During the three months ended March 31,
      2007, we sold all of our remaining excess cashflow certificates at fair value
      for $1.1 million, and consequently, no longer record any interest income or
      other income related to changes in fair value of the excess cashflow
      certificates.  For the three months ended September 30, 2006, we
      recorded interest income related to our excess cashflow certificates of
      $53,000.  For the nine months ended September 30, 2007 and 2006, we
      recorded interest income related to our excess cashflow certificates of $17,000
      and $433,000, respectively.  For the three months ended September 30,
      2006, we recorded a fair value gain in other income related to our excess
      cashflow certificates of $1.7 million.  For the nine months ended
      September 30, 2007 and 2006, we recorded fair value gain in income related
      to
      our excess cashflow certificates of $1.6 million and $9.2 million,
      respectively.





**(8)   Warehouse
      Financing**





Our
      warehouse credit facilities are collateralized by specific mortgage loans held
      for investment – pre-securitization at September 30, 2007 and December 31, 2006,
      the balances of which are equal to or greater than the outstanding balances
      under the warehouse credit facility at any point in time.  Mortgage
      loans held for sale also collateralized our warehouse credit facilities
      intra-quarter.  The amounts available under these warehouse credit
      facilities are based on the amount of the collateral pledged.  The
      amount we have outstanding on our warehouse credit facilities as of the end
      of
      any financial period generally is a function of the pace of mortgage loan
      originations relative to the timing of our securitizations and whole-loan
      sales.





Additionally,
      the amounts we are able to borrow under our warehouse credit facilities are
      dependent upon the valuations placed on the collateral by the warehouse
      providers.  The collateral is subject to re-valuation at any
      time.  Any downward re-valuations of the collateral may result in a
      margin call, which will subject us to either making a cash payment or delivering
      additional collateral to the warehouse provider, and result in the reduction
      of
      our available liquidity and can harm our results of operation and financial
      condition.


**20**


The
      following table summarizes
      information regarding warehouse credit facilities at September 30, 2007 and
      December 31, 2006:


*(Dollars
                  in
                  thousands)*
              
              
              
              
              
              **Balance
                  Outstanding****Warehouse
                  Credit
                  Facility**
              
              **Facility
                  Amount**(1)
              
              **Interest
                  Rate**
              
              **At**
                **September
                  30,
                  2007**
              
              
              **At**
                **December
                  31,
                  2006**
              
              **Expiration
                  Date**Deutsche
                  Bank(2)
              
              $
              500,000
              
              Margin
                  over
                  LIBOR
              
              $
              158,584
              
              
              $
              --
              
              October
                  2007RBS
                  Greenwich Capital(3)
              
              
              500,000
              
              Margin
                  over
                  LIBOR
              
              
              133,418
              
              
              
              24,570
              
              November
                  2007JPMorgan
                  Chase
              
              
              500,000
              
              Margin
                  over
                  LIBOR
              
              
              114,673
              
              
              
              --
              
              May
                  2008Citigroup
              
              
              500,000
              
              Margin
                  over
                  LIBOR
              
              
              --
              
              
              
              234,578
              
              May
                  2008Bank
                  of America(4)
              
              
              --
              
              Margin
                  over
                  LIBOR
              
              
              --
              
              
              
              76,717
              
              N/ATotal
              
              $
              2,000,000
              
              
              
              $
              406,675
              
              
              $
              335,865




*(1)  The
      warehouse facility amount shown is as of September 30, 2007, and was $1.75
      billion as of December 31, 2006.  The committed portion of the
      warehouse facility amount totaled approximately $1.25 billion and $1.0 billion
      at September 30, 2007 and December 31, 2006, respectively.*





*(2)*
            *The
                Deutsche Bank warehouse credit facility was extended to December
                2007 in
                October 2007.*





*(3)*
            *The
                RBS Greenwich Capital warehouse credit facility was extended to December
                2007 in October 2007.*





*(4)*
            *The
                Bank of America warehouse credit facility was not renewed upon its
                expiration in September 2007.*





Our
      warehouse financing costs are
      determined based upon a margin over the one-month LIBOR rate, which is the
      benchmark index used to determine our cost of borrowed funds.  The
      benchmark index increased 8 basis points to an average of 5.43% for the three
      months ended September 30, 2007, compared to an average of 5.35% for the three
      months ended September 30, 2006.  The benchmark index increased 34
      basis points to an average of 5.36% for the nine months ended September 30,
      2007, compared to an average of 5.02% for the nine months ended September 30,
      2006.  Partially offsetting the increase in the benchmark rate during
      the three and nine month periods was a decrease in the average margin over
      the
      benchmark index charged by our warehouse lenders during the same
      periods.  For the three months ended September 30, 2007 and 2006, we
      recorded interest expense related to our warehouse financing of $15.3 million
      and $7.6 million, respectively.  For the nine months ended September
      30, 2007 and 2006, we recorded interest expense related to our warehouse
      financing of $41.0 million and $23.0 million, respectively.





**(9)   Financing
      on Mortgage Loans Held for
      Investment, Net**





For our securitizations, which were structured and accounted for as financings,
      the securitization trust or special purpose entity (“SPE”) holds mortgage loans,
      referred to as “securitization loans,” and issues debt represented by
      securitization asset-backed securities.  The securitization loans are
      recorded as an asset on our consolidated balance sheets 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.”  Under securitizations structured as financings, we record
      interest income from the mortgage loans held for investment - securitized and
      interest expense from the asset-backed securities issued (financing on mortgage
      loans held for investment, net) 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.  Any discounts on the financing are amortized
      on a level-yield basis over the estimated life of the debt issued using the
      interest method.





At September 30, 2007 and December 31, 2006, the outstanding financing on
      mortgage loans held for investment, net consisted of $6.5 billion and $6.0
      billion, respectively.  The weighted-average interest rate of our
      financing on mortgage loans held for investment, net increased 15 basis points
      to 5.75% at September 30, 2007 from 5.60% at December 31, 2006.





**21**


The
      following table summarizes the expected maturities on our secured financings
      at
      September 30, 2007:





*(Dollars
                in
                thousands)*
            
            **Total**
            
            
            **Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Three
                Years**
            
            
            **Three
                to**
              **Five
                Years**
            
            
            **More
                than**
              **Five
                Years**Financing
                on mortgage loans held
                for investment, net(1)
            
            $
            6,514,154
            
            
            $
            2,153,017
            
            
            $
            2,380,857
            
            
            $
            1,005,556
            
            
            $
            974,724





*(1)  The amounts in
      the table do not include interest.*





Amounts shown above reflect estimated repayments based on anticipated receipt
      of
      principal and interest on the underlying mortgage loan collateral using
      prepayment assumptions.  The assumed prepayment assumptions are
      estimates based upon our historical loan performance and the performance of
      similar mortgage pools from other lenders, and considering other public
      information about market factors such as interest rates, inflation, recession,
      unemployment and real estate values, among others.  The funds used to
      repay these securitization asset-backed securities are generated solely from
      the
      underlying mortgage loans held for investment for each particular securitization
      trust.  We have no recourse obligation to repay these securitization
      asset-backed securities, except for the standard representations and warranties
      typically made as part of a sale of loans on a non-recourse basis.





For
      the three months ended September 30, 2007 and 2006, we recorded interest expense
      related to our securitization debt of $99.6 million and $77.1 million,
      respectively.  For the nine months ended September 30, 2007 and 2006,
      we recorded interest expense related to our securitization debt of $283.8
      million and $204.7 million, respectively.  Included in financing on
      mortgage loans held for investment, net at September 30, 2007 and December
      31,
      2006, are $12.7 million and $6.3 million, respectively, of unamortized
      discounts.




(10) 
      Other Borrowings




Other
      borrowings are comprised of (1) a
      residual financing facility, (2) convertible notes, and (3) capital leases
      and
      other arrangements related to our equipment financing.  On August 13,
      2007, we, together with certain of our subsidiaries, entered into agreements
      providing for an aggregate of $70.0 million in liquidity, consisting of a $60.0
      million residual financing facility and the issuance of $10.0 million in
      convertible notes.  The closing of these transactions took place on
      August 14, 2007.





The
      following table summarizes certain information regarding other borrowings at
      September 30, 2007 and December 31, 2006:





*(Dollars
                in
                thousands)*
            
            **Range
                of Interest Rates(1)**
            
            
            **Balance
                at September 30,
                2007**
            
            
            **Balance
                at**
              **December
                31,
                2006**
            
            **Range
                of Expiration Dates(1)**Residual
                financing facility, net(2)
            
            600
                basis points over one-month
                LIBOR
            
            
            $
            52,494
            
            
            $
            --
            
            August
                2008Convertible
                notes(3)
            
            
            6.00%
            
            
            
            10,000
            
            
            
            --
            
            August
                2008Equipment
                financing(4)
            
            7.05%
                to
                8.95%
            
            
            
            6,088
            
            
            
            5,970
            
            January
                2008 to September
                2010Total
            
            
            
            
            
            $
            68,582
            
            
            $
            5,970





*(1)      The
      range of interest rates and
      expiration dates are as of September 30, 2007.*





*(2)*  *The
      balance at September 30, 2007 is net
      of $4.5 million related to deferred warrant costs associated with the residual
      financing facility.*




*(3)*  *The
      convertible notes were converted
      into 2.0 million shares of our common stock on October 4,
      2007.*





*(4)    At
      December 31, 2006, the outstanding
      equipment financing had a range of interest rates of 6.26% to 8.95% and a range
      of expiration of January 2007 to November 2009.*





**22**


For
      the three months ended September 30,
      2007 and 2006, we recorded interest expense related to our other borrowings
      of
      $2.0 million and $107,000, respectively.  For the nine months ended
      September 30, 2007 and 2006, we recorded interest expense related to our other
      borrowings of $2.3 million and $317,000, respectively.





*Residual
      financing facility*– In August 2007, we entered into a $60.0 million
      residual financing facility withan affiliate of Angelo,
      Gordon & Co., L.P., (“Angelo Gordon”) an alternative asset management firm,
      which is collateralized by all of our existing securitization Class P, Class
      BIO
      and owner trust certificates (the “residual certificates”), which entitle the
      holder to receive the excess cash flows, if any, remaining in each payment
      period under the applicable securitization, after payments have been made in
      respect of the asset-backed notes and certificates, the contractual servicing
      fee and other fees, costs and expenses of administering the securitization
      trust.  Holders of the certain classes of residual certificates are
      also entitled to receive any prepayment penalties that are paid under the
      applicable securitization.  Under the terms of the residual financing
      facility, the cash flows from the residual certificates will be applied to
      pay
      down the principal of the residual financing facility.  The residual
      financing facility bears interest at the rate of 600 basis points over one-month
      LIBOR, and matures in 12 months (August 2008), if not sooner
      repaid.





In
      connection with the residual financing facility, we issued to affiliates of
      Angelo Gordon (the “Angelo Gordon Entities”) warrants to purchase, in the
      aggregate, up to 10.0 million shares of our common stock.  The initial
      exercise price of the warrants is $5.00 per share, and the exercise price is
      subject to adjustment.  In connection with the issuance of the
      warrants, the Angelo Gordon Entities were granted certain rights as
      investors.  The warrants expire in February 2009.  (See Note
      15 – “Subsequent Events”).  In
      accordance with Emerging Issues Task Force ("EITF") Issue 00-19, "Accounting
      for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock," we measured the warrants based upon their fair value
      at
      the date of issuance, or $5.1 million.  We classified the warrants as
      a capital contribution (additional paid-in capital) and as a corresponding
      discount on the associated debt on the date of issuance.





*Convertible
      notes*–In August
      2007, we issued $10.0
      million of convertible notes to entities managed by Mr. Mohnish Pabrai (“PIF
      Investors”).  The notes are mandatorily convertible into an aggregate
      of 2.0 million shares of our common stock, at a conversion price of $5.00 per
      share, upon approval of our stockholders.  The convertible notes
      mature in August 2008, if not converted or redeemed earlier, and bear interest
      at the rate of 6.0% per annum for the first 90 days, and thereafter at the
      rate
      of 12.0% per annum, until converted or redeemed.  The convertible
      notes converted into shares of our common stock in October 2007.  (See
      Note 15 – “Subsequent Events”).





*Equipment
      financing*– We generally enter into equipment financing arrangements on a
      quarterly basis in order to fund our equipment needs.  These
      borrowings consist of capital
      leases and other arrangements that are collateralized by pools of
      equipment (i.e., computer equipment and furniture and fixtures).  The
      arrangements are made at market rates on the date entered into and generally
      mature in two to three years from date of origination.





**(11) Derivative
      Instruments**





We account for our derivative financial instruments, such as corridors and
      interest rate swaps (including amortizing notional balance interest rate swaps),
      as cash flow hedges.  We utilize both corridors and amortizing
      notional balance interest rate swaps to hedge interest payments on
      securitization variable-rate debt, while we utilize interest rate swaps to
      hedge
      uncertain cash flows associated with future securitization
      financing.  At September 30, 2007 and December 31, 2006, the fair
      value of our corridors totaled $359,000 and $2.5 million, respectively, and
      the
      fair value of our interest rate swaps (including amortizing notional balance
      interest rate swaps) totaled a loss of $1.8 million and gains of $942,000,
      respectively.  The fair value of our corridors and interest rate swaps
      are recorded as a component of “prepaid and other assets” or “accounts payable
      and other liabilities.”





As
      of
      September 30, 2007, the effective portion of the changes in fair value of the
      corridors, interest rate swaps and any losses on terminated swaps are recorded
      as components of accumulated OCI and totaled, net of tax, losses of $566,000,
      losses of $2.9 million and losses of $2.4 million, respectively.  As
      of December 31, 2006, the effective portion of the changes in fair value of
      the
      corridors and interest rate swaps and any losses on terminated swaps are
      recorded as components of accumulated OCI, and totaled, net of tax, losses
      of
      $155,000, gains of $575,000 and losses of $1.9 million,
      respectively.  Accumulated OCI or loss relating to cash flow hedging
      is reclassified to earnings as a yield adjustment to interest expense as the
      interest payments affect earnings.  Hedge ineffectiveness associated
      with hedges resulted in a loss of $154,000 and a loss of $99,000 for the three
      months ended September 30, 2007 and 2006, respectively.  Hedge
      ineffectiveness associated with hedges resulted in a loss of $252,000 and a
      gain
      of $40,000 for the nine months ended September 30, 2007 and 2006,
      respectively.





**23**


If
      a
      hedge fails the assessment of hedge effectiveness test (the ratio of the
      outstanding balance of the hedged item (debt) to the notional amount of the
      hedge exceeds 125% or falls below 80%, since the notional amount varies) at
      any
      time, and therefore is not expected to be “highly effective” at achieving
      offsetting changes in cash flows, the hedge ceases to qualify for hedge
      accounting.  At September 30, 2007 and December 31, 2006, we
      classified $179,000 and $227,000, respectively, of derivative instruments
      (specifically corridors) as trading securities in prepaid and other assets
      as
      these instruments were no longer deemed “highly effective.”  During
      the three months ended September 30, 2007 and 2006, a loss of $43,000 and a
      loss
      of $163,000, respectively, was recorded to earnings on the changes in fair
      value
      of the hedges (specifically corridors) held as trading
      securities.  During the nine months ended September 30, 2007 and 2006,
      a gain of $42,000 and a gain of $121,000, respectively, was recorded to earnings
      on the changes in fair value of the hedges (specifically corridors) held as
      trading securities.





The following table summarizes the notional amount, expected maturities and
      weighted-average strike price or rate for the corridors (caps bought and caps
      sold) and amortizing notional balance interest rate swaps that we held as of
      September 30, 2007:





*(Dollars
                in
                thousands)*
            
            **Total**
            
            
            **One**
              **Year**
            
            
            **Two
                Years**
            
            
            **Three
                Years**
            
            
            **Four
                Years**
            
            
            **Five
                Years &
                Thereafter**Caps
                bought -
                notional
            
            $
            430,636
            
            
            $
            270,984
            
            
            $
            39,803
            
            
            $
            30,157
            
            
            $
            23,245
            
            
            $
            66,447Weighted-averagestrike
                rate
            
            
            7.39%
            
            
            
            7.31%
            
            
            
            7.46%
            
            
            
            7.46%
            
            
            
            7.43%
            
            
            
            7.42%Caps
                sold -
                notional
            
            $
            430,636
            
            
            $
            270,984
            
            
            $
            39,803
            
            
            $
            30,157
            
            
            $
            23,245
            
            
            $
            66,447Weighted-averagestrike
                rate
            
            
            9.30%
            
            
            
            9.33%
            
            
            
            9.27%
            
            
            
            9.27%
            
            
            
            9.29%
            
            
            
            9.32%Amortizing
                notional balance
                interest rate swaps:Notional
            
            $
            276,785
            
            
            $
            146,368
            
            
            $
            97,649
            
            
            $
            32,768
            
            
            $
            --
            
            
            $
            --Weighted-average
                rate
            
            
            5.10%
            
            
            
            5.11%
            
            
            
            5.08%
            
            
            
            5.00%
            
            
            
            --
            
            
            
            --





The
      notional amount of the corridors
      totaled $954.1 million at December 31, 2006.  The notional amount of
      the amortizing notional balance interest rate swaps totaled $274.7 million
      at
      December 31, 2006.





The
      original stated maturities of our corridors on the date of purchase ranged
      from
      a low of 1.3 years to a maximum of 8.3 years.  The original stated
      maturities of our amortizing interest rate swaps on the date of purchase ranged
      from a low of 3.0 years to a maximum of 3.1 years.  The maturities of
      our corridors as of September 30, 2007 ranged from October 2007 to July 2012
      and
      had weighted average strike prices of 6.94% to 8.20% for the caps bought and
      9.15% to 9.47% for caps sold.  The maturities of our notional balance
      interest rate swaps as of September 30, 2007 ranged from October 2007 to June
      2010 and had a weighted average rate of 4.96% to 5.12%.


**24**


**(12)
      Accumulated Other Comprehensive Loss**





In
      accordance with SFAS No. 130, “Reporting Comprehensive Income,” the components
      of OCI for the three and nine months ended September 30, 2007 and 2006 are
      as
      follows:





*(Dollars
                in
                thousands)*
            
            **Before
                Tax
                Amount**
            
            
            **Tax
                Benefit
                (Expense)**
            
            
            **After
                Tax**
              **Amount**For
                the three months ended
                September 30, 2007:Net
                unrealized holding
                losses on derivatives arising during the period
            
            $
            (7,351
            )
            
            $
            2,849
            
            
            $
            (4,502
            )Reclassification
                adjustment for losses on derivatives included in net (loss)
                income
            
            
            (32
            )
            
            
            12
            
            
            
            (20
            )Other
                comprehensive (loss)
                income
            
            $
            (7,383
            )
            
            $
            2,861
            
            
            $
            (4,522
            )For
                the three months ended
                September 30, 2006:Net
                unrealized holding
                losses on derivatives arising during the period
            
            $
            (9,768
            )
            
            $
            3,809
            
            
            $
            (5,959
            )Reclassification
                adjustment for loss on derivatives included in net
                income
            
            
            (2,771
            )
            
            
            1,081
            
            
            
            (1,690
            )Other
                comprehensive (loss)
                income
            
            $
            (12,539
            )
            
            $
            4,890
            
            
            $
            (7,649
            )





For
                the nine months ended
                September 30, 2007:Net
                unrealized holding
                losses on derivatives arising during the period
            
            $
            (6,818
            )
            
            $
            2,636
            
            
            $
            (4,182
            )Reclassification
                adjustment for loss on derivatives included in net (loss)
                income
            
            
            (162
            )
            
            
            63
            
            
            
            (99
            )Other
                comprehensive (loss)
                income
            
            $
            (6,980
            )
            
            $
            2,699
            
            
            $
            (4,281
            )For
                the nine months ended
                September 30, 2006:Net
                unrealized holding
                gains on derivatives arising during the period
            
            $
            2,903
            
            
            $
            (1,132
            )
            
            $
            1,771Reclassification
                adjustment for loss on derivatives included in net
                income
            
            
            (7,116
            )
            
            
            2,775
            
            
            
            (4,341
            )Other
                comprehensive (loss)
                income
            
            $
            (4,213
            )
            
            $
            1,643
            
            
            $
            (2,570
            )





**25**


**(13)  Earnings
      Per
      Share**





EPS
      is computed in accordance with SFAS
      No. 128, “Earnings Per Share.”Basic EPS is computed by
      dividing net income by the weighted-average number of shares of common stock
      outstanding during each period presented.  The computation of diluted
      EPS 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) and other share-based awards, warrants and convertible debt
      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.





**Three
                Months
                Ended**
              **September
                30,**
            
            
            **Nine
                Months
                Ended**
              **September
                30,***(Dollars
                in thousands, except
                share and**per
                share
                data)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                (loss) income, as
                reported
            
            $
            (39,636
            )
            
            $
            7,960
            
            
            $
            (33,972
            )
            
            $
            21,787Less
                preferred stock
                dividends
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Net
                (loss) income available to
                common stockholders
            
            $
            (39,636
            )
            
            $
            7,960
            
            
            $
            (33,972
            )
            
            $
            21,787Basic
                - weighted-average
                shares
            
            
            23,347,304
            
            
            
            23,213,262
            
            
            
            23,324,493
            
            
            
            22,214,538Basic
                EPS
            
            $
            (1.70
            )
            
            $
            0.34
            
            
            $
            (1.46
            )
            
            $
            0.98Basic
                - weighted-average
                shares
            
            
            23,347,304
            
            
            
            23,213,262
            
            
            
            23,324,493
            
            
            
            22,214,538Incremental
                shares-options(1)
                (2)
            
            
            --
            
            
            
            765,639
            
            
            
            --
            
            
            
            807,287Diluted
                - weighted-average
                shares
            
            
            23,347,304
            
            
            
            23,978,901
            
            
            
            23,324,493
            
            
            
            23,021,825Diluted
                EPS(1)
                (2)
            
            $
            (1.70
            )
            
            $
            0.33
            
            
            $
            (1.46
            )
            
            $
            0.95





*(1)For
      the
      three and nine months ended September 30, 2007, the weighted average of
      approximately 1.3 million and 1.7 million, respectively, in-the-money employee
      stock options and approximately 263,000 and 237,000, respectively, restricted
      stock awards/units, approximately 1.7 million and 827,000, respectively, of
      warrants and 1.0 million and 352,000, respectively, of convertible note related
      shares are excluded from the calculation of diluted EPS as they are
      anti-dilutive due to the loss reported for the period.  Also excluded
      was 371,000 and 50,000 of out-of-the-money employee stock options, which have
      been excluded since their effect is anti-dilutive, for the three and nine months
      ended September 30, 2007, respectively.*


*(2)   
For
      each of the
      three and nine months ended September 30, 2006, approximately 1.8 million
      in-the-money employee stock options and approximately 155,000 restricted stock
      awards are included in the calculation of diluted EPS, while approximately
      25,000 of out-of-the-money employee stock options have been excluded since their effectis
      anti-dilutive.*





**(14)  Restructuring
      Charge**





On
      August
      22, 2007, we eliminated 313 employees, resulting in an approximate 20.1%
      reduction in our nationwide workforce at that date.  The majority of
      the reductions related to the closing of our wholesale origination offices
      located in Florida, Texas, and California, and the elimination of certain
      employee positions involved in the originations process.  The
      positions and offices were eliminated in response to an unanticipated decrease
      in our origination volume driven by the market conditions that existed during
      July and August of 2007.





We
      incurred a pre-tax charge of $1.4 million during the three months ended
      September 30, 2007 as a result of the workforce reductions and office closing
      related expenses.  The following reconciles the activity of the types
      of costs associated with the staff reduction and office closings:





(*Dollars
                in
                thousands*)
            
            **Termination
                Date Amount
                Incurred**
            
            
            **Paid
                or
                Settled**
            
            
            **Adjustments**
            
            
            **Balance
                at**
              **September
                30,
                2007**Severance
                benefits
            
            $
            775
            
            
            $
            775
            
            
            $
            --
            
            
            $
            --Lease
                terminations
            
            
            572
            
            
            
            37
            
            
            
            --
            
            
            
            535Leasehold
                improvements and
                furniture and fixtures
            
            
            80
            
            
            
            55
            
            
            
            --
            
            
            
            25Total
            
            $
            1,427
            
            
            $
            867
            
            
            $
            --
            
            
            $
            560





Included
      in payroll and related costs during the three and nine months ended September
      30, 2007 was $775,000 of the severance benefits related to the August 2007
      staff
      reduction.  Additionally, included in general and administrative
      expense during the three and nine months ended September 30, 2007 was $652,000
      of office closing expenses related to the August 2007 office
      closings.





**26**


**(15) Subsequent
      Events**




On November 8, 2007, we announced that, in response to the continued disruption
        in the credit markets, we reduced our staff by approximately 470 employees
        and closed 4 origination offices.  We estimate that we will incur a
        pre-tax charge of approximately $7.5 million, of which $1.4 million will
        be paid
        immediately in severance, during the fourth quarter of 2007 as a result of
        the
        workforce reductions and office closing related expenses.


On
      October 4, 2007, we held a special
      meeting of our stockholdersto approve the issuance of shares of our
      common stock that are issuable upon exercise or conversion of securities that
      we
      issued in August 2007. The
      stockholders approved both of the following proposals presented: (1)the
      issuance of 5.4 million shares of our common stock that are issuable upon the
      exercise of warrants held by affiliates of Angelo Gordon (in addition to the
      4.6
      million warrant shares that were not subject to stockholder approval), and(2)the issuance of an aggregate
      of 2.0 million shares of our common stock that were issuable upon the conversion
      of the convertible notes held by the PIF Investors.  As a result of the vote,
      and in accordance with the terms of the convertible notes, the $10.0 million
      of
      convertible notes were automatically converted into 2.0 million shares of our
      common stock on October 4, 2007, upon receipt of the stockholder
      approval.





In October 2007, we extended our warehouse credit facilities with both Deutsche
      Bank and RBS Greenwich Capital to December 2007.  The material terms
      and conditions of both facilities remained consistent with the terms and
      conditions of the previous facilities.


**27**


**Item
      2.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations**





*This Quarterly Report on Form 10-Q (“Quarterly Report”) 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, 2006.  In
      addition, please read this section in conjunction with our Consolidated
      Financial Statements and Notes to Consolidated Financial Statements herein,
      and
      please see “Part II – Item 1A.. - Risk Factors,” including the information with
      respect to forward-looking statements that appear in this Report.  As
      discussed in Part II-Item 1A. of this Quarterly Report, there have been
      substantial operating difficulties for us and for companies in our sector during
      the three and nine months ended September 30, 2007 and in the weeks preceding
      the filing of this Quarterly Report.  Accordingly, our past
      performance described in this section should not be construed to be indicative
      of our future performance.*





**General**





We are a national specialty consumer finance company that originates,
      securitizes and sells non-conforming mortgage loans.  Our loans are
      primarily fixed rate and secured by first mortgages on one- to four-family
      residential properties.  Throughout our 25-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
      the
      conforming lending guidelines of Fannie Mae and Freddie Mac.  We make
      mortgage loans to these borrowers for purposes such as debt consolidation,
      refinancing, education 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 had
      amortization schedules ranging from five years to 30 years.





We make mortgage loans to individual borrowers, which are a cash outlay for
      us.  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 credit facilities or by utilizing our available working
      capital.  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 pre-sale holding period.





Following this initial holding period, we either securitize our loans or sell
      them on a whole-loan basis, using the net proceeds from these transactions
      to
      repay our warehouse credit facilities and for working
      capital.  Beginning in the first quarter of 2004 and through the
      second quarter of 2007, we structured each of our securitizations to be
      accounted for as on-balance sheet financings, in which we record interest income
      on the outstanding portfolio of loans in each securitization trust and interest
      expense from the asset-backed securities issued by each securitization trust
      over time.  During the third quarter of 2007 and for the periods prior
      to 2004, we structured our securitizations to be accounted for as sales, which
      required us to record cash and non-cash revenues as loss/gain-on-sale at the
      time the securitizations were completed.  Additionally, when we sell
      loans on a whole-loan basis, we record the net proceeds received upon sale
      as
      revenue, net of any deferred fees, and premium recapture or secondary marketing
      (indemnification) reserves.  (See “- Origination of Mortgage Loans -
      Securitizations and Whole-Loan Sales”).





**Origination
      of Mortgage
      Loans**





All of the mortgage loans we originate are originated using our underwriting
      guidelines.  The majority of the loans we originate represent loans
      that we intend to place into our on-balance sheet
      securitizations.  These loans are originated with the intent to hold
      the mortgage loans to maturity in our securitizations trusts.  We
      typically sell a small percentage of these mortgage loans on a whole-loan basis
      each quarter, depending upon the potential economic benefit from the sale of
      the
      loans.  The sale of these mortgage loans does not reflect on our intention
      when the mortgage loans are originated, but rather reflects the fact that we
      regularly review (generally on a monthly basis) our mortgage loans held for
      investment – pre-securitization portfolio to determine which mortgage loans we
      prefer to sell on a whole-loan basis, rather than
      securitize.  Beginning in the fourth quarter of 2007, we recommenced
      originating Federal Housing Authority (“FHA”) loans (we have not originated FHA
      loans in more than 10 years).  Because these loans represent loans
      that we originate with the intent to sell in the secondary market on a
      whole-loan sales basis, they will be classified as “held for sale”
loans.





**28**


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 headquarters, our Cincinnati, Ohio
      underwriting hub, and our regional office in Phoenix, Arizona.  We
      also purchase closed loans on a limited basis from other lenders.





For the three and nine months ended September 30, 2007 and 2006, we originated
      the following loans by origination channel and by loan type:





**For
                the Three
                Months**
              **Ended
                September
                30,**
            
            
            **For
                the Nine
                Months**
              **Ended
                September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Originations
                by
                channel:Wholesale
            
            $
            412,291
            
            
            $
            505,728
            
            
            $
            1,802,295
            
            
            $
            1,539,113Retail
            
            
            396,704
            
            
            
            489,204
            
            
            
            1,600,309
            
            
            
            1,371,155Total
                originations
            
            $
            808,995
            
            
            $
            994,932
            
            
            $
            3,402,604
            
            
            $
            2,910,268Loan
                type:Fixed
                rate
            
            
            98.4
            %
            
            
            87.0
            %
            
            
            95.8
            %
            
            
            85.4
            %Adjustable-rate
            
            
            1.6
            
            
            
            13.0
            
            
            
            4.2
            
            
            
            14.6Total
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %





For
      the three months ended September 30,
      2007, we originated $809.0 million of loans, a decrease of 18.7% over the $994.9
      million of loans originated during the three months ended September 30,
      2006.  Loan originations for the three months ended September 30, 2007
      were comprised of approximately $412.3 million of wholesale loans, representing
      51.0% of total loan production, and $396.7 million of retail loans, representing
      49.0% of total loan production.  This compares to originations for the
      three months ended September 30, 2006 of $505.7 million of wholesale loans,
      representing 50.8% of total loan production, and $489.2 million of retail loans,
      representing 49.2% of total loan production.





For
      the nine months ended September 30,
      2007, we originated $3.4 billion of loans, an increase of 16.9% over the $2.9
      billion of loans originated during the nine months ended September 30,
      2006.  Loan originations for the nine months ended September 30, 2007
      were comprised of approximately $1.8 billion of wholesale loans, representing
      53.0% of total loan production, and $1.6 billion of retail loans, representing
      47.0% of total loan production.  This compares to originations for the
      nine months ended September 30, 2006 of $1.5 billion of wholesale loans,
      representing 52.9% of total loan production, and $1.4 billion of retail loans,
      representing 47.1% of total loan production.





During
      the three months ended September 30, 2007 we continued to refine our
      underwriting criteria.  We raised the minimum required credit scores
      on some loans, lowered the maximum loan-to-value (“LTV”) ratios on other loans
      and eliminated certain product offerings, among other changes.  During
      the three months ended September 30, 2007, we ceased originating adjustable-rate
      loans, such as “3/27” loans (loans that have a fixed rate of interest for the
      first three years, and then adjusts thereafter for the remaining 27 years of
      the
      term) based upon changes in market conditions and because we did not believe
      that they provided sufficient financial benefit to our prospective borrowers,
      especially when compared to our fixed rate products.  Collectively,
      adjustable-rate loans represented only 1.6% and 4.2% of our total originations
      for the three and nine months ended September 30, 2007,
      respectively.  Additionally, we commenced the origination of Section
      203(b) FHA loans during October 2007.  Section 203(b) FHA loans are
      fixed rate mortgages with maturities of 15 or 30 years, and are insured by
      the
      U.S. Department of Housing and
      Urban Development (“HUD”).





**29**


**Securitizations
      and Whole-Loan
      Sales.**As a
      fundamental part of
      our present business and financing strategy, we securitize the majority of
      the
      mortgage loans we originate.  We generally structure our
      securitization transactions as a financing, but may from time-to-time structure
      a securitization as a “gain on sale” transaction, as we did in the third quarter
      of 2007.  Additionally, we also sell a portion of our loans (all of
      the mortgage loans held for sale and a portion of the mortgage loans held for
      investment – pre-securitized) on a whole-loan basis.  We select the
      outlet (securitization or whole-loan sale) depending on market conditions,
      relative profitability and cash flows.  For example, if all of the
      mortgage loans we originated in a quarter were placed in the pool being
      securitized at the end of that quarter, the pool would not have the optimal
      average loan life, mix of interest rate terms, mix of and overall LTV ratio,
      mix
      of credit quality, or geographic mix to maximize profitability and cash flow
      for
      the securitization.  Mortgage loans being held as mortgage loans held
      for investment – pre-securitized that are determined to be left out of the pool
      of mortgage loans collateralizing a securitization are typically sold shortly
      thereafter.  Additionally, in the fourth quarter of 2007, we began to
      originate FHA loans with the intent to sell them on a whole-loan
      basis.





During
      the three months ended September
      30, 2007 and 2006, whole-loan sales comprised approximately21.4% and
      19.3%, respectively, of the total
      amount of our combined securitizations and whole-loan sale
      transactions.  During the nine months ended September 30, 2007 and
      2006, whole-loan sales comprised approximately18.8% and 17.0%, respectively, of the
      total amount of
      our combined securitizations and whole-loan sale
      transactions.





The
      following table sets forth certain information regarding loans sold through
      our
      securitizations and on a whole-loan basis during the three and nine months
      ended
      September 30, 2007 and 2006:





**Three
                Months
                Ended**
              **September
                30,**
            
            
            **Nine
                Months
                Ended**
              **September
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Loan
                securitizations – structured as a sale
            
            $
            899,999
            
            
            $
            --
            
            
            $
            899,999
            
            
            $
            --Loan
                securitizations – structured as a financing
            
            
            --
            
            
            
            824,999
            
            
            
            1,799,998
            
            
            
            2,524,977Whole-loan
                sales
            
            
            244,510
            
            
            
            196,744
            
            
            
            626,971
            
            
            
            515,462Total
                securitizations and whole-loan sales
            
            $
            1,144,509
            
            
            $
            1,021,743
            
            
            $
            3,326,968
            
            
            $
            3,040,439





We
      apply the net proceeds from
      securitizations and whole-loan sales to pay down our warehouse credit facilities
      in order to make capacity available under these facilities to fund additional
      mortgage loans and utilize any remaining funds for working
      capital.





**Securitizations.**Securitizations,
      whether structured as a
      sale or secured financing, effectively provide us with a source of long-term
      financing.In a securitization, we pool together loans,
      typically each quarter, and convey these loans to a newly formed securitization
      trust.  For
      securitizations structured as a sale, the securitization trust is formed as
      a
      qualified special purpose entity (“QSPE”), which is not consolidated in our
      financial statements for financial reporting purposes.  For
      securitizations structured as a financing, the securitization trust is formed
      as
      a special purpose entity (“SPE”), which is consolidated for financial reporting
      purposes.These trusts are established for the limited purpose
      of receiving and holding our mortgage loans and issuing asset-backed securities,
      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 may not rely upon us for payment;
      likewise, the assets held by the securitization trust are not available to
      our
      general creditors, although when we utilized securitizations structured as
      a
      financing we record the securitized loans and the securitization financing
      on
      our consolidated financial statements.  We carry no contractual
      obligation related to these trusts or the loans sold to the trusts, 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.  Furthermore, we provide no guarantees
      to investors with respect to the cash flow or performance of these
      trusts.


**30**


Each
        of our securitizations contains an
        overcollateralization (“O/C”) provision, which is a credit enhancement
        determined and required by the rating agencies and/or the bond insurer insuring
        the securities.  The required O/C can increase or decrease throughout
        the term of the securities depending upon subordination levels, delinquency
        and/or loss tests, and is subject to minimum and maximum levels. The O/C
        provision is designed to provide additional credit support for the securities
        sold from credit losses, which may arise principally from defaults on the
        underlying mortgage loans.  O/C occurs when the amount of collateral
        (*i.e.*,
        mortgage loans) owned by a
        securitization trust exceeds the aggregate amount of asset-backed securities
        (senior note portion only).





The
        securitizations we completed during the nine months ended September 30, 2007
        required an O/C ranging from 3.6% to 6.0% of the initial mortgage loans
        sold to
        the securitization trust.  During the year ended December 31,
        2006, our securitizations required a range of O/C from 2.7% to 3.1% of the initial mortgage loans
        sold to
        the securitization trust.  The level of O/C required for our
        securitizations is driven by the ratings placed on our asset-backed securities
        by the rating agencies, which areStandard & Poor's Ratings Services
        (“S&P”), Moody's Investors Service, Inc (“Moody’s”), Fitch Ratings, Inc.
        (“Fitch”) and/or Dominion Bond
        Rating Service, Inc. (“DBRS”).  During the three months ended
        September 30, 2007, several of the rating agencies announced substantial
        changes
        to their ratings criterion and methodologies which, among other things, raised
        the level of O/C required on our third quarter 2007 securitization transaction
        to a level above the levels we experienced during the first six months of
        2007
        (which ranged from 3.6% to 3.7%).  We anticipate that the level of O/C
        required on our future securitizations will also be directly affected by
        the
        market conditions present at the time of securitization, among other things,
        which we currently expect to continue to substantially exceed the levels
        we
        experienced during the first six months of 2007.





For
      securitizations structured to be
      accounted for as secured financings, no up front gain (or loss) is recorded;
      rather, the mortgage loans that collateralizes the financings are recorded
      on
      our balance sheet as mortgage loans held for investment - securitized, together
      with the related financing on the mortgage loans held for
      investment.  For securitizations structured as sales, we record an
      upfront loss or gain at the time of securitization, which is recorded in our
      statements of operations as a component of net loss or gain on sale of mortgage
      loans.





We
      regularly issue net interest margin (“NIM”) securities (either NIM notes or
      Class N Notes) simultaneously with the underlying securitization.  In
      a NIM transaction, the right to receive the excess cash flows generated by
      the
      pool of loans collateralizing the securitization structured as a financing,
      or
      from the excess cashflow certificates or residual securitization certificates
      in
      transactions structured as sales, is transferred to a NIM investor, in exchange
      for an up front cash payment to us.





The
      NIM note(s) or Class N Notes entitle
      the holder to be paid a specified interest rate, and further provides for,
      (1)
      in the case of the Class N Notes, all remaining cash flows generated by the
      trust after payment of senior payment priorities and expenses, or (2) in the
      case of the NIM notes, the cash flows generated by the excess cashflow
      certificates or residual securitization certificates, to be used to pay all
      principal and interest on the NIM note(s) or the Class N Notes until paid in
      full, which typically occurs approximately 15 to 24 months from the date the
      NIM
      note(s) or the Class N Notes are issued.  We ultimately will hold the
      excess cashflow, residual securitization or owner trust certificates after
      the
      holder(s) of the NIM note(s) or the Class N Notes has been paid in full, or
      may
      sell the certificates either at the time of securitization or when economically
      beneficial to do so.





NIM
      transactions generally enable us to generate upfront cash flow when the
      securitization and related NIM transaction close, net of funding the upfront
      O/C, securitization and NIM costs.  Historically, NIM transactions
      helped us offset a portion of our cost to originate the loans included in the
      transaction, to the extent there are any excess proceeds.  We intend
      to continue to issue NIM notes or Class N Notes in connection with any
      securitization transactions that we complete in the foreseeable
      future.





Each
      securitization trust also has the
      additional credit 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 that is not
      a
      hybrid, all of the securities are senior securities.  The monoline
      insurance company guarantees the timely payment of principal and interest to
      all
      security holders in the event that the cash flows 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 with respect to the senior
      securities.





**31**


Each
      of our securitizations includes a
      series of asset-backed securities with various credit ratings, maturities and
      interest rates.  The combined weighted average interest rate of the
      asset-backed securities in each securitization generally will increase over
      time
      as the shorter-term asset-backed securities with higher credit ratings and
      lower
      interest costs mature, leaving the longer-term asset-backed securities with
      lower credit ratings and higher interest costs remaining.





**Securitizations
      Structured as a
      Financing**.All
      of our securitizations
      completed since the beginning of 2004 through the end of the second quarter
      of
      2007 were structured and accounted for as secured financings, as they do not
      meet theQSPE criteria
      under SFAS No. 140 and related interpretations, because, after the loans are
      securitized, we have the option to either contribute a derivative instrument
      into the applicable trust orpurchase
      up to 1% of
      the mortgage loans contained in the securitization mortgage pool.  We refer to the recording
      of these transactionsas “portfolio accounting.”  Securitization transactions
      consummated
      prior to 2004 and the third quarter of 2007 securitization transaction met
      the
      QSPE criteria under SFAS No. 140 and were accounted for, recognized and recorded
      as sales.





With
      portfolio accounting, (1) the
      mortgage loans we originate remain on our consolidated balance sheets as
      mortgage loans held for investment; (2) the securitization debt replaces the
      warehouse debt associated with the securitized mortgage loans; and (3) we record
      interest income on the mortgage loans and interest expense on the securities
      issued in the securitization over the life of the securitization, instead of
      recognizing a gain or loss upon completion of the
      securitization.  We
      believe that portfolio accounting treatment closely matches the recognition
      of
      income with the receipt of cash payments on the individual
      loans.We intend to continue to utilize portfolio accounting
      in the foreseeable future.





The
      following table sets forth
      information about our securitized mortgage loan portfolio and the corresponding
      securitization debt balance for each on-balance sheet asset-backed security
      series completed since the first quarter of 2004, at September 30,
      2007:





*(Dollars
                in
                thousands*)**Asset-backed
                Security
                Series:**
            
            **Issue
                Date**
            
            **Current
                Loan Principal
                Balance(1)**
            
            
            **Total
                Securitization Debt
                Balance(2)**2004-1
            
            March
                30,
                2004
            
            $
            158,311
            
            
            $
            153,8782004-2
            
            June
                29,
                2004
            
            
            188,009
            
            
            
            176,2372004-3
            
            September
                29,
                2004
            
            
            223,263
            
            
            
            206,1352004-4
            
            December
                29,
                2004
            
            
            254,880
            
            
            
            237,9822005-1
            
            March
                31,
                2005
            
            
            349,646
            
            
            
            327,3402005-2
            
            June
                29,
                2005
            
            
            397,156
            
            
            
            375,1382005-3
            
            September
                29,
                2005
            
            
            481,984
            
            
            
            453,6582005-4
            
            December
                30,
                2005
            
            
            539,335
            
            
            
            513,6502006-1
            
            March
                30,
                2006
            
            
            575,211
            
            
            
            554,6632006-2
            
            June
                29,
                2006
            
            
            612,387
            
            
            
            597,3742006-3
            
            September
                29,
                2006
            
            
            674,254
            
            
            
            663,8032006-4
            
            December
                29,
                2006
            
            
            563,282
            
            
            
            557,8362007-1
            
            March
                29,
                2007
            
            
            904,299
            
            
            
            889,6132007-2
            
            June
                18,
                2007
            
            
            829,590
            
            
            
            819,512Total
            
            
            
            $
            6,751,607
            
            
            $
            6,526,819





*(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 the principal portion
      of
      trustee receivables.*





*(2)     The
      total securitization debt (financing on mortgage loans held for investment,
      net)
      balance shown excludes discounts of $12.7 million at September 30,
      2007.*


**32**


**Securitizations
      Structured as a
      Sale.**During
      the third quarter of 2007 and for
      the periodprior to 2004, we structured our securitizations to be
      accounted for as sales under SFAS
      No. 140, which is known as “gain-on-sale accounting.”  In a securitization structured
      as a
      sale, or off-balance sheet, we sell a pool of loans to a trust for a cash
      purchase price and we receive one or more excess cashflow certificates or
      residual certificates evidencing our ownership in certain distributions from
      the
      trust.  Prior to 2004, we recognized our securitizations on again-on-sale basis, and we recorded an upfront gain at the time of
      securitization and recorded the fair value of the excess cashflow certificates
      on our balance sheet.  We allocated our basis in the
      mortgage
      loans and excess cashflow or residual certificate between the portion of the
      mortgage loans and excess cashflow or residual certificate sold through
      securitization and the portion retained based on the relative fair values of
      those portions on the date of sale.





Our
      net
      investment in the pool of loans sold at the date of the securitization
      represented the amount originally paid to originate the loans, adjusted for
      the
      following:





·
            any
                direct loan origination costs incurred (an increase in the investment)
                and
                loan origination fees received (a decrease in the investment) in
                connection with the mortgage loans, which are treated as a component
                of
                the initial investment in the mortgage
                loans;





·
            the
                principal payments received, and the amortization of the net loan
                fees or
                costs, during the period we held the mortgage loans prior to their
                securitization; and





·
            any
                gains (a decrease in the investment) or losses (an increase in the
                investment) we incurred on any hedging instruments that we may have
                utilized to hedge against the effects of changes in interest rates
                during
                the period we held the loans prior to their
                securitizations.  (See “–Summary of Critical Accounting Policies
                - Accounting for Hedging
                Activities”).





The
      excess cashflow or residual certificate retained in the transaction are
      classified as trading securities and are carried at their fair
      value.  Any changes in their fair value were recognized through
      earnings as a component other income.  The fair value of the excess
      cashflow
      certificates held at December 31, 2006 totaled $1.2 million. During the first
      quarter of 2007, we sold all of our remaining excess cashflow certificates,
      and
      we no longer held any excess cashflow certificates at September 30,
      2007.





In
      the
      securitization structured as a sale during the third quarter of 2007, we sold
      the residual certificate and did not retain any economic interest in the
      securitization.





**Securitizations
        Structured as
        Real Estate Mortgage Investment Conduits and Owner-Trusts for Income Tax
        Purposes****.**During
        the third quarter of
        2007, and for the periods prior to 2005, we structured our
        securitizations for tax purposes, as Real Estate Mortgage Investment Conduits
        (“REMICs”) or “sale-for-tax” treatment.  For federal tax purposes,
        REMICs are accounted for as a sale, which required us to recognize a gain
        or
        loss at the time we securitized the mortgage loans.  Beginning in
        2005, and through the second quarter of 2007, we structured our securitizations
        for tax purposes, as owner-trust transactions or “debt-for-tax” treatment and
        issued our securitizations through our Real Estate Investment Trust (“REIT”)
        subsidiary to avoid taxable mortgage pool issues (double
        taxation).  For federal tax purposes, owner-trust transactions are
        accounted for as debt, which facilitates compliance with the applicable REIT
        income and asset tests and allows us to recognize any taxable income associated
        with the securitized mortgage loans and corresponding securitized debt over
        time.  Although we intend to continue to structure most of our
        securitizations as owner-trust transactions, we may engage in REMIC
        securitizations, as we did during the third quarter of 2007, in the
        future.  We have in the past, and may in the future, recognize excess
        inclusion income attributable to the interests we retain in these securitization
        transactions, including the owner trust certificates, which could have negative
        tax consequences to us.





**33**


**Whole-Loan
      Sales**.  Whole-loan sales are the sales of pools of mortgage
      loans to banks, consumer finance-related companies and institutional investors
      on a servicing-released basis.  As discussed above, we sell a portion
      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 mortgage loans and our investment in the mortgage loans, including any
      unamortized loan origination fees and costs.  We generally sell these
      mortgage loans without recourse, except that we provide standard representations
      and warranties to the purchasers of these loans.  During the three
      months ended September 30, 2007 and 2006, we sold whole-loans without recourse
      (with the exception of a premium recapture and secondary marketing
      (indemnification) reserves described below) to third-party purchasers and on
      a
      servicing-released basis of $244.5 million and $196.7 million,
      respectively.  During the nine months ended September 30, 2007 and
      2006, we sold whole-loans without recourse (with the exception of a premium
      recapture and secondary marketing (indemnification) reserves described below)
      to
      third-party purchasers and on a servicing-released basis of $627.0 million
      and
      $515.5 million, respectively.  The average gross premium we received
      for the whole loans sold during the three months ended September 30, 2007 was
      2.24%, compared to 3.79% for the three months ended September 30,
      2006.  The average gross premium we received for the whole loans sold
      during the nine months ended September 30, 2007 was 2.88%, compared to 3.60%
      for
      the nine months ended September 30, 2006.  The gross premium paid to
      us by third-party purchasers in whole-loan sale transactions does not take
      into
      account premiums we pay to originate the mortgage loans, the origination fees
      we
      collect, premium recapture reserves or secondary marketing (indemnification)
      reserves – each of which are components of the net gain on sale
      calculation.





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
      whole-loan sale through a provision, which is reflected as a reduction of the
      gain on sale of mortgage loans.  During the three months ended
      September 30, 2007 and 2006, we recorded a premium recapture reserve recovery
      of
      $117,000 and a provision of $248,000, respectively, for the refunding of
      premiums to whole-loan sale investors.  During the nine months ended
      September 30, 2007 and 2006, we recorded a premium recapture reserve provision
      of $179,000 and $732,000, respectively, for the refunding of premiums to
      whole-loan sale investors.  The premium recapture reserve is recorded
      as a liability on our consolidated balance sheets.  We estimate
      recapture losses primarily based upon historical premium recaptures and by
      reviewing the types of loan products, interest rates, borrower prepayment fees,
      if any, and an estimate of the impact that future interest rate changes may
      have
      on early repayments.  The premium recapture reserve totaled $386,000
      and $958,000 at September 30, 2007 and December 31, 2006,
      respectively.





We
      also maintain a secondary market
      (indemnification) reserve related to our estimated exposure to losses arising
      from loan repurchases, or net settlements, related to claims by investors
      relating to breaches of representations and warranties.  The secondary
      marketing reserve is established at the time of the whole-loan sale through
      a
      provision, which is reflected as a reduction of the gain on sale of mortgage
      loans.  During the three months ended September 30, 2007 and 2006, we
      recorded a secondary market (indemnification) reserve provision of $502,000
      and
      $158,000, respectively, for losses that arise in connection with loans that
      we
      may be required to repurchase from whole-loan sale investors.  During
      the nine months ended September 30, 2007 and 2006, we recorded a secondary
      market (indemnification) reserve provision of $1.2 million and $386,000,
      respectively.  We estimate the exposure primarily based upon
      historical repurchases and we estimate losses using a detailed analysis of
      historical loan performance by product type and origination year, similar to
      the
      analysis performed for the allowance for loan losses related to our mortgage
      loans held for investment portfolio.  The secondary market
      (indemnification) reserve allowance totaled $744,000 and $512,000 at September
      30, 2007, and December 31, 2006, respectively.





**Summary
      of Critical Accounting
      Policies**





An
      appreciation of our critical accounting policies is necessary to understand
      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, many of which
      are beyond our control, and there can be no assurance that our estimates are
      accurate.





**34**


**Accounting
      for Hedging
      Activities.**Our hedging
      strategy
      revolves around two principal activities: (a) the issuance of our prospective
      securitization financing which is collateralized by the origination of mortgage
      loans, and (b) the issuance of variable-rate securitization debt
      (financing).  As a result of these activities, 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.  We utilize hedges to mitigate our interest
      rate exposure.  After we originate mortgage loans, our strategy is to
      generally use a series of duration-matched interest rate swap contracts (i.e.,
      two, three and five-year contracts) in an effort to lock in a pre-determined
      base interest rate on designated portions of our prospective future
      securitization financing (i.e., the asset-backed securities that we expect
      to
      issue).  We also use corridors (corresponding purchases and
      sales of interest rate caps with similar notional balances at different strike
      prices) and/or amortizing notional
      balance interest rate swaps that are designed to limit our financing costs
      on
      the variable portion of the debt issued in the securitization.  The
      purpose of the hedge within the securitization is to maintain minimum margins
      over specific periods of time, with the possibility of allowing us to increase
      margins during periods in which prevailing interest rates are lower than
      anticipated.  Both the interest rate swaps (which generally have an
      expected life of 36 months) and corridors (which have a range of expected lives)
      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 consolidated
      balance sheets 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, 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
      initially is 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 contemporaneously 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 counterparties other than the reporting
                entity.





If
      and
      when a derivative no longer qualifies for hedge accounting because it fails
      the
      test of hedge effectiveness (the ratio of the changes in the value of the
      hedging instrument to the changes in the value of the hedged item exceeds 125%
      or falls below 80%, and therefore the hedge is no longer “highly effective”),
      hedge accounting is discontinued and any amounts previously recorded in OCI
      are
      amortized into earnings over the remaining life of the hedged asset or
      liability.  As permitted by SFAS No. 133, when a hedge relationship is
      discontinued for this reason, we will analyze the derivative to determine
      whether all or a portion of the derivative may be designated as a hedge of
      a
      different transaction or item.  If all or a portion of the derivative
      qualifies for a new hedging relationship, hedge accounting is applied to future
      changes in the fair value of that portion of the derivative.  The
      future changes for any portion of the derivative that does not qualify for
      a new
      hedge relationship are included in net loss or income as they
      occur.





**35**


The
“new
      hedge relationship” is
      determined by re-aligning the hedge with the projected remaining bond balances
      (debt) as of the date the original hedge became retrospectively
      ineffective.  The ratio of the outstanding balance of the debt to
      notional size of the revised hedge will then be 100% as of the re-alignment
      date.  The expected repayment pattern of the debt associated with the
      original hedge is used as the basis to establish the “new hedge relationship”
future repayment pattern.  The difference between the fair value of
      the original hedge and the “new hedge relationship” hedge on the re-alignment
      date is classified as a trading security.  Once classified as a
      trading security, any changes in the fair value are recorded directly to the
      income statement as a component of “gain or loss on derivative
      instruments.”





**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 currently believes
      that, based upon on the available evidence, it is more likely than not that
      the results of future operations
      will generate sufficient taxable income to realize the deferred tax
      assets.  Therefore, at September 30, 2007 and December 31,
      2006, we did not maintain a valuation allowance against our deferred tax
      assets.  Additionally, on January 1, 2007, we adopted FIN No. 48,
      which clarified the accounting for uncertainty in income taxes recognized
      inan enterprise’s
      financial statements in accordance with SFAS No. 109.  Our adoption of
      FIN No. 48 did not have a material effect on our consolidated financial
      statements.





**Allowance for Loan Losses on Mortgage Loans Held for Investment.** In connection with our mortgage loans held for investment,
      excluding those loans which meet the criteria for specific review under SFAS
      No.
      114, “Accounting by Creditors for Impairment of a Loan - an amendment of FASB
      Statements No. 5 and 15,” we established an allowance for loan losses that we
      expect will arise within the next 18 to 24 months following the analysis date
      of
      September 30, 2007.  Provisions for loan losses are made for
      loans to the extent that we bear probable losses on these
      loans.  Provision amounts are charged as a current period expense to
      operations.  We charge-off uncollectible loans at the time we deem
      that they are not probable of being collected.





In order to estimate an appropriate allowance for losses on mortgage loans
      held
      for investment (both securitized and pre-securitized), we estimate losses using
      a detailed analysis of historical mortgage loan performance data, which is
      updated each quarter.  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, excluding those loans
      which meet the criteria for specific review under SFAS No. 114, 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 by which to calculate or estimate
      the allowance for loan losses.  The results of that analysis are then
      applied to the current long-term mortgage portfolio, and an allowance for loan
      losses estimate is created to take into account both known and inherent losses
      in the loan portfolio.  Losses incurred will be written-off against
      the allowance for loan losses.





While we will continually evaluate the adequacy of the allowance for loan
      losses, 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 borrowers’
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 and there is inherently
      uncertainty in our 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, our income for that period would
      decrease.





**36**


In
      accordance with SFAS No. 114, as amended by SFAS No. 118, a loan is impaired
      when, based on current information and events, it is probable that a creditor
      will be unable to collect all amounts due according to the contractual terms
      of
      the mortgage loan agreement.  Based upon analyses performed, we
      identified specific mortgage loans in which the borrowers’ abilities to repay
      the loans in accordance with their contractual terms was impaired.  We
      assessed the extent of damage to the underlying collateral, and the extent
      to
      which the damaged collateral was not covered by insurance, in determining the
      amount of specific reserves needed.  We established specific reserves
      for these affected mortgage loans based upon our estimates of loss
      exposure.  As additional information is obtained and processed over
      the coming months and quarters, we will continue to assess the need for any
      adjustments to our estimates and the specific reserves related to the impaired
      mortgage loans.





**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 on the outstanding balance and the 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.  Our net deferred origination fees/costs consist principally of
      origination fees, discount points, broker premiums, 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 some
      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 experience, as
      well
      as industry data, is 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.  During the three months ended June 30, 2007, we revised the
      prepayment assumptions utilized to accrete the deferred origination income
      related to our fixed rate mortgage loans.  The assumptions utilized
      during the three months ended June 30, 2007 were not changed during the three
      months ended September 30, 2007.  In general, prepayment speeds
      are lowest
      in the first month after origination, and 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 prepayment curve established during the second
      quarter of 2007 lowered the prepayment speeds we expect over the next 12
      months.  As of June 30, 2007, the revised prepayment curve for fixed
      rate loans seasoned less than 15 months ranged from 4.0% to 35.0% over the
      next
      12 months as compared to 4.0% to 43.0% on the previous prepayment
      curve.  As of June 30, 2007, the revised prepayment curve for fixed
      rate loans seasoned 15 months or more is 24.0% over the next 12 months as
      compared a range of 34.0% to 43.0% on the previous prepayment
      curve.  As of June 30, 2007, the prepayment curves for adjustable-rate
      loans seasoned less than 15 months and 15 months or more ranged from 4.0% to
      75.0% and 35.0% to 75.0%, respectively, over the next 12 months, which is
      unchanged from the previous prepayment curves.





**Amortization
      of Deferred Debt Issue Discounts and Transaction
      Costs.**  Interest expense on our securitization and residual
      financing is comprised of the accrual of interest based on the contractual
      terms, and among other things, cash receipts and amortization related to our
      cash flow hedges (interest rate swaps and corridors), the amortization of
      deferred debt issue discounts and transaction costs.  The deferred
      debt 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.  The deferred issuance discounts and transaction costs
      related to our residual financing facility and convertible notes 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.





**37**


**Stock-Based
      Compensation Expense.**  Effective January 1, 2006, we account
      for stock-based compensation costs in accordance with SFAS No. 123(R), which
      requires the measurement and recognition of compensation expense for all
      stock-based payment awards made to our employees and directors.  Under
      the fair value recognition provisions of SFAS No. 123(R), stock-based
      compensation cost is measured at the grant date based on the fair value of
      the
      award and is recognized as expense over the vesting
      period.  Determining the fair value of stock-based awards at the grant
      date requires considerable judgment, including estimating expected volatility,
      expected term and risk-free interest rate.  Our expected volatility is
      based upon the historical volatility of our common stock.  The
      expected term of the stock options is based on factors including historical
      observations of employee exercise patterns and expectations of employee exercise
      behavior in the future, giving consideration to the contractual terms of the
      stock-based awards.  The risk-free interest rate assumption is based
      on the yield at the time of grant of a U.S. Treasury security with an equivalent
      remaining term.  If factors change and we employ different
      assumptions, stock-based compensation expense may differ significantly from
      the
      amounts we have recorded or reported in the past.





**Results
      of
      Operations**





**Three
      Months Ended September 30, 2007
      Compared to Three Months Ended September 30, 2006**





**General**




The third quarter of 2007 witnessed a global credit market disruption that
          dramatically affected the securitization and subprime markets, and virtually
          every company that operates within the subprime market.  The magnitude
          and duration of the market disruption was greater than anyone predicted
          and
          resulted in companies in our sector scaling back or ceasing their
          operations.  Virtually every originator of subprime loans, as well as many
          of those who purchase, securitize or buy asset-backed securities collateralized
          by subprime mortgages, sustained substantial losses as a result of this
          market
          disruption.  We were able to complete a securitization in early
          September 2007 collateralized by $900.0 million of mortgage loans, but
          received
          adverse pricing on this transaction as a result of the global credit crisis
          and
          consequent highly illiquid securitization market conditions at that
          time.  We structured the transaction as a sale, and not a financing;
          as a result, we incurred all of the losses associated with the transaction,
          totaling $56.2 million, during the third quarter of 2007.  Although
          we reported a large loss for the quarter, by completing this
          securitization, we significantly reduced our credit risk on our balance
          sheet
          and exposure to additional margin calls on warehouse lines.  The effects of
          these market disruptions negatively impacted our operating results for the
          three and nine months ended September 30, 2007, as described
          below.
  Our
          net loss for the three months ended
          September 30, 2007 was $39.6 million, or $1.70 per share basic and diluted,
          compared to net income of $8.0 million, or $0.34 per share basic and $0.33
          per
          share diluted, for the three months ended September 30, 2006.  As
          described in more detail below, the decrease in net income primarily related
          to
          (a) the $56.2 million loss incurred on the sale of mortgage loans we recorded
          on
          the securitization we structured as a sale during the third quarter of
          2007, (b)
          the $14.6 million increase in the provision for loan losses primarily related
          to
          the size and seasoning of the mortgage loans held for investment, net,
          (c) the
          $5.0 million increase in REO related expenses, (d) the $1.9 million of
          interest
          expense related to our August 2007 residual financing and convertible notes,
          and
          (e) the $1.4 million expense related to restructuring charges incurred
          in
          connection with the elimination of 313 positions and the closing of some
          wholesale origination offices.  Additionally, the net loss was generated by
          the net effect of:





(1)
            An
                increase in net interest income
                before the provision for loan losses of $37.7 million, or 0.3%, during
                the
                three months ended September 30, 2007 from $37.6 million recorded
                during
                the three months ended September 30, 2006.  The increase in net
                interest income before the provision for loan losses reflects the
                net
                effect of recognizing interest income on a 18.2% larger amount of
                mortgage
                loans held for investment and recognizing interest expense on a 17.3%
                larger amount of mortgage loan related financing (including warehouse
                credit financing) from September 30, 2006.  Mitigating the
                increase in interest income was the $6.4 million increase in non-accrual
                interest (interest income not recorded on loans that are generally
                90 days
                or more delinquent) for the three months ended September 30, 2007
                as
                compared to the same period in 2006.  The increase in net
                interest income was also mitigated by a $2.7 million decrease in
                prepayment penalty income during the three months ended September
                30,
                2007, compared to the three months ended September 30, 2006, due
                to the
                slower prepayments experienced during the three months ended September
                30,
                2007 compared to the same period in 2006;
                and





(2)
            A
                decrease in net gain on sale of
                mortgage loans related to whole-loan sales of $1.7 million, or 17.4%,
                to
                $7.8 million on the sale of $244.5 million of mortgage loans on a
                whole-loan basis during the three months ended September 30, 2007,
                from a
                $9.5 million gain during the three months ended September 30, 2006
                on
                sales on a whole-loan basis of $196.7 million of mortgage
                loans.  Whole loan sales represented 30.2% and 19.8% of total
                loans originated for the three months ended September 30, 2007 and
                2006,
                respectively.  The decrease in the gain primarily relates to the
                155 basis point decrease in the premiums received, partially offset
                by the
                increase in the percentage of whole loan sales to loans originated
                for the
                three months ended September 30, 2007 as compared to the three months
                ended September 30, 2006.





**38**


We
      originated $809.0 million of mortgage
      loans during the three months ended September 30, 2007, representing a $185.9
      million, or 18.7%, decrease from $994.9 million of mortgage loans originated
      during the three months ended September 30, 2006.  We sold $1.1
      billion of loans during the three months ended September 30, 2007, an increase
      of $122.8 million, or 12.0%, compared to the $1.0 billion of loans securitized
      and/or sold during the three months ended September 30, 2006.  The
      increase in the total loans securitized and sold during the three months ended
      September 30, 2007 as compared to the same period in 2006 was attained by
      utilizing the mortgage loans held for investment – pre-securitized portfolio to
      offset the effect of the reduced origination levels for the
      period.  We had a $341.3 million decrease in the amount of mortgage
      loans held pre-securitization from June 30, 2007 to September 30,
      2007.





**Net
      Interest
      Income**





We recorded net interest income of $37.7 million during the three months ended
      September 30, 2007, an increase of $124,000, or 0.3%, from the $37.6 million
      recorded during the three months ended September 30, 2006.  The slight
      increase in net interest income primarily reflects the net effect of the higher
      average balance of mortgage loans held for investment and the related financing,
      coupled with the net changes in the interest rates earned or incurred on those
      balances, and the impact of the change in prepayment speeds on the
      accretion/amortization of deferred income and expenses during the three months
      ended September 30, 2007 compared to the three months ended September 30,
      2006.  Additionally offsetting net interest income during the three
      months ended September 30, 2007 were: (1) the increase in non-accrual loans
      -
      which reduces the amount of interest income recognized for the period, and
      (2)
      the interest expense incurred on the August 2007 financings.  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 $32.4
      million, or 26.5%, to $154.7 million for the three months ended September 30,
      2007, from $122.3 million for the three months ended September 30,
      2006.  The increase was primarily due to (1) a $17.9 million increase
      in interest income earned (including prepayment penalty income) on our loans
      held for investment - securitized, which totaled $6.6 billion at September
      30,
      2007, compared to $5.9 billion at September 30, 2006, coupled with a 25 basis
      point increase in the average interest rate over the same period, (2) a $15.4
      million increase in interest income on mortgage loans held for investment –
pre-securitized due to an increase in the average amount of mortgage loans
      we
      held prior to securitization or sale during the three months ended September
      30,
      2007 compared to the three months ended September 30, 2006, coupled with a
      41
      basis point increase in the average interest rate over the same period, and
      (3)
      $2.0 million of interest income related to mortgage loans held for sale during
      the three months ended September 30, 2007.  These increases were
      partially offset by (1) an increase in non-accrual loans for the quarter ended
      September 30, 2007, representing $6.4 million less in interest income from
      the
      period one-year ago, (2) a $3.0 million decrease in securitization pass-through
      interest received from securitization trusts on fixed-rate asset-backed
      securities due to structuring the securitization as a sale during the three
      months ended September 30, 2007 as compared to structuring the securitization
      as
      a financing during the comparable 2006 period, (3) a $2.7 million decrease
      in
      prepayment penalty income (despite a 18.2% increase in the size of our mortgage
      loans held for investment, net at September 30, 2007, compared to September
      30,
      2006) due to the slower prepayments experienced during the three months ended
      September 30, 2007 as compared to the same period in 2006.


**39**


The
      following table is a summary of
      interest income for the three months ended September 30, 2007 and
      2006:





**For
                the Three Months
                Ended**
              **September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**Interest
                income on mortgage loans
                held for investment - securitized, net(1)
            
            $
            128,086
            
            
            $
            110,232Interest
                income on mortgage loans
                held for investment - pre-securitization, net
            
            
            24,343
            
            
            
            8,966Interest
                income on mortgage loans
                held for sale, net
            
            
            2,014
            
            
            
            --Securitization
                pass-through
                interest
            
            
            --
            
            
            
            3,048Interest
                income on excess cashflow
                certificates
            
            
            --
            
            
            
            53Miscellaneous
                interest
                income
            
            
            301
            
            
            
            14Total
                interest
                income
            
            $
            154,744
            
            
            $
            122,313





*(1)   
The
      amounts for
      the three months ended September 30, 2007 and 2006 include $3.3 million and
      $6.0
      million, respectively, of prepayment penalties.*





***Interest Expense.***  Interest expense increased by $32.3
      million, or 38.1%, to $117.0 million for the three months ended September 30,
      2007, from $84.7 million for the three months ended September 30,
      2006.  The $22.6 million, or 29.3%, increase in interest expense on
      mortgage loans held for investment financing was primarily due to the increase
      in the weighted average cost of the financing, which increased by 22 basis
      points from 5.51% during the three months ended September 30, 2006 to 5.73%
      during the three months ended September 30, 2007, coupled with the increase
      in
      the average balance of the financing over the same period.  The $7.7
      million, or 100.3%, increase in interest expense on warehouse financing was
      due
      to the increase in the average balance of the loans held for investment -
      pre-securitization and financed during the three months ended September 30,
      2007
      on our warehouse facilities, compared to the three months ended September 30,
      2006, coupled with an increase in the average one-month LIBOR rate, which is
      the
      benchmark index used to determine the cost of our borrowed funds.  The
      index rate increased 8 basis points to an average of 5.43% for the three months
      ended September 30, 2007, compared to an average of 5.35% for the three months
      ended September 30, 2006.  Also increasing interest expense during the
      three months ended September 30, 2007 was the $1.9 million increase in interest
      expense on our August 2007 financings (residual financing facility and
      convertible notes).  The increase in interest expense was somewhat
      offset by a slowing in the recognition of the deferred debt issuance costs,
      trustee expenses and hedging costs, as a result of the slower prepayments on
      the
      securitization debt (directly related to the slower prepayments on the mortgage
      assets described above) extending the life of the financing on mortgage loans
      held for investment.





The
      following is a summary of the
      components of interest expense for the three months ended September 30, 2007
      and
      2006:





**For
                the Three Months
                Ended**
              **September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**Interest
                expense on mortgage loans
                held for investment financing(1)
            
            $
            99,649
            
            
            $
            77,057Interest
                expense on warehouse
                financing
            
            
            15,310
            
            
            
            7,645Interest
                expense on other
                borrowings(2)
            
            
            2,012
            
            
            
            107Other
                interest expense
                (income)
            
            
            70
            
            
            
            (75
            )Total
                interest
                expense
            
            $
            117,041
            
            
            $
            84,734





*(1)    The
      amounts for the three months ended
      September 30, 2007 and 2006 includes an expense of $2.5 million and income
      of
      $33,000, respectively, of securitization debt issuance cost amortization and
      trustee expenses recognized during the period, net of hedge
      amortization.*





*(2)   The
      amount for the three months ended
      September 30, 2007 includes an expense of $911,000 of debt issuance cost and
      discount amortization related to the August 2007 financings (residual financing
      facility and convertible notes).*





**40**


**Provision
      for Loan
      Losses**





A
      provision for loan losses on mortgage
      loans held for investment is recorded to maintain the related allowance for
      loan
      losses at an appropriate level for currently existing probable losses of
      principal.  We recorded a provision for loan losses of $21.5 million
      and $6.9 million for the three months ended September 30, 2007 and 2006,
      respectively, related to mortgage loans held for investment.  The
      increase in the amount of the provision for loan losses, excluding the specific
      provision related to impaired loans, corresponds to the performance and
      seasoning of our mortgage loans held for investment during the respective
      period, coupled with the impact of the declining real estate market during
      the
      three months ended September 30, 2007, which increased our loss
      estimates.





**Non-Interest
      Income**





Total
      non-interest income decreased by
      $59.6 million to a loss of $48.3 million for the three months ended September
      30, 2007, from income of $11.3 million for the three months ended September
      30,
      2006.  The decrease in non-interest income resulted from the $56.2
      million of losses recorded on the securitization structured as a sale during
      the
      three months ended September 30, 2007 and, to a lesser extent, a $1.7 million
      decrease in the gain recorded from the sale of mortgage loans on a whole-loan
      basis and a $1.7 million decrease in the amount of fair value gains recorded
      on
      our excess cashflow certificates during the three months ended September 30,
      2007 as compared to the three months ended September 30,
      2006.





***Net (Loss) Gain on Sale of Mortgage Loans.***  The net loss
      on the sale of mortgage loans recorded during the three months ended September
      30, 2007 was comprised of (1) a loss from the securitization structured as
      a
      sale and (2) a gain from the sale of loans on a whole-loan
      basis.  During the three months ended September 30, 2007, we recorded
      a $56.2 million loss on the sale of $900.0 million of mortgage loans related
      to
      the third quarter 2007 securitization.  The third quarter 2007
      securitization was structured to be accounted for as a sale under SFAS No.
      140.  The net loss on sale of mortgage loans related to the
      securitization was comprised primarily of the basis differential between the
      cash purchase price we received in connection with selling the asset-backed
      securities related to the securitization and the cost basis of the mortgage
      loans, net of any hedge losses or gains associated with the securitization,
      deferred origination costs or fees, and costs associated with the
      securitization.





In
      addition to the impact of the loss
      from the securitization structured as a sale during the three months ended
      September 30, 2007, net gain on sale of mortgage loans decreased by $1.7 million
      related to whole-loan sales primarily due to a 155 basis point decrease in
      the
      gross premiums received period-over-period, offsetting the impact of the 24.3%
      increase in the amount of loans sold.  The decrease in the premiums
      received during the third quarter of 2007 reflected the market conditions and
      weighted-average coupon on the mortgage loans sold during the same period,
      coupled with our selling $2.5 million of non-performing loans at a discount
      of
      $855,000.  During the three months ended September 30, 2007, we
      recorded a $7.8 million gain on the sale of $244.5 million of mortgage loans
      on
      a whole-loan basis, as compared to a gain of $9.5 million on the sale of $196.7
      million of mortgage loans on a whole-loan basis during the three months ended
      September 30, 2006.  The net gain on sale of mortgage loans related to
      whole-loan sales 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 and
      secondary marketing (indemnification) reserves.


**41**


The
      following table is a summary of our
      net loss or gain on sale of mortgage loans for thethree months ended September
      30,
      2007and
      2006:





**For
                the Three Months Ended
                September 30,****2007**
            
            
            **2006***(Dollars
                in
                thousands)*
            
            **Securitization**
            
            
            **Whole-loan**
            
            
            **Total**
            
            
            **Whole-loan**Loans
                sold
            
            $
            899,999
            
            
            $
            244,510
            
            
            $
            1,144,509
            
            
            $
            196,744(Loss)
                gain on
                securitization/whole-loan sales (1)
            
            $
            (91,829
            )
            
            $
            5,466
            
            
            $
            (86,363
            )
            
            $
            7,449Premium
                recapture reserve(2)
            
            
            --
            
            
            
            117
            
            
            
            117
            
            
            
            (248
            )Secondary
                marketing
                (indemnification) reserve(3)
            
            
            --
            
            
            
            (502
            )
            
            
            (502
            )
            
            
            (158
            )Net
                loan origination
                fees
            
            
            4,399
            
            
            
            2,765
            
            
            
            7,164
            
            
            
            2,458Hedging
                loss
            
            
            (1,001
            )
            
            
            --
            
            
            
            (1,001
            )
            
            
            --Discounts
            
            
            34,635
            
            
            
            --
            
            
            
            34,635
            
            
            
            --Securitization
                transaction
                costs
            
            
            (2,393
            )
            
            
            --
            
            
            
            (2,393
            )
            
            
            --Net
                (loss) gain on sale
                recorded
            
            $
            (56,189
            )
            
            $
            7,846
            
            
            $
            (48,343
            )
            
            $
            9,501Average
                whole-loan sales
                (discount) premium
            
            
            (10.20
            )%
            
            
            2.24
            %
            
            
            (7.55
            )%
            
            
            3.79
            %Average
                whole-loan sales
                (discount) premium,net
                of reserves(4)
            
            
            (10.20
            )%
            
            
            2.08
            %
            
            
            (7.58
            )%
            
            
            3.58
            %Average
                net (loss) gain on sale
                ratio(5)
            
            
            (6.24
            )%
            
            
            3.21
            %
            
            
            (4.22
            )%
            
            
            4.83
            %


*(1)    The amount shown is inclusive of the lower of cost or
        market adjustment recorded on the date we determined that the mortgage loans
        would be sold.*


*(2)*  *The
      premium recapture reserve amount shown for the three months ended September
      30,
      2007 was comprised of a provision of $187,000 related to the loans sold during
      the three months ended September 30, 2007 and a recovery of $304,000 related
      to
      reserve adjustments for loan sales from prior year periods.*





*(3)*  *The
      secondary marketing
      (indemnification) reserve amount shown for the three months ended September
      30,
      2007 was comprised of a provision of $242,000 related to the loans sold during
      the three months ended September 30, 2007 and an additional provision of
      $260,000 related to reserve adjustments for loan sales from prior
      periods.*





*(4)*  *The
      average whole-loan sales premium,
      net of reserves, on whole-loan sales for the three months ended September 30,
      2007 and 2006 was 2.08% and 3.58%, respectively.  The average
      whole-loan sales premium, net of reserves, is calculated by dividing the gain
      on
      whole-loan sales, net of premium recapture and secondary marketing
      (indemnification) reserves, by the total amount of loans
      sold.*





*(5)     The
      average net gain on sale ratio on whole-loan sales for the three months ended
      September 30, 2007 and 2006 was 3.21% and 4.83%, respectively.  The
      average net gain on sale ratio is calculated by dividing the net gain on sale
      by
      the total amount of loans sold.*





***Other Income.***  Other income decreased $1.8 million to
      $23,000 for the three months ended September 30, 2007, from $1.8 million for
      the
      three months ended September 30, 2006.  The decrease in other income
      period over period primarily relates to $1.7 million decline in the amount
      of
      the fair value change recorded on our excess cashflow
      certificates.  During the three months ended March 31, 2007, we sold
      all of our remaining excess cashflow certificates.  Accordingly, we
      did not record any fair value adjustments during the three months ended
      September 30, 2007, compared to a $1.7 million fair value adjustment gain for
      the three months ended September 30, 2006.





Additionally,
during
      the three months ended September
      30, 2006, we recorded a gain of $50,000 on the sale of our MSRs to a
      third-party.  We did not sell any MSRs during the three months ended
      September 30, 2007.





**42**


**Non-interest
      Expense**





Total non-interest expense increased by $3.4 million, or 11.7%, to $32.6 million
      for the three months ended September 30, 2007, from $29.2 million for the three
      months ended September 30, 2006.  The increase primarily is due to (1)
      a $5.0 million increase in REO related expenses and (2) the $1.4 million
      restructuring charge related to the August 2007 staff reduction (approximately
      20.1% of the workforce) and office closings.





***Payroll and Related Costs.*** Payroll and related costs include
      salaries, benefits and payroll taxes for all employees, but excludes the
      deferrable portion of those costs attributable to employees involved in loan
      production.  Payroll and related costs decreased by $2.0 million, or
      12.3%, to $14.5 million for the three months ended September 30, 2007, from
      $16.5 million for the three months ended September 30, 2006.  The
      decrease was primarily the result of lower compensation and related payroll
      cost
      associated with our staff reduction, which occurred during the second half
      of
      August 2007, and by the lower commissions due to the decrease in our quarterly
      loan production.  As of September 30, 2007, we employed 1,056 full-
      and part-time employees, a decrease of 23.3% over our 1,376 full- and part-time
      employees as of September 30, 2006, which is primarily as a result of the August
      2007 staff reduction.  Included in payroll and related costs during
      the three months ended September 30, 2007 was a severance expense of $775,000
      related to the August 2007 staff reduction.  Additionally, payroll and
      related costs, specifically for loan production related personnel, were lower
      due to the 18.7% decrease in loan production during the three months ended
      September 30, 2007, compared to the three months ended September 30,
      2006.





***General and Administrative Expenses.*** General and
      administrative expenses consist primarily of office rent, insurance expense,
      telephone expense, depreciation, legal reserves and fees, license fees,
      accounting fees, travel and entertainment expenses, advertising and promotional
      expenses, REO-related expenses and the provision for recourse
      loans.  General and administrative expenses increased $5.5 million, or
      44.5%, to $17.9 million for the three months ended September 30, 2007, from
      $12.4 million for the three months ended September 30, 2006.  The
      increase primarily was due to a $5.0 million increase in REO expenses, a
      $462,000 increase in professional fees (i.e., legal, accounting and consulting
      fees) and $652,000 of restructuring charges related to the closing of wholesale
      origination offices in August 2007.  The increase in REO-related
      expenses in the three months ended September 30, 2007 was due to the expected
      increase in REO activity as our mortgage loan portfolio became more seasoned,
      coupled with the impact of the declining real estate market during the
      period.  As the portfolio of REO properties increases, the expenses
      arising from the operation (i.e., payment of real estate taxes and insurance)
      and disposal of those properties will also generally increase.  The
      amount of REO properties held totaled $62.9 million and $17.8 million at
      September 30, 2007 and 2006, respectively.





***Loss (Gain) on Derivative Instruments.***  The gain or loss
      on derivative instruments recorded during the three months ended June 30, 2007
      and 2006 represented (1) the ineffective portion of the change in fair value
      of
      interest rate swaps used to lock in a pre-determined interest rate on designated
      portions of our prospective future securitization financing, (2) the ineffective
      portion related to the change in the fair value of our corridors we use to
      protect the variable-rate financing and (3) changes in the fair value of the
      derivative instruments classified as trading securities.





During the three months ended September 30, 2007, we recorded a net loss on
      derivative instruments of $197,000, as compared to a net loss on derivative
      instruments of $262,000 during the three months ended September 30,
      2006.  During the three months ended September 30, 2007, we recorded a
      loss of $154,000 on the ineffective portion of corridors and interest rate
      swaps, compared to a loss of $99,000 recorded on the ineffective portion of
      corridors and interest rate swaps during the three months ended September 30,
      2006.  Additionally, at September 30, 2007 and 2006, we held $179,000
      and $258,000, respectively, of corridors classified as trading securities in
      prepaid and other assets, as these corridors were no longer deemed “highly
      effective.”  During the three months ended September 30, 2007 and
      2006, we recorded a loss of $43,000 and $163,000, respectively, for the changes
      in the fair value of the hedges (specifically corridors) held as trading
      securities.





**43**


**Provision
      for Income Tax (Benefit) Expense**





We
      recorded an income tax benefit of
      $25.0 million on a pre-tax loss of $64.7 million for the three months ended
      September 30, 2007 (an effective tax rate of approximately
      38.7%).  The effective tax rate for the three months ended September
      30, 2007reflects our estimate of a lower overall effective tax rate for
      2007 and subsequent years.  As a result of our net loss
      before
      income tax benefit, we recorded a tax benefit for the three months ended
      September 30, 2007, which mitigated the impact of the permanent differences
      (which were fairly consistent period-over-period).  We recorded an
      income tax expense of $4.9 million on pre-tax income of $12.9 million for the
      three months ended September 30, 2006 (an effective tax rate of approximately
      38.1%).





**Nine
      Months Ended September 30, 2007
      Compared to Nine Months Ended September 30, 2006**





**General**





Our
      net loss for the nine months ended
      September 30, 2007 was $34.0 million, or $1.46 per share basic and diluted,
      compared to net income of $21.8 million, or $0.98 per share basic and $0.95 per
      share diluted, for the nine months ended September 30, 2006.  As
      described in more detail below, the decrease in net income primarily
      related to (a) the $56.2 million loss incurred on the sale of mortgage
      loans we recorded on the securitization we structured as a sale during the
      third
      quarter of 2007, (b) the $25.1 million increase in the provision for loan losses
      due primarily to the increase in the size and seasoning of the mortgage loan
      held for investment – securitized portfolio, (c) the $10.2 million increase in
      REO related expenses, (d) the $1.9 million of interest expense related to our
      August 2007 financing arrangements, (e) the $1.4 million restructuring charge
      incurred due to the elimination of 313 positions and the closing of some
      wholesale origination offices and (f) the $7.6 million decrease in the amount
      of
      fair value change recorded on our excess cashflow certificates due to our sale
      of all remaining excess cashflow certificates in the first quarter of
      2007.





These
      decreases were partially offset by
      an increase in net interest income before the provision for loan losses of
      $8.5
      million, or 7.8%, to $117.2 million during the nine months ended September
      30,
      2007, from $108.7 million recorded during the nine months ended September 30,
      2006.  The increase in net interest income before the provision for
      loan losses reflects the net effect of recognizing interest income on a 18.2%
      larger amount of mortgage loans held for investment, net and recognizing
      interest expense on a 17.3% larger amount of mortgage loan related financing
      (including warehouse credit financing) from September 30,
      2006.  Mitigating the increase in interest income was the $14.2
      million increase in non-accrual interest for the nine months ended September
      30,
      2007 as compared to the prior comparable period.  The increase in net
      interest income was also mitigated by a $1.8 million decrease in interest income
      related to a reduction in prepayment penalty income (despite a 18.2% increase
      in
      the size of our mortgage loans held for investment, net at September 30, 2007
      from September 30, 2006) as compared to the nine months ended September 30,
      2006, due to the slower prepayments occurring during the nine months ended
      September 30, 2007 compared to the same period in 2006.  Additionally
      impacting both interest income and interest expense during the nine months
      ended
      September 30, 2007 was a change in the prepayment assumptions in the second
      quarter of 2007, used to accrete/amortize deferred income and expenses, which
      lowered net interest income during the period.





We
      originated $3.4 billion of mortgage
      loans during the nine months ended September 30, 2007, representing a $492.3
      million, or 16.9%, increase from $2.9 billion of mortgage loans originated
      during the nine months ended September 30, 2006.  We securitized
      and/or sold $3.3 billion of loans during the nine months ended September 30,
      2007, an increase of 9.4% compared to the $3.0 billion of loans securitized
      and/or sold during the nine months ended September 30, 2006.





**Net
      Interest
      Income**





We recorded net interest income of $117.2 million during the nine months ended
      September 30, 2007, an increase of $8.5 million, or 7.8%, from the $108.7
      million recorded during the nine months ended September 30, 2006.  The
      increase in net interest income primarily reflects the net effect of the higher
      average balance of mortgage loans held for investment and the related financing,
      coupled with the net changes in the interest rates earned or incurred on those
      balances, and the impact of the change in prepayment speeds on the
      accretion/amortization of deferred income and expenses during the nine months
      ended September 30, 2007 compared to the nine months ended September 30,
      2006.  Additionally offsetting net interest income during the nine
      months ended September 30, 2007 were (1) the increase in non-accrual loans,
      which reduces the amount of interest income recognized for the period, and
      (2)
      the interest expense incurred on the August 2007 financings.  Net
      interest income represents the difference between our interest income and our
      interest expense, each of which is described in the following
      paragraphs.





**44**


***Interest Income.***  Interest income increased $107.4
      million, or 31.8%, to $444.4 million for the nine months ended September 30,
      2007, from $337.0 million for the nine months ended September 30,
      2006.  The increase was primarily due to (1) a $77.3 million increase
      in interest income earned (including prepayment penalty income) on our loans
      held for investment - securitized, which totaled $6.6 billion at September
      30,
      2007, compared to $5.9 billion at September 30, 2006, coupled with a 31 basis
      point increase in the average interest rate over the same period, (2) a $31.6
      million increase in interest income on mortgage loans held for investment –
pre-securitized due to an increase in the average amount of mortgage loans
      we
      originated and held prior to securitization or sale during the nine months
      ended
      September 30, 2007 compared to the nine months ended September 30, 2006, coupled
      with a 50 basis point increase in the average interest rate over the same
      period, and (3) $2.0 million of interest income related to mortgage loans held
      for sale (interest earned on the mortgage loans collateralizing the third
      quarter 2007 securitization structured as a sale from the reclassification
      date
      to the date of securitization) during the nine months ended September 30,
      2007.  These increases were partly offset by (1) an increase in
      non-accrual loans for the nine months ended September 30, 2007, representing
      $14.2 million less in interest income from the period one-year ago (2) a $3.6
      million decrease in securitization pass-through interest received from
      securitization trusts on fixed-rate asset-backed securities was primarily due
      to
      structuring one of the three securitizations as a sale during the nine months
      ended September 30, 2007, and (3) a $1.8 million decrease in prepayment penalty
      income recognized during the nine months ended September 30, 2007 compared
      to
      the nine months ended September 30, 2006, due to the slower prepayment
      environment that existed during 2007 as compared to 2006.





The
      following table is a summary of
      interest income for the nine months ended September 30, 2007 and
      2006:





**For
                the Nine Months
                Ended**
              **September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**Interest
                income on mortgage loans
                held for investment - securitized, net(1)
            
            $
            377,611
            
            
            $
            300,357Interest
                income on mortgage loans
                held for investment - pre-securitization, net
            
            
            58,295
            
            
            
            26,664Interest
                income on mortgage loans
                held for sale, net
            
            
            2,014
            
            
            
            --Securitization
                pass-through
                interest
            
            
            5,934
            
            
            
            9,553Interest
                income on excess cashflow
                certificates
            
            
            17
            
            
            
            433Miscellaneous
                interest
                income
            
            
            488
            
            
            
            15Total
                interest
                income
            
            $
            444,359
            
            
            $
            337,022





*(1)     The
      amounts for the nine months ended
      September 30, 2007 and 2006 include $13.4 million and $15.2 million,
      respectively, of prepayment penalties.*





***Interest Expense.***  Interest expense increased by $98.9
      million, or 43.3%, to $327.2 million for the nine months ended September 30,
      2007, from $228.3 million for the nine months ended September 30,
      2006.  The $79.1 million, or 38.6%, increase in interest expense on
      mortgage loans held for investment financing was primarily due to the increase
      in the weighted average cost of the financing, which increased by 42 basis
      points from 5.26% during the nine months ended September 30, 2006 to 5.68%
      during the nine months ended September 30, 2007, coupled with the increase
      in
      the average balance of the financing over the same period.  The $18.0
      million, or 78.3%, increase in interest expense on warehouse financing was
      due
      to the increase in the average balance of the loans held for investment –
pre-securitization and financed during the nine months ended September 30,
      2007
      on our warehouse facilities, compared to the nine months ended September 30,
      2006, coupled with an increase in the average one-month LIBOR rate, which is
      the
      benchmark index used to determine the cost of our borrowed funds.  The
      index rate increased 34 basis points to an average of 5.36% for the nine months
      ended September 30, 2007, compared to an average of 5.02% for the nine months
      ended September 30, 2006.  Additionally, the slowing of prepayments on
      the mortgage loans as described above has the effect of extending (slowing
      the
      repayments) the life of the financing on mortgage loans held for investment,
      thereby slowing the amortization of the deferred debt issuance costs, trustee
      expenses and hedging.  Also increasing interest expense during the
      nine months ended September 30, 2007 was the $1.9 million increase in interest
      expense incurred on the August 2007 financings (residual financing facility
      and
      convertible notes).





**45**


The
      following is a summary of the
      components of interest expense for the nine months ended September 30, 2007
      and
      2006:





**For
                the Nine Months
                Ended**
              **September
                30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**Interest
                expense on mortgage loans
                held for investment financing(1)
            
            $
            283,840
            
            
            $
            204,738Interest
                expense on warehouse
                financing
            
            
            40,964
            
            
            
            22,979Interest
                expense on other
                borrowings(2)
            
            
            2,252
            
            
            
            317Other
                interest
                expense
            
            
            145
            
            
            
            260Total
                interest
                expense
            
            $
            327,201
            
            
            $
            228,294





*(1)   The
      amounts for the nine months ended
      September 30, 2007 and 2006 include $7.0 million and $782,000, respectively,
      of
      securitization debt issuance cost amortization and trustee expenses recognized
      during the period, net of hedge amortization.*





*(2)   The
      amount for the nine months ended
      September 30, 2007 includes an expense of $911,000 of debt issuance cost and
      discount amortization related to the August 2007 financings (residual financing
      facility and convertible notes).*





**Provision
      for Loan
      Losses**





A provision for loan losses on mortgage loans held for investment is recorded
      to
      maintain the related allowance for loan losses at an appropriate level for
      currently existing probable losses of principal.  We recorded a
      provision for loan losses of $45.4 million (including a recovery of $333,000
      of
      a specific provision related to impaired loans) and $20.3 million (including
      a
      recovery of $675,000 of a specific provision related to impaired loans) for
      the
      nine months ended September 30, 2007 and 2006, respectively, related to mortgage
      loans held for investment.  The increase in the amount of the
      provision for loan losses, excluding the specific provision related to impaired
      loans, corresponds to the performance and seasoning of our mortgage loans held
      for investment during the respective period, coupled with the impact of the
      declining real estate market during the later part of the nine months ended
      September 30, 2007, which increased our loss estimates.





**Non-Interest
      Income**





Total
      non-interest income decreased by
      $63.4 million to a loss of $30.4 million for the nine months ended September
      30,
      2007, from $33.0 million for the nine months ended September 30,
      2006.  The decrease in non-interest income resulted from the $56.2
      million of losses recorded on the securitizations structured as a sale during
      the nine months ended September 30, 2007 and, to a lesser extent, a $7.6 million
      decrease in the amount of fair value gains recorded on our excess cashflow
      certificates.





***Net (Loss) Gain on Sale of Mortgage Loans.***  The net loss
      on the sale of mortgage loans recorded during the nine months ended September
      30, 2007 was comprised of (1) a loss from the securitization structured as
      a
      sale and (2) a gain from the sale of loans on a whole-loan
      basis.  During the three months ended September 30, 2007, we recorded
      a $56.2 million net loss on the sale of $900.0 million of mortgage loans related
      to the third quarter 2007 securitization.  The third quarter 2007
      securitization was structured to be accounted for as a sale under SFAS No.
      140.  The net loss on sale of mortgage loans related to the
      securitization was comprised primarily of the basis differential between the
      cash purchase price we received in connection with selling the asset-backed
      securities related to the securitization and the cost basis of the mortgage
      loans, net of any hedge losses or gains associated with the securitization,
      deferred origination costs or fees, and costs associated with the
      securitization.





**46**


In addition to the impact of the loss from the securitization structured as
      a
      sale during the three months ended September 30, 2007, net gain on sale of
      mortgage loans increased by $112,000 related to whole-loan sales primarily
      due
      to the 21.6% increase in the amount of loans sold during the nine months ended
      September 30, 2007 as compared to the same period in 2006, offsetting the impact
      of the 72 basis point decrease in the gross premiums received (2.88% during
      the
      nine months ended September 30, 2007 compared to 3.60% during the same period
      in
      2006) period-over-period.  The decline in the premiums received during
      the third quarter of 2007 reflected the declining market conditions in the
      whole-loan market during the same period, coupled with our selling $2.5 million
      loans at a discount of $855,000.  During the nine months ended
      September 30, 2007 we recorded a $23.7 million gain on the sale of $627.0
      million of mortgage loans on a whole-loan basis, as compared to a gain of $23.6
      million on the sale of $515.5 million of mortgage loans on a whole-loan basis
      during the nine months ended September 30, 2006.





The
      following table is a summary of our
      net loss or gain on sale of mortgage loans for thenine months ended September
      30,
      2007and
      2006:





**For
                the Nine Months Ended
                September 30,****2007**
            
            
            **2006***(Dollars
                in
                thousands)*
            
            **Securitization**
            
            
            **Whole-loan**
            
            
            **Total**
            
            
            **Whole-loan**Loans
                sold
            
            $
            899,999
            
            
            $
            626,971
            
            
            $
            1,526,970
            
            
            $
            515,462(Loss)
                gain on
                securitization/whole-loan sales (1)
            
            $
            (91,829
            )
            
            $
            18,054
            
            
            $
            (73,775
            )
            
            $
            18,543Premium
                recapture reserve(2)
            
            
            --
            
            
            
            (179
            )
            
            
            (179
            )
            
            
            (732
            )Secondary
                marketing
                (indemnification) reserve(3)
            
            
            --
            
            
            
            (1,164
            )
            
            
            (1,164
            )
            
            
            (386
            )Net
                loan origination
                fees
            
            
            4,399
            
            
            
            7,004
            
            
            
            11,403
            
            
            
            6,176Hedging
                loss
            
            
            (1,001
            )
            
            
            --
            
            
            
            (1,001
            )
            
            
            --Discounts
            
            
            34,635
            
            
            
            --
            
            
            
            34,635
            
            
            
            --Securitization
                transaction
                costs
            
            
            (2,393
            )
            
            
            --
            
            
            
            (2,393
            )
            
            
            --Net
                (loss) gain on sale
                recorded
            
            $
            (56,189
            )
            
            $
            23,713
            
            
            $
            (32,476
            )
            
            $
            23,601Average
                whole-loan sales
                (discount) premium
            
            
            (10.20
            )%
            
            
            2.88
            %
            
            
            (4.83
            )%
            
            
            3.60
            %Average
                whole-loan sales
                (discount) premium,net
                of reserves(4)
            
            
            (10.20
            )%
            
            
            2.67
            %
            
            
            (4.92
            )%
            
            
            3.38
            %Average
                net (loss) gain on sale
                ratio(5)
            
            
            (6.24
            )%
            
            
            3.78
            %
            
            
            (2.12
            )%
            
            
            4.58
            %




(1)    The amount shown is inclusive of the lower of
      cost or market adjustment recorded on the date we determined that the mortgage
      loans would be sold.


*(2)    The
      premium recapture reserve amount shown for the nine months ended September
      30,
      2007 was comprised of a provision of $712,000 related to the loans sold during
      the nine months ended September 30, 2007 and a recovery of $533,000 related
      to
      reserve adjustments for loan sales from prior year periods.*





*(3)    The
      secondary marketing
      (indemnification) reserve amount shown for the nine months ended September
      30,
      2007 was comprised of a provision of $624,000 related to the loans sold during
      the nine months ended September 30, 2007 and an additional provision of $540,000
      related to reserve adjustments for loan sales from prior
      periods.*





*(4) 
  The
      average whole-loan sales premium,
      net of reserves, related to whole-loan sales for the nine months ended September
      30, 2007 and 2006 was 2.67% and 3.38%, respectively.  The average
      whole-loan sales premium, net of reserves, is calculated by dividing the gain
      on
      whole-loan sales, net of premium recapture and secondary marketing
      (indemnification) reserves, by the total amount of loans
      sold.*





*(5)    The average net gain
      on sale ratio
      related to whole-loan sales for the nine months ended September 30, 2007 and
      2006 was 3.78% and 4.58%, respectively.  The average net gain on sale
      ratio is calculated by dividing the net gain on sale by the total amount of
      loans sold.*





***Other Income.***  Other income decreased $7.3 million, or
      77.7%, to $2.1 million for the nine months ended September 30, 2007, from $9.4
      million for the nine months ended September 30, 2006.  The decrease in
      other income primarily relates to a $7.6 million decline in the amount of the
      fair value change recorded on our excess cashflow
      certificates.  During the nine months ended September 30, 2007, we
      recorded a $1.6 million fair value adjustment gain, compared to a $9.2 million
      fair value adjustment gain for the nine months ended September 30,
      2006.  The decrease in the amount of fair value adjustment gains
      recorded during the nine months ended September 30, 2007 was primarily driven
      by
      the amount of excess cashflow certificates that we held throughout the period,
      prior to our sale of the remaining excess cashflow certificates during the
      first
      quarter of 2007.  As the cash flows are received, the value of the
      excess cashflow certificates declines.





**47**


Also
      included in other income are the gains recognized on the sale of
      MSRs.  During the nine
      months ended September 30, 2007, we recorded a gain of $491,000 on the
      sale of our MSRs to a third-party, an increase of $347,000 over the amount
      recognized during the nine months
      ended September 30, 2006.  The increase in the gain on sale of
      MSRs is due to the composition of the relative fair values of the MSRs and
      the
      related mortgage loans used in the gain calculation during the nine months ended September
      30, 2007
      as compared to the nine months ended September 30, 2006.





**Non-interest
      Expense**





Total non-interest expense increased by $10.4 million, or 12.1%, to $96.3
      million for the nine months ended September 30, 2007, from $85.9 million for
      the
      nine months ended September 30, 2006.  The increase primarily is due
      to the $1.4 million restructuring charge related to the August 2007 staff
      reduction (approximately 20.1% of the workforce) and office
      closings.  Additionally, the increase in non-interest expense is due
      to an increase in general and administrative expenses reflecting the impact
      of
      the 16.9% increase in our mortgage loan production and increased REO related
      expenses.  The increase was somewhat offset by a decrease in payroll
      and related costs due to our decrease in staff after giving effect to the August
      2007 staff reduction.





***Payroll and Related Costs.***  Payroll and related costs
      decreased by $849,000, or 1.7%, to $49.2 million for the nine months ended
      September 30, 2007, from $50.1 million for the nine months ended September
      30,
      2006.  The slight decrease was primarily the result of lower
      compensation and related payroll cost associated with the decrease in our
      staff.  As of September 30, 2007, we employed 1,056 full- and
      part-time employees, a decrease of 23.3% over our 1,376 full- and part-time
      employees as of September 30, 2006.  The majority of the decline in
      headcount occurred during the August 2007 reduction (eliminated 313
      positions).  Included in payroll and related costs during the nine
      months ended September 30, 2007 was $775,000 of severance expense related to
      the
      August 2007 staff reduction.  Offsetting the decreases in payroll and
      related costs was an increase in costs associated with loan production,
      specifically commissions, due to the 16.9% increase in loan production during
      the nine months ended September 30, 2007, compared to the nine months ended
      September 30, 2006.





***General and Administrative Expenses.*** General and
      administrative expenses increased $10.8 million, or 30.2%, to $46.8 million
      for
      the nine months ended September 30, 2007, from $36.0 million for the nine months
      ended June 30, 2006.  The increase primarily was due to (1) a $10.2
      million increase in REO related expenses due to the increase in the average
      amount of REO properties held period-over-period, and (2) an increase in
      expenses associated with our 16.9% increase in loan production during the nine
      months ended September 30, 2007, compared to the nine months ended September
      30,
      2006.  Additionally, included in general and administrative expenses
      was $652,000 of restructuring charges related to the closing of three wholesale
      origination offices in August 2007.  This increase was partially
      offset by a $913,000 decrease in advertising and marketing expenses, primarily
      due to our reduced marketing efforts during the later part of the nine months
      ended September 30, 2007 in response to the prevailing market
      conditions.





The
      increase in REO-related expenses in the nine months ended September 30, 2007
      was
      due to the expected increase in REO activity as the mortgage loan portfolio
      became more seasoned, coupled with a decline in market values of real estate
      that have occurred during 2007.  As the portfolio of REO properties
      increases, the expenses arising from the operation (i.e., payment of real estate
      taxes and insurance) and disposal of those properties will also generally
      increase.  The amount of REO properties held totaled $62.9 million and
      $17.8 million at September 30, 2007 and 2006, respectively.





***(Gain) Loss on Derivative Instruments.***  The gain or loss
      on derivative instruments recorded during the nine months ended September,
      2007
      and 2006 represented (1) the ineffective portion of the change in fair value
      of
      interest rate swaps used to lock in a pre-determined interest rate on designated
      portions of our prospective future securitization financing, (2) the ineffective
      portion related to the change in the fair value of our corridors we use to
      protect the variable-rate financing, and (3) changes in the fair value of the
      derivative instruments classified as trading securities.





**48**


During
      the nine months ended September
      30, 2007, we recorded a loss on derivative instruments of $210,000, as compared
      to a net gain on derivatives instruments of $161,000 during the nine months
      ended September 30, 2006.  During the nine months ended September 30,
      2007, we recorded a loss of $252,000 on the ineffective portion of corridors
      and
      interest rate swaps, compared to a gain of $40,000 recorded on the ineffective
      portion of corridors and interest rate swaps during the nine months ended
      September 30, 2006.  Additionally,at September 30, 2007 and
      2006, we held $179,000 and $258,000, respectively, of corridors classified
      as
      trading securities in prepaid and other assets, as these corridors were no
      longer deemed “highly effective.”  During the nine months ended September
      30,
      2007 and 2006, we recorded a gain of $42,000 and a gain of $121,000,
      respectively, for the changes in the fair value of the hedges (specifically
      corridors) held as trading securities.





**Provision
      for Income Tax (Benefit)
      Expense**





We
      recorded an income tax benefit of
      $20.9 million on a pre-tax loss of $54.9 million for the nine months ended
      September 30, 2007 (an effective tax rate of approximately
      38.1%).  The effective tax rate for the nine months ended September
      30, 2007,reflects our estimate of a lower overall effective tax rate for
      2007 and subsequent years.  As a result of our net loss
      before
      income tax benefit, we recorded a tax benefit for the nine months ended
      September 30, 2007.  We recorded an income tax expense of $13.8
      million on pre-tax income of $35.6 million for the nine months ended September
      30, 2006 (an effective tax rate of approximately 38.8%).





**Financial
      Condition**





**September
      30, 2007 Compared to December 31, 2006**





***Cash and Cash Equivalents.***  Cash and cash equivalents
        decreased $1.5 million, or 26.7%, to $4.2 million at September 30, 2007,
        from
        $5.7 million at December 31, 2006.  This decrease was primarily
        related to the timing of cash received and disbursed from normal
        operations.





***Mortgage Loans Held for Investment,
      Net*****.**  Mortgage loans held for
      investment, net increased $612.0 million, or 9.6%, to $7.0 billion at September
      30, 2007, from $6.4 billion at December 31, 2006.  This account
      represents our basis in the mortgage loans that were either delivered to the
      securitization trusts (recorded as mortgage loans held for investment –
securitized) structured as financings or are pending delivery into future
      securitizations intended to be financing transactions (recorded 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 at September 30, 2007 and December
      31, 2006:





*(Dollars
                in
                thousands)*
            
            **At
                September
                30,**
              **2007**
            
            
            **At
                December 31,
                2006**Mortgage
                loans held for investment
                – securitized
            
            $
            6,629,892
            
            
            $
            6,051,996Mortgage
                loans held for investment
                - pre-securitization(1)
            
            
            480,514
            
            
            
            417,818Discounts
                (MSR
                related)
            
            
            (43,412
            )
            
            
            (36,933
            )Net
                deferred origination
                fees
            
            
            (20,722
            )
            
            
            (19,194
            )Allowance
                for loan
                losses
            
            
            (75,878
            )
            
            
            (55,310
            )Mortgage
                loans held for
                investment, net
            
            $
            6,970,394
            
            
            $
            6,358,377





*(1)    Included in our mortgage loans held for investment –
pre-securitization at September 30, 2007 and December 31, 2006 was approximately
      $433.9 million and $335.9 million, respectively, of mortgage loans that were
      pledged as collateral for our warehouse financings at September 30, 2007 and
      December 31, 2006, respectively.*





Mortgage loans held for investment – securitized is comprised of the mortgage
      loans collateralizing our outstanding financings on mortgage loans held for
      investment.  During the three months ended September 30, 2007 we did
      not close a securitization structured to be accounted for as secured financing
      (during the three months ended September 30, 2007, we reclassified $900.0
      million of mortgage loans to mortgage loans held for sale, which were included
      in the securitization structured as a sale during the third quarter of
      2007).  During the three months ended September 30, 2006 we closed a
      securitization transaction totaling $800.3 million which was structured to
      be
      accounted for as a secured financing and was collateralized by $825.0 million
      of
      mortgage loans held for investment - securitized.  During the nine
      months ended September 30, 2007 and 2006, we closed securitization transactions
      totaling $1.7 billion and $2.5 billion, respectively, which were structured
      to
      be accounted for as secured financings and were collateralized by $1.8 billion
      and $2.5 billion, respectively, of mortgage loans held for investment -
      securitized.  Mortgage loans held for investment – securitized had a
      weighted-average interest rate of 8.31% and 8.19% per annum at September 30,
      2007 and December 31, 2006, respectively.





**49**


Mortgage loans held for investment – pre-securitization is comprised primarily
      of mortgage loans waiting to be securitized, and, to a lesser extent, a
      relatively small amount of loans that may be sold on a whole loan
      basis.  Included in our mortgage loans held for investment –
pre-securitization at September 30, 2007 and December 31, 2006, was
      approximately $433.9 million and $335.9 million, respectively, of mortgage
      loans
      that were pledged as collateral for our warehouse financings at those same
      respective dates.  Mortgage loans held for investment –
pre-securitization had a weighted-average interest rate of 9.81% and 8.73%
      per
      annum at September 30, 2007 and December 31, 2006, respectively.





We maintain an allowance for loan losses based on our estimate of losses that
      we
      expect will arise (i.e., for which the confirming event will take place) within
      the next 18 to 24 months on our mortgage loans held for investment (both
      securitized and pre-securitization).  At September 30, 2007 and
      December 31, 2006, we established an allowance for loan losses totaling $75.9
      million and $55.3 million, respectively, based upon our analysis of the mortgage
      loans held for investment portfolio, including a $306,000 and $1.0 million,
      respectively, reserve for probable loan losses on impaired mortgage
      loans.  The increase in the allowance for loan losses is primarily
      driven by the growth and seasoning of our mortgage loans held for investment
      portfolio.  We have not substantively changed any aspect of our
      overall approach in the determination of the allowance for loan losses under
      SFAS No. 5, and there have been no material changes in our assumptions or
      estimates as compared to the prior year that impacted the determination of
      the
      allowance for loan losses at September 30, 2007.





The
      following table sets forth a summary
      of the activity in the allowance for loan losses for the nine months ended
      September 30, 2007 and the year ended December 31, 2006:





*(Dollars
                in
                thousands)*
            
            **For
                the
                Nine**
              **Months
                Ended**
              **September
                30,
                2007**
            
            
            **For
                the**
              **Year
                Ended**
              **December
                31,
                2006**Allowance
                for loan losses –
                beginning of year
            
            $
            55,310
            
            
            $
            36,832Provision
                for loan losses(1)
            
            
            45,392
            
            
            
            29,085Charge-offs(2)
            
            
            (24,824
            )
            
            
            (10,607
            )Allowance
                for loan losses – end of
                period/year(3)
            
            $
            75,878
            
            
            $
            55,310





*(1)*  *The
      provision for loan losses for the
      nine months ended September 30, 2007 and the year ended December 31, 2006
      includes a specific provision which consisted of a $333,000 recovery and a
      $377,000 recovery, respectively.  The specific provisionsrelates to probable losses attributable to impaired
      loans.*





*(2)*  *The
      charge-offs for the nine months ended September 30, 2007 includes $333,000
      of
      charge-offs related to impaired loans.  The charge-offs for the year
      ended December 31, 2006 includes $342,000 (net of $10,000 of recoveries) in
      charge-offs against the specific allowance for loan losses attributable to
      impaired loans, primarily related to loans located in Hurricanes Katrina and
      Rita disaster areas.*





*(3)*  *The
      allowance for loan losses at September 30, 2007 and December 31, 2006 includes
      a
      specific allowance for impaired loans of $306,000 and $1.0 million,
      respectively.  A portion of the specific allowance, or $212,000 and
      $675,000, relates to impaired loans located in Hurricanes Katrina and Rita
      disaster areas at September 30, 2007 and December 31, 2006,
      respectively.*





**50**


Our
      specific allowance for loan losses at September 30, 2007 and December 31, 2006
      is based upon our probable loss exposure attributable to 10 and 17 properties,
      respectively, securing a total unpaid principal balance (impaired loans) of
      $893,000 and $2.5 million, respectively.  The impaired loan totals at
      September 30, 2007 and December 31, 2006 include approximately $460,000 (none
      of
      which are pre-securitization loans) and $1.3 million (of which $226,000 are
      pre-securitization loans), respectively, of mortgage loans held for investment
      located in the Hurricanes Katrina and Rita disaster areas designated by the
      Federal Emergency Management Agency (“FEMA”).  As additional
      information is obtained, we will continue to assess the need for any adjustments
      to our specific reserves related to our impaired loans.





***Trustee Receivable.***  Trustee receivable decreased $41.2
      million, or 56.2%, to $32.2 million at September 30, 2007 from $73.4 million
      at
      December 31, 2006.  Trustee receivable principally represents any
      un-remitted principal and interest payments collected by the securitization
      trust’s third-party loan servicer subsequent to the monthly remittance cut-off
      date on our mortgage loans held for investment – securitized
      portfolio.  The unscheduled principal payments and prepaid loan
      payments received after the remittance cut-off date as of September 30, 2007
      and
      December 31, 2006 totaled $28.4 million and $67.0 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 mainly will be
      used to pay down principal on the related financing on mortgage loans held
      for
      investment, net.  Additionally comprising the balance in trustee
      receivable is 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 September 2007 remittance cut-off date will be remitted to us in October
      2007).





The decrease in the trustee receivable balance primarily reflects the reduction
      in prepayment activity that occurred during the third quarter of 2007 and,
      to a
      lesser degree, due the seasoning of the loan portfolio.  Additionally,
      since the third quarter 2007 securitization was structured as a sale, we do
      not
      record any trustee receivables related to that securitization.





***Accrued Interest Receivable.***  Accrued interest
      receivable increased $11.1 million, or 26.7%, to $52.8 million at September
      30,
      2007, from $41.7 million at December 31, 2006.  The increase is due to
      (1) the 9.5% increase in mortgage loans held for investment – securitized from
      December 31, 2006, and, to a lesser extent, (2) the effect of an increase in
      the
      weighted-average interest rates on the mortgage loans held for investment –
securitized of 12 basis points from December 31, 2006 to September 30,
      2007.  Additionally contributing to the increase in the accrued
      interest receivable balance is the increase in the amount of accrued interest
      owed relating to loans that are 30 to 89 days past due in accordance with the
      contractual terms of the mortgage at September 30, 2007 compared to December
      31,
      2006.





***Excess
      Cashflow
      Certificates*****.**The
      following table presents the
      activity related to our excess cashflow certificates for the nine months ended
      September 30, 2007 and the year ended December 31, 2006:





*(Dollars
                in
                thousands)*
            
            **For
                the Nine**
              **Months
                Ended**
              **September
                30,
                2007**
            
            
            **For
                the**
              **Year
                Ended**
              **December
                31,
                2006**Balance,
                beginning of
                year
            
            $
            1,209
            
            
            $
            7,789Excess
                cashflow certificates
                sold
            
            
            (1,050
            )
            
            
            (1,500
            )Accretion
            
            
            17
            
            
            
            452Cash
                receipts
            
            
            (1,736
            )
            
            
            (16,198
            )Net
                change in fair
                value
            
            
            1,560
            
            
            
            10,666Balance,
                end of
                period
            
            $
            --
            
            
            $
            1,209





During the nine months ended September 30, 2007 and the year ended December
      31,
      2006, we sold at fair value $1.1 million and $1.5 million, respectively, of
      excess cashflow certificates to a third-party without recourse.  After
      the sale in the first quarter of 2007, we no longer hold any excess cashflow
      certificates.





***Equipment, Net*****.**  Equipment, net,
      decreased $1.1 million, or 13.0%, to $7.2 million at September 30, 2007, from
      $8.3 million at December 31, 2006.  The decrease is primarily due to
      the depreciation recognized during the nine months ended September 30, 2007
      exceeding the amount of equipment purchases made during the same period. During
      the third quarter of 2007, we eliminated 313 employee positions and closed
      some
      origination offices, which reduced our equipment needs and resulted in the
      disposal of certain furniture and fixtures at those closed
      locations.  In contrast, during the later part of 2006, we purchased
      computer equipment and office furnishings, in addition to making leasehold
      improvements, which reflected the increase in employees and office expansions
      made during that period of time.





**51**


***Accounts Receivable.*** Accounts receivable increased $12.9
      million to $17.8 million at September 30, 2007, from $4.9 million at December
      31, 2006.  The increase primarily is due to a $12.7 million increase
      in current taxes receivable to $13.4 million at September 30,
      2007.  The increase in the current taxes receivable is primarily
      attributable to the estimated refund attributable to the carryback of the net
      operating loss recorded during the nine months ended September 30, 2007, which
      resulted principally from the sale of our remaining excess cashflow certificates
      (which also resulted in a decrease in our deferred tax asset, as described
      below) during the first quarter of 2007 and the impact of the loss recorded
      on
      the third quarter 2007 securitization structured as a sale.





***Prepaid and Other Assets.***  Prepaid and other assets
      increased $29.8 million, or 59.7%, to $79.6 million at September 30, 2007,
      from
      $49.8 million at December 31, 2006.  The increase primarily is due to
      the $33.3 million, or 112.6%, increase in REO properties due to the expected
      seasoning of the loan portfolio, partially offset by a $806,000 decrease in
      prepaid securitization fees and a $3.1 million net decrease in the fair value
      of
      our derivative instruments used to hedge our securitization debt during the
      nine
      months ended September 30, 2007.  The decrease in prepaid
      securitization fees resulted from the amortization of those fees from all of
      our
      outstanding securitizations exceeding the fees paid related to our
      securitizations structured as financings during the nine months ended September
      30, 2007.





At September 30, 2007 and December 31, 2006, we held $62.9 million and $29.6
      million, respectively, of REO properties, which we carry at the lower of cost
      or
      fair value, less estimated selling costs.





***Deferred
      Tax
      Asset.***The
      deferred tax asset
      increased by $13.5 million, or 29.7%, to $59.3 million at September 30, 2007,
      from $45.8 million at December 31, 2006.  The increase primarily
      relates to (1) a net operating loss carryforward resulting from the loss on
      sale, for both GAAP and tax purposes, related to the third quarter 2007
      securitization, (2) the timing of loan losses (allowance for loan losses),
      (3)
      non-accrual interest, (4) our 2004 securitizations which were accounted for
      as
      secured financings versus REMIC tax accounting, and (5) a $2.7 million increase
      related to the fair value of the hedge instruments within accumulated
      OCI.  These increases were partially offset by a decrease related to
      (1) gain-on-sale accounting versus REMIC tax accounting for securitizations
      entered into prior to 2004 (primarily attributable to the sale of our remaining
      excess cashflow certificates), and (2) deferred origination fees and related
      costs, net.





***Bank Payable.***  Bank payable increased $240,000, or
      15.4%, to $1.8 million at September 30, 2007, from $1.6 million at December
      31,
      2006.  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 increased
      $70.8 million, or 21.1%, to $406.7 million at September 30, 2007, from $335.9
      million at December 31, 2006.  The increase was primarily due to a
      $62.7 million, or 15.0%, increase in the amount of mortgage loans held for
      investment - pre-securitization from December 31, 2006 to September 30,
      2007.





***Financing on Mortgage Loans Held for Investment,
      Net.***  Our financing on mortgage loans held for
      investment, net increased $496.2 million, or 8.2%, to $6.5 billion at September
      30, 2007, from $6.0 billion at December 31, 2006.  This increase in
      the issuance of asset-backed securities corresponds to the 9.5% increase in
      loans held for investment - securitized during the nine months ended September
      30, 2007.  The balance of this account will generally increase or
      decrease in proportion to the change in the balance of our mortgage loans held
      for investment - securitized.





***Other
      Borrowings.***Other borrowings are comprised of (1) a residual
      financing facility, (2) convertible notes, and (3) capital leases and other
      arrangements related to our equipment financing.  Other borrowings
      increased $62.6 million to $68.6 million at September 30, 2007 from $6.0 million
      at December 31, 2006.  The increase in other borrowings was due to the
      $70.0 million of financing arrangements ($60.0 million residual financing
      facility and $10.0 million of convertible notes) entered into in August of
      2007.


**52**


The
      following table summarizes certain information regarding other borrowings at
      September 30, 2007 and December 31, 2006:





*(Dollars
                in
                thousands)*
            
            **Range
                of Interest Rates(1)**
            
            
            **Balance
                at**
              **September
                30,
                2007**
            
            
            **Balance
                at**
              **December
                31,
                2006**
            
            **Range
                of Expiration Dates(1)**Residual
                financing facility, net(2)
            
            600
                basis points overone-month
                LIBOR
            
            
            $
            52,494
            
            
            $
            --
            
            August
                2008Convertible
                notes(3)
            
            
            6.00%
            
            
            
            10,000
            
            
            
            --
            
            August
                2008Equipment
                financing(4)
            
            7.05%
                to
                8.95%
            
            
            
            6,088
            
            
            
            5,970
            
            January
                2008 to September
                2010Total
            
            
            
            
            
            $
            68,582
            
            
            $
            5,970





*(1)   The
      range of interest rates and
      expiration dates are as of September 30, 2007.*





*(2)   The
      balance at September 30, 2007 is net
      of $4.5 million related to deferred warrant costs associated with the residual
      financing facility.*





*(3)   The
      convertible notes were converted
      into 2.0 million shares of our common stock on October 4,
      2007.*





*(4)   At
      December 31, 2006, the outstanding
      equipment financing had a range of interest rates of 6.26% to 8.95% and a range
      of expiration of January 2007 to November 2009.*





***Accrued Interest Payable.***  Accrued interest payable
      increased $3.6 million, or 14.6%, to $28.7 million at September 30, 2007, from
      $25.1 million at December 31, 2006.  The increase was primarily
      related to (1) the 8.2% increase in financing on mortgage loans held for
      investment, net, (2) the 21.1% increase in warehouse financing and (3) the
      impact of the 15 basis point increase (5.75% at September 30, 2007 from 5.60%
      at
      December 31, 2006) in the weighted-average cost on mortgage loans held for
      investment financing.





***Accounts Payable and Other Liabilities.***  Accounts
      payable and other liabilities increased $35.1 million, or 66.1%, to $88.3
      million at September 30, 2007, from 53.2 million at December 31,
      2006.  The increase relates primarily to (1) the $33.9 million
      increase in accrued servicer payables related primarily to the growth in our
      mortgage loans held for investment portfolio, and (2) a $1.8 million increase
      in
      the fair value of the interest rate swaps hedging our securitization debt and
      future securitization debt.  These increases were partially offset by
      a $1.2 million decrease in dividends payable as we did not declare a dividend
      during the third quarter of 2007.





***Stockholders’ Equity.***  Stockholders’ equity decreased
      $34.3 million, or 22.9%, to $115.3 million at September 30, 2007 from $149.6
      million at December 31, 2006.  This decrease is primarily due to (1)
      the recording of a $34.0 million net loss for the nine months ended September
      30, 2007, (2) a $4.3 increase in the net unrealized losses from derivatives
      and
      (3) the payment of $2.3 million of common stock dividends during the first
      and
      second quarter of 2007.  These decreases were partially offset by
      increases to stockholders’ equity related to (1) the $5.1 million from the
      issuance of warrants and (2) the $998,000 of stock-based compensation recorded
      during the nine months ended September 30, 2007.  No common stock
      dividends were declared during the three months ended September 30,
      2007.


**53**


**Contractual
      Obligations**





The
      following table summarizes our
      material contractual obligations as of September 30, 2007:





*(Dollars
                in
                thousands)*
            
            **Total**
            
            
            **Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Three
                Years**
            
            
            **Three
                to**
              **Five
                Years**
            
            
            **More
                than**
              **Five
                Years**Financing
                on mortgage loans held
                for investment, net(1)
            
            $
            6,514,154
            
            
            $
            2,153,017
            
            
            $
            2,380,857
            
            
            $
            1,005,556
            
            
            $
            974,724Operating
                leases
            
            $
            27,909
            
            
            $
            8,050
            
            
            $
            14,486
            
            
            $
            5,373
            
            
            $
            --Residual
                financing facility, net(1)
            
            $
            52,494
            
            
            $
            52,494
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Convertible
                notes(2)
            
            $
            10,000
            
            
            $
            10,000
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Equipment
                financing
            
            $
            6,088
            
            
            $
            555
            
            
            $
            5,533
            
            
            $
            --
            
            
            $
            --





*(1)*  *Amounts
      shown reflect estimated repayments based on anticipated receipt of principal
      and
      interest of the underlying mortgage loan collateral using prepayment speed
      assumptions based upon historical loan performance.*





*(2)*  *The
      convertible notes were converted
      into 2.0 million shares of our common stock on October 4,
      2007.*





**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.  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 SFAS No.
      133.  Accordingly, they are not recorded in our consolidated financial
      statements.At
      September 30, 2007 and December 31, 2006, we had outstanding origination
      commitments to fund approximately $26.8 million and $117.1 million,
      respectively, in mortgage loans.





**Off-Balance
      Sheet
      Arrangements**





We
      structured our third quarter 2007
      securitization, as well as all of our pre-2004 securitizations, as off-balance
      sheet sale transactions.  In our third quarter 2007 securitization, we
      did not retain any residual economic interests, while in our pre-2004
      securitizations we retained the excess cashflow certificates on-balance sheet
      to
      reflect our ownership interest in these securitizations.  During the
      nine months ended September 30, 2007, we sold our remaining excess cashflow
      certificates pertaining to our pre-2004 securitizations.





We
      have no obligation to provide funding
      support to either the third-party investors or the off-balance sheet
      trusts.  The third-party investors and the trusts have no recourse to
      our assets or to us and do not have the ability to require us to repurchase
      their loans, other than for non-credit-related recourse that can arise under
      standard representations and warranties.  See “- Origination of
      Mortgage Loans – Securitizations” and “- Securitizations Structured as a Sale”
for additional information regarding these transactions.





**Cash
      Flows**





The
      following table summarizes our cash flows for the nine months ended September
      30, 2007 and 2006:





**For
                the Nine Months Ended
                September 30,***(Dollars
                in
                thousands)*
            
            **2007**
            
            
            **2006**Net
                cash provided by (used
                in):Operating
                activities
            
            $
            62,761
            
            
            $
            28,581Investing
                activities
            
            $
            (691,119
            )
            
            $
            (1,286,832
            )Financing
                activities
            
            $
            626,824
            
            
            $
            1,258,685





**54**


*Operating
      Activities*– The net**cash provided by operating activities
      was $62.8 million for the nine months ended September 30, 2007, compared to
      $28.6 million for the nine months ended September 30, 2006.  The
      decrease for the nine months ended September 30, 2007 primarily reflects the
      net
      impact of the net loss on the sale of mortgage loans, $33.9 million increase
      in
      accrued interest payable, accounts payable and other liabilities, the $45.4
      million provision for loan losses, the $16.3 million of proceeds received from
      the sale of MSRs, the $1.7 million of cash received related to our excess
      cashflow certificates (including proceeds from sales) and the $41.2 million
      decrease in trustee receivable.  Partially offsetting these increases
      was the impact of the $34.0 million loss recorded, $60.0 million increase in
      accrued interest receivable, accounts receivable and prepaid and other assets,
      the $10.9 million of deferred tax benefit recorded, the $16.9 million of
      deferred origination income and $1.6 million of gains on the change in fair
      value of excess cashflow certificates.





*Investing
      Activities –*The net cash used in investing activities was $691.1 million
      for the nine months ended September 30, 2007, compared to $1.3 billion for
      the
      nine months ended September 30, 2006.  The decrease in net cash used
      in investing activities during the nine months ended September 30, 2007
      primarily related to the $3.4 billion of mortgage loans held for investment
      originated, offset by $1.2 billion in principal repayments received on mortgage
      loans held for investment and by $1.5 billion in proceeds received from the
      sale
      of mortgage loans (securitized and whole-loan combined).





*Financing
      Activities*– The net
      cash provided by financing activities was $626.8 million for the nine months
      ended September 30, 2007, compared to $1.3 billion for the nine months ended
      September 30, 2006.  The decrease in net cash provided during the nine
      months ended September 30, 2007 primarily related to the $3.4 billion in
      proceeds received from warehouse financing, the $64.0 million of residual
      financing and convertible notes and by $1.8 billion in the proceeds received
      from the financing on mortgage loans held for investment.  Partially
      offsetting the increases was a $3.4 billion decrease from the repayment of
      warehouse financing and a $1.3 billion decrease from the repayment of financing
      on mortgage loans held for investment.





**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, securitization activities, tax payments and dividend
      payments, if any.  Historically, we have generated working capital
      primarily from the cash proceeds we receive from our securitizations, including
      the NIM transactions and the sale of MSRs.  Our current cost structure
      has many embedded fixed costs, which can be significantly affected by a
      relatively substantial decrease in our loan origination volume.  There
      can be no assurance, however, that we will continue to originate a sufficient
      amount of mortgage loans or be able to securitize our loans at favorable terms
      or at all.  For
      instance, in the third quarter of 2007, as a result of what many describe as
      the
      "worst global credit crisis to date" the entire credit market, including the
      securitization market, became extremely illiquid with virtually no new subprime
      securitizations being issued or sold.  While we were one of the only
      subprime companies to successfully complete a securitization - we were able
      to
      sell all our securitization bonds - we did receive adverse pricing on the
      transaction.  The transaction was structured as a sale, and not a
      financing, in which we incurred all of the losses associated with the
      transaction, totaling $56.2 million, during the third quarter of
      2007.  Our rationale for completing a securitization during this time
      was to significantly reduce our credit risk on our balance sheet
      and exposure to additional margin calls from our warehouse
      providers.




In addition, because of changes we made to our underwriting guidelines and
      increases we made to our mortgage rates in response to the turbulent operating
      environment, we originated substantially fewer mortgage loans in the third
      quarter of 2007.  As a result, we were unable to generate sufficient
      sources of cash to offset our uses of cash in the third quarter of 2007
      and, in fact, expended substantially more cash than we generated.





To the extent that we may be able in the future to securitize our loans at
      favorable terms, and originate a sufficient amount of loans in order to generate
      adequate amounts of cash to fund our operations, there are still other factors
      that could affect our liquidity.  For
      example, each of the following may negatively impact our cash flow in any period
      in which any of these events occur: higher than expected margin calls on
      our warehouse financing facilities; choosing to not sell MSRs; reduce the
      amount of securitization debt we issue; higher funding costs, or higher reserve
      requirements on our securitization transactions as driven by the agencies rating
      our securitizations. Additionally,
      although we believe our strategy to hedge our exposure to rising interest rates
      in an effort to “lock in” our spread (as discussed in more detail in “- Summary
      of Critical Accounting Policies - Accounting for Hedging Activities” above and
“- Item 3. Quantitative and Qualitative Disclosures About Market Risk - Hedging”
below) to be appropriate, changes in prevailing interest rates could adversely
      impact our cash flow in future periods.





**55**


The subprime mortgage industry has experienced a period of turmoil during the
      first nine months of 2007, which has worsened since mid- to late- July
      2007.  Our liquidity has been adversely impacted by these
      unprecedented market conditions and the resultant margin calls we have received
      from our warehouse line providers (described below).  (See "-Part II -
      Item 1A - Risk Factors").  During the third quarter of 2007, we
      received margin calls from our warehouse credit facility providers which, when
      we evaluated our business and prevailing market conditions, caused us to seek
      additional sources of working capital and to alter our operations to address
      the
      volatility of the current operating environment.  In response to that
      evaluation, we entered into two financing transactions, as described
      below.





**August
      2007 Financing**





On
      August
      14, 2007, we closed a financing facility with an affiliate of Angelo Gordon
      in
      the principal mount of $60.0 million and bearing interest at 600 basis points
      over one-month LIBOR.  The facility is collateralized by our
      securitization BIO and owner trust certificates (the “securitization-related
      certificates”) – which entitle the holder to receive the difference between the
      interest payments received from the loans held in the related securitization
      trust and the payments to the related asset-backed investors (less the
      contractual servicing fee and other fees, costs and expenses of administering
      the securitization trust).  The cash flows from these securitization
      related certificates are utilized to pay the principal under the
      facility.  Additionally, we make monthly interest payments on the
      then-existing principal balance of the facility from other operating
      sources.  The facility matures in 12 months (August 2008), if not
      repaid earlier.





In
      connection with this transaction, we issued to an affiliate of Angelo Gordon
      warrants to purchase up to 10.0 million shares of our common stock, with an
      initial exercise price of $5.00 per share and expiring in February
      2009.  The issuance of 5.4 million of the warrants was subject to the
      approval of our shareholders, which we received on October 4, 2007.





On
      August
      14, 2007, we also issued $10.0 million of convertible notes to several funds
      controlled by one of our existing equity investors, Mr. Mohnish
      Pabrai.  The convertible notes were scheduled to mature in 12 months,
      if not converted or redeemed earlier, from the date of issuance.  Upon
      receipt of approval by our stockholders, these notes automatically convert
      into
      2.0 million shares of our common stock.  On October 4, 2007, we
      obtained shareholder approval and the notes were converted into 2.0 million
      shares of our common stock, at the conversion price of $5.00 per
      share.  The convertible notes bore interest at a rate of 6% per annum
      for the period commencing with the date of issuance until the October 4, 2007
      conversion date.




As of the date of this report, adverse conditions in the securitization
          market
          for subprime and other mortgage-backed securities still persist and may
          limit
          our ability to complete securitization transactions on favorable terms,
          or at
          all.  Until such time that these conditions improve, we will seek to
          sell our originations to whole loan investors and/or government
          agencies.  We may be unable to do so on terms that are favorable to
          us.  Accordingly, unless market conditions improve substantially, we
          believe that it is likely that we will need to complete one or more financing
          transactions during the next twelve months in order to continue our operations
          and to satisfy our liquidity obligations.  We have been pursuing
          financing alternatives, and have been in discussions with potential investors
          which may lead to a significant issuance of debt or equity securities,
          and may
          result in significant dilution for existing stockholders.  Under these
          circumstances, any failure to obtain additional financing, or to satisfy
          these
          obligations, could require us to reduce the scope of our operations, and
          could
          adversely affect our ability to operate as a going concern.


We
      believe we must generate sufficient
      cash from the following in order to maintain sufficient working
      capital:





·
            the
                proceeds we receive from selling or financing asset-backed securities
                (including NIM notes or Class N Notes) 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 corridors and interest rate swaps;
                and





·
            principal
                and interest payments we receive on our loans held for investment
                or
                sale.




**56**




Currently, our primary uses of cash include the funding of:





·
            mortgage
                loans held for investment – pre-securitization and mortgage loans held for
                sale which are not financed;





·
            the
                difference between (a) the
                amount advanced by our credit providers on, and (b) the principal
                balance
                of,mortgage loans held for investment – pre-securitization and
                mortgage loans held for sale which are
                financed;





·
            posting
                additional variation
                margin with our derivative counterparties on interest rate swaps
                used to
                finance future
                securitizations;





·
            the
                required overcollateralization
                on new securitization
                transactions;





·
            securitization
                bond
                discounts;





·
            interest
                expense on warehouse credit financings (including any related margin
                calls), financing of mortgage loans held for investment, residual
                financing facilities, interest rate swap payments and other
                financings;





·
            scheduled
                principal pay-downs on financing of mortgage loans held for investment,
                warehouse credit financings, residual financing facilities, and other
                financings;





·
            transaction
                costs, derivative costs and related margin requirements and credit
                enhancement (O/C requirements) in connection with our
                securitizations;





·
            repurchase
                of mortgage loans due
                to breaches of representations and/or
                warranties;





·
            general
                ongoing administrative and operating expenses, including the cost
                to
                originate loans;





·
            tax
                payments, including those related to excess inclusion income on our
                REMIC
                securitizations issued through 2004 and in the third quarter of 2007,
                and
                all, or a portion, of the dividends received from our REIT subsidiary;
                and





·
            common
                stock dividends, if and when approved by the board of
                directors.





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.





We have repurchase agreements with institutions that purchased mortgage loans
      from us several years ago.  Some of the agreements provide for our
      repurchase 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 $271,000 and
      $387,000 at September 30, 2007 and December 31, 2006,
      respectively.  Included in “accounts payable and other liabilities” is
      an allowance for recourse loans related to those loans sold with recourse of
      $142,000 and $81,000 at September 30, 2007 and December 31, 2006,
      respectively.  During the nine months ended September 30, 2007, we
      reimbursed investors $70,000 through the recourse reserve to net settle several
      loans.  We did not repurchase any loans that were sold with recourse
      under our existing repurchase agreements during the nine months ended September
      30, 2007 or during the year ended December 31, 2006.





**57**


**Warehouse
      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.  There also
      can be no assurance that we will be able to utilize all or any portion of our
      warehouse facilities that are uncommitted.  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 primarily through secured warehouse credit
      facilities.  Throughout each quarter, as we amass loans for inclusion
      in the next securitization, a significant portion of our total warehouse
      financing lines may be utilized to fund these loans.  As
      securitization transactions or whole-loan sales are completed, a substantial
      portion of the proceeds from the securitization or whole-loan sale are used
      to
      pay down our warehouse credit facilities.  Therefore, the outstanding
      amount of warehouse financing will fluctuate from quarter to quarter, and could
      be significantly higher or lower as our mortgage production and securitization
      programs continue.





The
      amounts we are able to borrow under our warehouse credit facilities may be
      dependent upon the valuations placed on the collateral (mortgage loans) by
      the
      warehouse providers.  The collateral is subject to valuation changes
      at any time and at the warehouse providers’ sole discretion.  Any
      subsequent reduction in the valuations of the collateral may result in a margin
      call, which will subject us to either posting a cash payment or delivering
      additional collateral to the warehouse provider and result in the reduction
      in
      our available liquidity and substantially harm our financial condition and
      results of operations.  There can be no assurance that we will be able
      to satisfy margin
      calls.  We have received substantial margin calls from our warehouse
      providers during the third quarter of 2007.  To date, we have been
      able to satisfy these margin calls from our existing liquidity.  There
      can be no assurance, however, that we will not be subject to increased margin
      calls after the date of this Report and, if so, whether we will be able to
      satisfy our obligations thereunder.





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.If
      we fail to comply with any of these covenants or otherwise default under a
      warehouse credit facility, the lender has the right to terminate the warehouse
      credit facility and require immediate payment, which may require sale of the
      collateral at less than optimal terms.  In addition, if we default
      under any one warehouse credit facility, it would generally trigger a
      cross-default under the other warehouse credit facilities.  We believe that we are in compliance
      with these covenants as of September 30, 2007.





All
      of our warehouse facilities provides us with
      the ability
      to borrow at the lower of 95% to 98% of fair market value or 100% of the par
      amount of the mortgage loans between 0 to 59 days delinquent (0 to 29 days
      delinquent for Deutsche Bank) and a limited amount of mortgage loans between
      60
      to 89 days delinquent (30 to 89 days delinquent for Deutsche
      Bank).The majority of the loans collateralizing warehouse
      borrowings are held for a period of up to 120 days, at which point they are
      typically securitized or sold.  Each facility provides 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 material terms and
      features of our warehouse credit facilities in place at September 30, 2007
      (including any subsequent changes thereto) are as follows:





**Deutsche Bank Warehouse Credit Facility.**  We have a $500.0
      million facility ($250.0 million of which is committed) with Deutsche Bank
      which
      bears interest based upon a fixed margin over one-month LIBOR.  This
      facility was scheduled to expire in October 2007, but has been extended to
      December 2007.  As of September 30, 2007, the outstanding balance
      under the facility was $158.6 million.





**RBS Greenwich Capital Warehouse Credit Facility.**  We have a
      $500.0 million facility ($250.0 million of which is committed) with RBS
      Greenwich Capital Financial Products, Inc., which bears interest based upon
      a
      fixed margin over one-month LIBOR.  This facility was scheduled to
      expire in November 2007, but has been extended to December 2007.  As
      of September 30, 2007, the outstanding balance under the facility was $133.4
      million.





**58**


**JPMorgan
      Chase Warehouse Credit
      Facility.**We have a $500.0
      million
      facility ($250.0 million of which is committed) with JPMorgan Chase which bears
      interest based upon a fixed margin over one-month LIBOR.  As of
      September 30, 2007, the outstanding balance under the facility was $114.7
      million.





**Citigroup Warehouse Credit Facility.**  We have a $500.0
      million committed facility with Citigroup Global Markets Realty Corp., which
      bears interest based upon a fixed margin over one-month LIBOR. This facility
      expires in May 2008.  As of September 30, 2007, we had no outstanding
      balance under the facility.





During****the three months ended September 30, 2007, we did
      not renew our $500.0 million warehouse credit facility ($250.0 million of which
      was committed) with Bank of America.  We did not replace this credit
      facility as of September 30, 2007, as we believed our borrowing capacity under
      the remaining warehouse credit facilities were deemed to be sufficient to meet
      our needs.





**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”).





*Current Interest Rate Environment.*  Net interest income after
      provision for loan loss represented 173.4% and 72.8% of our net revenues (net
      interest income and non-interest income, less provision for loan loss) during
      the nine months ended September 30, 2007 and 2006,
      respectively.  Accordingly, the interest rate environment has a
      substantial impact on our earnings, affecting such matters as credit market,
      credit quality and changes to rating agencies assumptions (i.e., bad debt,
      losses, etc.).  Our balance sheet is currently liability
      sensitive.  A company with a liability sensitive balance sheet
      generally experiences reduced net interest income in a rising interest rate
      environment, while earnings are enhanced in a decreasing interest rate
      cycle.  The impact of rising short-term interest rates and a
      flattening of the yield curve have negatively impacted our margin since the
      spread between our longer-term assets and our shorter-term liabilities has
      contracted.





**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.  These policies and procedures, however, may not prevent
      unexpected losses that could adversely affect our results.





We
      also sell loans on a whole-loan
      basis, from time-to-time, to banks and other financial
      institutions.When we sell mortgage loans on a whole-loan
      basis, we normally make standard mortgage industry representations and
      warranties, which may require us to repurchase one or more of the mortgage
      loans
      if they are breached.  Additionally, certain whole-loan sale contracts
      include provisions that require us to repurchase a loan if a borrower fails
      to
      make one or more of the first loan payments due on the loan.  In these instances, we are subject
      to
      repurchase risk in the event of a breach of the representations or warranties
      we
      make in connection with these whole-loan sales.  During the nine
      months ended September 30, 2007 and the year ended December 31, 2006, we
      repurchased or net settled $4.5 million ($1.2 million related to the three
      months ended September 30, 2007) and $2.3 million, respectively, of loans under
      certain re-purchase provisions related to 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 September
      30, 2007, approximately 21.1%, 12.0%, 7.5%, 6.9% and 5.9%, based upon principal
      balance, of the mortgage loans we originated were on properties located in
      New
      York, Florida, New Jersey, Illinois and Pennsylvania, respectively, with no
      other state representing more than 5% of the originations.





**59**


The
      concentration of mortgage loans in specific geographic areas may increase the
      risk of loss.  Economic conditions in the states where borrowers
      reside may affect the delinquency, loss and foreclosure experience of the
      mortgage loans.  These states may suffer economic problems, natural
      disasters or reductions in market values for residential properties that are
      not
      experienced in other states.





The
      value
      of mortgaged properties could decline as a result of an overall decline in
      the
      economy or residential real estate market, or from the occurrence of a natural
      disaster that is not covered by standard homeowners’ insurance policies
      (*i.e.,* hurricane-related damages).  This decline, in turn,
      would increase the risk of delinquency, default or foreclosures on mortgage
      loans in our mortgage loans held for investment portfolio and restrict our
      ability to originate, sell or securitize mortgage loans.





**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.





**Inflation**





Inflation affects us most significantly in the areas of mortgage loan
      originations and profit margins.  Interest rates normally increase
      during periods of rising inflation (or in periods when the Federal Reserve
      Bank
      attempts to prevent inflation).  Historically, as interest rates
      increase, mortgage loan production decreases, particularly from loan
      refinancing.  Generally, in those periods of reduced mortgage loan
      production, the associated profit margins also decline due to increased
      competition among loan originators and higher unit costs, further reducing
      our
      earnings.  (See “- Item 3. Quantitative and Qualitative Disclosures
      About Market Risk - Interest Rate/Market Risk”).





**Impact
      of New Accounting Standards**




*Fair Value Measurement of Loan Commitments.*  On November 5, 2007,
        the SEC issued SAB No. 109, which provides guidance regarding written loan
        commitments that are accounted for at fair value through earnings under
        GAAP.  The SEC had previously issued SAB No. 105, which stated that in
        measuring the fair value of a derivative loan commitment, it would be
        inappropriate to incorporate the expected net future cash flows related to
        the
        associated servicing of the loan.  SAB No. 109 supersedes SAB No. 105
        and expresses the current view of the SEC that, consistent with the guidance
        in
        SFAS No. 156 and SFAS No. 159, the expected net future cash flows related
        to the
        associated servicing of the loan should be included in the measurement of
        all
        written loan commitments that are accounted for at fair value through
        earnings.  We will apply SAB No. 109 on a prospective basis to
        derivative loan commitments issued or modified in fiscal quarters beginning
        after December 15, 2007.  We are currently evaluating SAB No. 109, and
        have not yet determined the effect it will have on our consolidated financial
        statements.





*Offsetting
      of Amounts Related to
      Certain Contracts.*In April 2007, the FASB issued FSP No.
      FIN 39-1,which amends FIN
      No. 39to permit a
      reporting entity to offset fair value amounts recognized for the right to
      reclaim cash collateral (a receivable) or the obligation to return cash
      collateral (a payable) against fair value amounts recognized for derivative
      instruments executed with the same counterparty under the same master netting
      arrangement that have been offset in accordance with FIN No. 39.  FSP
      No. FIN 39-1 also amends FIN No. 39 for certain terminology
      modifications.  FSP No. FIN 39-1 is effective for fiscal years
      beginning after November 15, 2007, with early application permitted, and is
      applied retrospectively as a change in accounting principle for all financial
      statements presented.  Upon adoption of FSP No. FIN 39-1, we are
      permitted to change our accounting policy to offset or not offset fair value
      amounts recognized for derivative instruments under master netting
      arrangements.  We are currently evaluating FSP No. FIN 39-1, and have
      not yet determined the effect the adoption of FSP No. FIN 39-1 will have on
      our
      consolidated financial statements.





*Fair
      Value Option for Financial Assets and Financial Liabilities*.  In
      February 2007,**FASB issued SFAS No. 159, which permits entities to
      elect to measure many financial instruments and certain other items at fair
      value that are not currently required to be so measured.  The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently, without having to apply complex
      hedge accounting provisions.  SFAS No. 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between entities that choose different measurement attributes for similar types
      of assets and liabilities.  SFAS No. 159 does not affect any existing
      accounting literature that requires certain assets and liabilities to be carried
      at fair value, and does not eliminate disclosure requirements included in other
      accounting standards, including requirements for disclosures about fair value
      measurements included in SFAS No. 157 and SFAS No. 107.**SFAS No.
      159 is effective for our fiscal year beginning after November 15,
      2007.  We are currently
      assessing the impact that the adoption of SFAS No. 159 will have on our
      consolidated financial statements, but we do not expect that the adoption
      during the first quarter of 2008 will have a material impact on our financial
      condition or results of operations.





**60**


*Fair
      Value Measurements.*In September 2006, FASB issued SFAS No. 157,
      which defines fair value, establishes a framework for measuring fair value
      in
      GAAP, and expands disclosures about fair value measurements.  SFAS No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal
      years.  We are currently
      assessing the impact that the adoption of SFAS No. 157 will have on our
      consolidated financial statements, but we do not expect that the adoption
      during the first quarter of 2008 will have a material impact on our financial
      condition or results of operations.





*Accounting
      for Uncertainty in Income Taxes.*In June
      2006,**FASB issued FIN No. 48, which clarifies the accounting for
      uncertainty in income taxes recognized inaccordance with SFAS
      No.
      109.  Only tax positions meeting a “more-likely-than-not” threshold of
      being sustained are recognized under FIN No. 48.  FIN No. 48 also
      provides guidance on derecognition, classification of interest and penalties
      and
      accounting and disclosures for annual and interim financial
      statements.  FIN No. 48 is effective for fiscal years beginning after
      December 15, 2006.  The cumulative effect of the changes arising from
      the initial application of FIN No. 48 is required to be reported as an
      adjustment to the opening balance of retained earnings in the period of
      adoption.  The adoption of FIN No. 48 on January 1, 2007 did not have
      a material effect on our consolidated financial statements.





**Item
      3.  Quantitative and Qualitative Disclosures 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.  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 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.  We
      may use hedges, such as interest rate swaps and corridors, to mitigate the
      effect of changing interest rates between the time we originate loans and the
      time we either securitize or sell the loans.  If hedges are not
      utilized, as interest rates rise between the time we originate the loans and
      the
      time we securitize or sell the loans, the excess spread generally would narrow,
      resulting in a loss of value on the loans and lowering the net interest income
      we would receive on the mortgage loans we securitize and lower net gains, or
      possibly produce losses on the whole loans we sell.  Since we close
      and fund mortgage loans at a specified interest rate with an expected spread
      to
      be earned over their life, our exposure to decreases in the fair value of the
      mortgage loans rises 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 credit
      facilities 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.





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.  To reduce our financial
      exposure to changes in interest rates, 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.  We also use corridors
      (corresponding purchases and sales of interest rate caps with similar notional
      balances at different strike prices) and/or amortizing notional balance interest
      rate swaps that are designed to mitigate our basis risk within the
      securitization.  (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.  (See “- Interest Rate Risk/Market Risk”
and “Part II. – Item 1A. – Risk Factors”).





**61**


**Interest
      Rate/Market
      Risk**





Our
      general investment policy is to
      maintain the net interest margin between assets and
      liabilities.





**Loan Price Volatility**. We currently utilize the market for wholesale
      non-conforming mortgage loans to sell a portion of our loan origination
      production, normally at a gain, each quarter.  The use of the
      wholesale mortgage loan market to sell our loans is dependent upon the market
      prices being offered compared to the potential financial benefit of retaining
      the loans (*i.e.,* securitizing the loans) in our
      portfolio.  Our financial results may be significantly impacted
      depending upon whether we decide to sell or retain the loans.  Our
      decision to sell will also depend, in part, on our ability to find purchasers
      for our loans at prices that cover origination expenses.





**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 portfolio underlying our securitizations.  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, decreasing our net
      interest margin.





Fluctuating interest rates also may affect the net interest income we earn,
      resulting from the difference between the yield we receive on the loans held
      pending securitization or sale and the interest paid by us for funds borrowed
      under our warehouse credit facilities.  In the past, from time to
      time, we have undertaken specific 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.  With our
      transition to on-balance sheet portfolio securitizations in 2004, we have and
      may continue to hedge our exposure to interest rate risk as described above
      in
“- Item 2. - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations - Summary of Critical Accounting Policies - Accounting
      for
      Hedging Activities.”





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 loss or
      income in changing interest rate environments.





Management primarily uses financing sources where the interest rate resets
      frequently.  As of September 30, 2007, the adjustable-rate borrowings
      under all of our financing arrangements adjust daily (*i.e.*, our
      warehouse credit facilities) or monthly (*i.e.,* residual financing
      facility or portions of our securitization debt).  On the other hand,
      most of the mortgage loans we own are fixed rate; the remainder contain features
      where rates are fixed for some period of time and then adjust frequently
      thereafter (typically every six months).  For example, one of the
      types of loan products we originated prior to September 30, 2007 is referred
      to
      as a “3/27” loan.  This 30-year loan has a fixed rate of interest for
      its first three years and then adjusts every six months thereafter.





**62**


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 consolidated 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 (primarily
      comprised of mortgage loans held for investment) and interest-bearing
      liabilities (primarily comprised of the securitization and warehouse financing
      related to our mortgage loans and any related hedging instruments) and their
      effect on overall earnings.  The simulations assume instantaneous and
      parallel shifts in interest rates and the degree to which those shifts affect
      net interest income.  First, we project our net interest income for
      the next 12 months and 36 months using the current end-of-period data, in
      conjunction with a forward LIBOR curve and estimated repayment data based on
      anticipated receipt of principal and interest on the underlying mortgage loan
      collateral.





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 case and
      includes any associated changes in projected mortgage prepayment
      speeds.  The following sensitivity table presents the results of each
      100 basis point change in interest rates compared to the base case, in order
      to
      determine the estimated dollar and percentage change to net interest income
      at
      September 30, 2007:





*(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)
            
            $
            166,135
            
            
            $
            163,360
            
            
            $
            161,146
            
            
            $
            167,500
            
            
            $
            169,924Percentage
                change from
                base
            
            
            
            
            
            
            (1.67)%
            
            
            
            (3.00)%
            
            
            
            0.82%
            
            
            
            2.28%***Three-Year
                Projection:***Net
                interest income(1)(2)
            
            $
            346,500
            
            
            $
            342,330
            
            
            $
            338,613
            
            
            $
            349,862
            
            
            $
            355,159Percentage
                change from
                base
            
            
            
            
            
            
            (1.20)%
            
            
            
            (2.28)%
            
            
            
            0.97%
            
            
            
            2.50%





*(1)  
 Net
      interest income from assets (income
      from 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 100 basis
      points and 200 basis points.*





*(2)    Assumes
      warehouse interest expense
      through December 31, 2007.*





Because
      the assumptions used in the sensitivity tables are inherently uncertain, we
      cannot predict precisely the effect of higher or lower interest rates on net
      interest income.  Actual results will differ from simulated results
      due to the timing, magnitude and frequency of interest rate changes, the
      difference between actual experience and the assumed volume and characteristics
      of new business and behavior of existing positions, and changes in market
      conditions (including prepayment rates) and management strategies, among other
      factors.





**63**


**Hedging**.  From an interest rate risk management perspective,
      we use derivative instruments (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 generally intends 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 consolidated 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 in 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 net purchase option 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 are equal to the
      difference between actual LIBOR and the strike rate.  Interest rate
      swaps have similar characteristics.  An interest rate swap is a
      transaction between two parties in which each agrees to exchange payments tied
      to different interest rates or indices for a specified period of time, generally
      based on a notional amount of principal.  The interest rate swap
      agreements we utilize 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 price or rates
      for corridors and amortizing notional balance interest rate swaps that we held
      as of September 30, 2007:





*(Dollars
                in
                thousands)*
            
            **Total**
            
            
            **One**
              **Year**
            
            
            **Two
                Years**
            
            
            **Three
                Years**
            
            
            **Four
                Years**
            
            
            **Five
                Years &
                Thereafter**Caps
                bought -
                notional
            
            $
            430,636
            
            
            $
            270,984
            
            
            $
            39,803
            
            
            $
            30,157
            
            
            $
            23,245
            
            
            $
            66,447Weighted-average
                strikerate
            
            
            7.39%
            
            
            
            7.31%
            
            
            
            7.46%
            
            
            
            7.46%
            
            
            
            7.43%
            
            
            
            7.42%Caps
                sold -
                notional
            
            $
            430,636
            
            
            $
            270,984
            
            
            $
            39,803
            
            
            $
            30,157
            
            
            $
            23,245
            
            
            $
            66,447Weighted-average
                strikerate
            
            
            9.30%
            
            
            
            9.33%
            
            
            
            9.27%
            
            
            
            9.27%
            
            
            
            9.29%
            
            
            
            9.32%Amortizing
                notional balance
                interest rate swaps:Notional
            
            $
            276,785
            
            
            $
            146,368
            
            
            $
            97,649
            
            
            $
            32,768
            
            
            $
            --
            
            
            $
            --Weighted-average
                rate
            
            
            5.10%
            
            
            
            5.11%
            
            
            
            5.08%
            
            
            
            5.00%
            
            
            
            --
            
            
            
            --





**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 September 30, 2007,
      these disclosure controls and procedures were effective to ensure that
      information required to be disclosed in the reports we file or submit under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 also are 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 were no significant
      deficiencies or material weaknesses identified during the course of this
      evaluation.  There have not been any changes in our internal control
      over financial reporting that occurred during the three months ended September
      30, 2007 that materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.





**64**


**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 the Home Ownership and
                Equity
                Protection Act of 1994, the federal Truth-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, the plaintiffs 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 District 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.  The objectors filed their appellate brief in July
                2005.  We filed our appellate papers in opposition in September
                2005, and the objectors filed their reply papers in September
                2005.  In February 2006, the Appellate Court vacated the
                District Court’s decision to approve the settlement, not based on the
                merits of the settlement, but because a motion to intervene was decided
                by
                the District Court Magistrate Judge and not the District Court
                Judge.  The Appellate Court instructed the District Court Judge
                to rule on the motion to intervene and, until then, it cannot be
                determined if the District Court Judge will also have to rule on
                the
                fairness of the settlement, or if that issue will have to return
                to the
                Appellate Court.  Briefing on the intervention motion was
                re-submitted to the District Court Judge in July 2006, and the motion
                was
                denied in November 2006.  In January 2007, we executed a
                proposed amendment to the settlement with the plaintiffs which did
                not
                increase the settlement amount.  In March 2007, the plaintiffs
                filed a motion for preliminary approval of the amended settlement
                and the
                proposed notice to the class.  In April 2007, certain objectors
                filed an opposition to the motion for preliminary approval.  We
                filed our reply to the objectors' opposition in May 2007.  The
                plaintiffs also filed their reply to the objectors' opposition in
                May
                2007.  If the District Court preliminarily approves the
                settlement, as amended, a new fairness hearing date will be
                scheduled.  If the settlement is not approved, 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
                July 2003, we commenced a lawsuit in the Supreme Court of the State
                of New
                York, Nassau County, against Delta Funding Residual Exchange Company
                LLC
                (the “LLC”), an unaffiliated limited liability company, 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.  In or about October 2004, the LLC commenced an
                action against KPMG LLP, our independent public accountants at that
                time,
                based upon similar allegations as asserted in this action.  In
                September 2005, it was agreed that the action against KPMG LLP would
                be
                joined with this action.  In the countersuit, the LLC was
                granted permission to serve an amended complaint, which it did in
                November
                2005.  The amended complaint included two additional causes of
                action alleging breach of fiduciary duty owed to the LLC, one against
                us
                and the other against several of our officers and directors.  In
                December 2005, we filed a motion to amend our complaint to add claims
                (both individually and as a member of the LLC) against Mr. Morrison
                arising from the same and/or similar facts and circumstances, seeking
                recovery for waste, for improper personal benefit, for breach of
                fiduciary
                duty (beyond those already alleged in the complaint) and for a material
                misstatement in the LLC’s financial statements.  In April 2006,
                the Supreme Court dismissed our motion to amend and granted us permission
                to revise the motion and re-file it.  In July 2006, we re-filed
                our motion to amend our complaint, which motion was opposed.  In
                November 2006, the Court denied our motion.  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.





**65**


·
            In
                or 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”, now a division of our
                other subsidiary, Delta Funding Corporation), did not pay its loan
                officers overtime compensation and/or minimum wage in violation of
                the
                Federal Fair Labor Standards Act (“FLSA”).  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.  Any
                potential class members who desired to join the collective action
                were
                provided an opportunity to do so during an “opt-in” period that ended in
                October 2005.  Approximately 180 individuals, virtually all of
                whom are former employees, are plaintiffs in the collective
                action.  In April 2006, the plaintiffs filed a motion for
                summary judgment.  By agreement in June 2006, the Court stayed
                the action while the parties engaged in non-binding mediation, and
                plaintiffs’ motion for summary judgment was withdrawn without prejudice to
                it being re-filed.  The matter was not resolved through
                mediation, the stay was lifted in August 2006, the plaintiffs’ motion was
                re-filed and we filed our opposition to the motion and a cross-motion
                for
                partial summary judgment.  In September 2006, the plaintiffs
                filed their papers in response to our opposition to their motion
                and
                replied to our cross-motion.  In October 2006, we filed our
                reply papers to the plaintiffs’ opposition to our
                cross-motion.  In March 2007, the Magistrate Judge rendered a
                report and recommendation that the plaintiffs' motion for summary
                judgment
                be granted, and our motion denied, as to our entitlement to a retail
                or
                service establishment exemption under the FLSA; that plaintiffs’ motion be
                denied as to: (a) our entitlement to an administrative employee exemption
                under the FLSA and (b) plaintiffs’ entitlement to liquidated damages; and
                our motion be granted as to the sufficiency of the employees’ compensation
                under the salary basis test, but denied as to the remaining two conditions
                of an administrative employee exemption.  In April 2007, we
                filed our objections to the Magistrate Judge's report and recommendation,
                insofar as it did not recommend the granting of our cross-motion
                for
                partial summary judgment, and the plaintiffs filed their opposition
                to our
                objections.  In May 2007, we filed our reply to the plaintiffs'
                opposition to our objections.  In May 2007, the District Court
                issued an order adopting the Magistrate Judge’s report and
                recommendation.  In July 2007, we filed a motion for
                certification of an interlocutory appeal from the District Court’s May
                2007 order and the plaintiffs filed their opposition papers in July
                2007;
                and we filed our reply papers in August 2007.  Discovery is
                continuing.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.





·
            In
                or about February 2007, we received notice that we had been named
                in a
                lawsuit filed in the United States District Court for the Northern
                District of Illinois, Eastern Division, alleging that we had accessed
                certain consumers' credit reports without a permissible purpose under
                the
                Fair Credit Reporting
                Act of
                1970, as amended (“FCRA”), and sent improper prescreening offers in
                Illinois.  The complaint seeks: (a) certification of a class of
                plaintiffs, (b) injunctive relief against further violations, (c)
                statutory damages and general and other damages, and (d) attorneys’ fees,
                costs and litigation expenses, based upon alleged (i) violations
                of the
                FCRA, (ii) common law invasion of privacy and (iii) consumer fraud/unfair
                acts and practices.  In March 2007, we filed a motion for a stay
                of the action pending certain decisions expected to be rendered by
                other
                courts in actions pending against other companies, which decisions
                we
                expect may impact the legal issues involved in our case.  In
                March 2007, the Court stayed the action until June 2007.  In
                June 2007, the plaintiff stipulated, without prejudice, to dismissing
                the
                common law invasion of privacy claim and the consumer fraud/unfair
                acts
                and practices claim, and dismissed only that part of the relief seeking
                injunctive relief on the FCRA claim.  In June 2007, we filed an
                answer to the complaint and discovery is proceeding.  In July
                2007, plaintiff filed a motion for class certification and our opposition
                filing was due in August 2007.  In September 2007, we agreed to
                an individual nuisance value settlement on an individual basis with
                the
                plaintiff and the lawsuit has been
                dismissed.





·
            In
                or about August 2007, we received notice that we have been named
                in a
                lawsuit styled as a class action and collective action filed in the
                United
                States District Court of the Eastern District of New York, alleging
                that
                Fidelity did not pay its loan officers overtime compensation and/or
                minimum wage in violation of the FLSA and New York and Ohio state
                wage and
                hour laws.  The complaint seeks (1) with respect to the FLSA
                collective action claims: (a) an amount equal to the unpaid wages
                at the
                applicable overtime rate, (b) an amount equal to the overtime wage
                damages
                as liquidated damages, (c) judgment that Fidelity willfully violated
                the
                FLSA, (d) prejudgment interest and (e) costs and attorneys’ fees; (2) with
                respect to the New York state wage and hour laws claims: (a) certification
                of a class of plaintiffs, (b) an amount equal to the unpaid wages
                at the
                applicable overtime rate, and (c) costs and attorneys’ fees; and (3) with
                respect to the Ohio state wage and hour law claims: (a) certification
                of a
                class of plaintiffs, (b) an amount equal to the unpaid wages at the
                applicable overtime rate, (c) an amount equal to six percent of the
                unpaid
                overtime wage, or $200, whichever is greater, as liquidated damages
                and
                (d) costs and attorneys’ fees.  In October 2007, we filed an
                answer to the complaint.  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.





**66**


**Item
      1A.  Risk Factors**





Certain
      statements contained in this Quarterly Report constitute forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933
      and
      Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties
      that exist in our operations and business environment, and are subject to change
      based on a variety of important factors.  Generally, forward-looking
      statements can be identified by the use of forward-looking terminology
      including, but not limited to, “anticipate that,” “believes,” “continue to,”
“estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,”
“predict,” “project,” “should,” “target,” “could,” “is likely to,” “believe,”
“to be,” “will be,” “will continue to be,” or similar words or
      terminology.  These
      statements include, but are not limited to, our future profitability and our
      future net interest income, our future cash flows, financing activities and
      liquidity requirements, the future performance of our loan portfolios, the
      impact of changes in interest rates, our future hedging strategy, the
      availability of warehouse, residual and other credit facilities; our ability
      or
      inability to continue to access the securitization and whole-loan markets on
      favorable terms and conditions or at all; the structure of future
      securitizations (sale or financing); the potential impact that amortizing the
      discount related to our warrants may have on our financial statements; rating
      agencies' changes impacting reserve levels; loan prepayment rates, delinquency
      and default rates; the impact of expected losses on REOs; the impact of changes to accounting
      rules, our ability to realize benefits from our deferred tax asset, changes
      in
      tax laws, and our anticipated outcome of litigation and regulatory matters,as well as statements expressing optimism or pessimism about future
      operating results.  Such
      statements are subject to the “safe harbor” provisions of the Private Securities
      Litigation Reform Act of 1995.The forward-looking statements
      are based upon management’s views and assumptions as of the date of this
      Quarterly Report regarding future events and operating performance and are
      applicable only as of the date of such statements.  By their nature,
      all forward-looking statements involve risk and uncertainties.  We caution readers that numerous
      important factors discussed in this section, or detailed in our Annual Report
      on
      Form 10-K for the year ended December 31, 2006 under the caption “Risk Factors,”
in some cases have caused, and in the future could cause, our actual results
      to
      differ materially from those expressed in any forward-looking statements made
      in
      this Quarterly Report.





The
      following risks and uncertainties, and those contained in our Annual Report
      on
      10-K for the year ended December 31, 2006, should be considered in evaluating
      forward-looking statements, and undue reliance should not be placed on any
      such
      forward-looking statements.  We do not undertake any obligation to
      update any of these statements in light of future events, except as required
      by
      law.  There can be no assurance, however, that our expectations will
      necessarily come to pass.  We qualify any and all of our
      forward-looking statements entirely by these cautionary
      factors.  The following
      include some, but not all, of the factors or uncertainties that could cause
      our
      actual results to differ from our projections:





·
            The
                subprime and securitization markets have continued to experience
                disruptions and more severe turmoil, which has continued through
                the date
                of this Report.  The combination of these significant industry
                events – including relatively poor performing collateral primarily from
                2006 and early 2007 securitizations, rating agencies downgrades,
                changes
                in credit enhancement levels required by rating agencies, issues
                with
                investors in sub-prime mortgage securities, and mortgage companies
                failing
                – has resulted in what has been characterized as unprecedented disruption
                in the securitization market upon which we and others in the subprime
                industry rely for long-term financing, further exacerbating the operating
                environment.  In response to higher rates of delinquencies and
                defaults, a large number of mortgage-backed securities have been
                placed on
                “credit watch,” and in many cases, downgraded, by the major U.S. rating
                agencies (S&P,
                Moody's, Fitch and/or DBRS).  As a result, investors in
                asset-backed securities (“ABS”), including collateralized debt obligations
                (“CDO”) and structured investment vehicles (“SIVs”), have either been
                experiencing, or are expected to experience, problems arising from
                their
                investments in subprime mortgage securities.  Also, during the
                third and fourth quarters of 2007, the major U.S. rating agencies
                that
                rate subprime securitizations have significantly increased reserve
                requirements for the securitizations to provide additional credit
                support.  The magnitude of these increased reserve requirements
                was unanticipated.  Unexpected changes
                in ratings or
                rating methodology by the major U.S. rating agencies, including,
                without limitation, the required levels of O/C on our newly issued or
                existing securitization transactions may have an adverse impact on
                our
                cash position and may affect the prices we receive on all or certain
                portions of the asset-backed securities we issue.  The required O/C and
                sizing of
                each rated class of asset-backed securitiesbeing offered
                are generally
                determined solely by the rating
                agencies;





**67**


·
            Our
                ability or inability to continue our practice of securitizing mortgage
                loans, as well as our ability to utilize optimal securitization structures
                (including the execution of NIM transactions and 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.  We rely
                heavily upon the asset-backed securities market for our long term
                financing.  During the past several months and continuing
                through the filing date of this Report, this market has been severely
                constrained, with only a small number of transactions coming to
                market.  We cannot assure you that we will continue to be
                successful in securitizing mortgage loans.  Our ability to
                complete securitizations of our mortgage loans will depend upon a
                number
                of factors, many of which are beyond our control, including conditions
                in
                the credit and securities markets generally, conditions in the
                asset-backed securities market specifically and the performance of
                our
                mortgage loans previously
                securitized;




·
            The
                  disruption and severe turmoil in the subprime and securitization
                  markets
                  discussed above has negatively impacted our operations and eroded
                  a
                  substantial amount of our liquidity.  If these market conditions
                  continue or worsen, particularly if we are unable to consummate
                  securitizations, or to do so on favorable terms, we may need to
                  raise
                  additional capital, which would likely be very dilutive to our
                  existing
                  stockholders and/or carry significant interest expense to
                  us.  In light of recent market conditions, and our operations in
                  the subprime sector, there may be a very limited number of investors
                  who
                  may seek to make an investment in us.  We are in discussions
                  with potential investors which may lead to a significant issuance
                  of debt
                  or equity securities, and may result in significant dilution for
                  existing
                  stockholders.  There can be no assurance that we will be able to
                  raise additional capital on terms favorable to us, or at
                  all.  If we cannot raise additional capital, we may need to
                  reduce, or even substantially reduce, the scope of our operations,
                  including our loan production, the size of our workforce and the
                  number
                  and size of our facilities, all of which could result in financial
                  losses,
                  and could adversely impact our ability to operate as a going
                  concern;




·
            Our
                ability to realize proceeds equal to or greater than the carrying
                value of
                the mortgage loans we securitize.  We were not able to do so
                during the third quarter of 2007 and cannot assure you that we will
                be
                successful doing so in the future.  As a result of conditions
                within the subprime mortgage industry, rating agencies, financial
                guarantee insurers and investors have recently begun to, and may
                continue
                to in the future, require additional credit enhancement to support
                the
                securities sold in securitizations of subprime mortgage
                loans.  This requirement generally has the effect of reducing
                the proceeds we may receive from, and increasing the overall expense
                of,
                executing securitizations.  The rating agencies that rate
                subprime securitizations have recently increased reserve requirements,
                the
                magnitude of which was unanticipated, which may affect the amount
                of
                proceeds we can expect to receive in future securitizations.  We
                have raised our mortgage rates and modified our product offerings
                and
                underwriting guidelines in an effort to mitigate the effects of these
                changes.  There can be no assurance, however, that we will be
                successful in doing so.  In addition, we expect to receive lower
                proceeds from any future securitization that contains collateral
                that was
                originated based upon our previous guidelines and
                rates;





·
            Our
                ability or inability to continue to access, renew or replace credit
                facilities at favorable terms and conditions, including without
                limitation, warehouse and other credit facilities used to finance
                newly
                originated mortgage loans held for investment – pre-securitization or
                mortgage loans held for sale and our ability or inability to comply
                with
                covenants contained in these credit facilities.  In the past,
                our warehouse providers have agreed to increase the available capacity
                on
                our warehouse credit facilities beyond their contractual
                limits.  There can be no assurance that our warehouse providers
                would do so in the future should the need
                arise;





·
            Because
                our warehouse credit providers generally rely on the securitization
                and
                whole loan markets as a means for valuing the mortgage loans securing
                their warehouse lines, changes in securitization prices in the primary
                or
                secondary credit markets or reserve requirements by the rating agencies,
                or other disruption in the securitization and whole-loan markets,
                may have
                an adverse impact on the valuation ascribed to our mortgage loans
                used as
                collateral under our warehouse lines.  This may result in our
                warehouse lenders increasing the amount of their margin calls and
                reducing
                the advance rate they will provide to us under these credit lines,
                which
                may adversely impact our cash position.  As discussed above, the
                securitization and whole-loan market has been severely disrupted
                over the
                past several months, particularly since mid-July 2007 and continuing
                through the date of this Report.  Few transactions have been
                consummated and, as a result, warehouse line providers have significantly
                marked down the value of the collateral of loans against which they
                provide financing - which has resulted in margin calls being placed
                and a
                reduction in the advance rates received by subprime and other lenders,
                including us.  These increased margin calls and lower advance
                rates have required us and other lenders to utilize large amounts
                of
                capital to make up the shortfall and have resulted in more distressed
                sales which, in turn, put further downward pressure on whole loan
                sale
                prices, regenerating the cycle with escalating negative
                results.  The amount of financing we receive under our warehouse
                credit facilities depends in large part on our lenders’ valuation of the
                mortgage loans securing the financings.  Each credit facility
                provides the lender the right to re-evaluate the loan collateral
                that
                secures our outstanding borrowings at any time.  If the lender
                determines that the value of the collateral has decreased, the lender
                has
                the right to initiate a margin call.  A margin call would
                require us to provide the lender with additional collateral or to
                repay a
                portion of our outstanding borrowings.  Any margin call would
                result in the reduction in our available liquidity and harm our results
                of
                operation and financial condition.  We have received substantial
                margin calls from our warehouse providers during the three months
                ended
                September 30, 2007, and subsequent to that date.  To date, we
                have been able to satisfy all such margin calls from our existing
                liquidity.  There can be no assurance, however, that we will not
                be subject to increased margin calls after the filing of this Report
                and,
                if so, whether we will be able to satisfy our obligations
                thereunder.  In the event we are not able to satisfy a margin
                call, we could lose the related line of credit and trigger defaults
                under
                our other credit facilities;





**68**


·
            Any
                significant change in the credit quality or fair market value of
                our loan
                portfolio would have a significant effect on our financial position
                (both
                as to profitability and cash flows), the amount of borrowings we
                can
                generate from our warehouse credit facilities, results of operations
                and
                our ability to securitize or sell our loans.  Declines in the
                fair market value of the mortgage loans held as collateral under
                our
                warehouse credit facilities may subject us to margin calls, which
                may
                effect our financial position and results of operations.  A
                substantial number of margin calls could cause us to breach the required
                capital or other covenants under our warehouse credit
                facilities.  Each such breach, unless waived, could trigger a
                default of our other facilities under their respective cross-default
                provisions.  Developments of this kind could cause us to lose
                access to these warehouse credit
                facilities;





·
            In
                August 2007, we entered into a $60.0 million repurchase facility
                financing
                transaction with Angelo Gordon to increase our available
                liquidity.  The repurchase facility is collateralized by our
                residual certificates, which entitle the holder to receive the excess
                cash
                flow, if any, remaining in each payment period under the applicable
                securitization, after payments have been made in respect of the
                asset-backed notes and certificates, the contractual servicing fee
                and
                other fees, costs and expenses of administering the securitization
                trust.  Under the terms of the repurchase facility, the cash
                flows from our securitization certificates will be applied to pay
                down the
                principal of the repurchase facility.  We are also obligated to
                make monthly interest payments on the then-existing principal balance
                of
                the repurchase facility.  Although the repurchase facility has
                permitted us to monetize the securitization certificates’ excess cash
                flows to bolster our liquidity, it has also eliminated, for now,
                our
                receipt of cash flows from these securitization certificates until
                the
                facility has been repaid in full.  The elimination of these cash
                flows, upon which we have relied heavily over the past several quarters
                to
                help offset our operating costs, can have a negative effect on our
                financial condition.  In addition, the repurchase facility
                matures in 12 months, if not sooner repaid.  There can be no
                assurance that we will be able to repay the outstanding balance of
                the
                repurchase facility at that time, if at all or that it will be renewed
                or
                extended;





·
            Our
                ability to obtain additional sources of collateralized financing
                is
                limited as the majority of our assets are encumbered by our present
                financing sources;




·
            Our
                profitability has recently declined, and we cannot assure you that
                we will
                be profitable in future periods.  We reported a net loss of
                $39.6 million for the three months ended September 30, 2007, compared
                to
                net income of $8.0 million for the same period of 2006.  We
                reported a net loss of $34.0 million for the nine months ended September
                30, 2007, compared to net income of $21.8 million for the same period
                of
                2006.  We expect to report a loss in the fourth quarter of 2007
                related to the tumultuous market conditions, expected securitization
                execution and our current level of originations.  Our
                profitability for the current fiscal year has been adversely affected
                by
                the fact that our results of operations for the nine months ended
                September 30, 2007 included a significant loss related to the structuring
                and execution of our September 2007 securitization, as well as losses
                arising from our August 2007 staff reduction and branch
                closings;





·
            Recently,
                numerous residential
                mortgage loan originators that originate subprime mortgage loans
                have
                experienced serious financial difficulties and, in some cases,
                bankruptcy.  Those difficulties have resulted in part from
                declining markets for mortgage loans, as well as from claims for
                repurchases of mortgage loans previously sold for material breaches
                of the
                representations and warranties made on the mortgage loans, such as
                fraud
                claims.The mortgage loans we originate are generally
                considered subprime mortgage loans, and it is possible that we, due
                to
                substantial economic exposure to the subprime mortgage market, for
                financial or other reasons, may not be capable of repurchasing or
                providing a substitute mortgage loan for any defective mortgage loans
                we
                previously securitized or sold;





**69**


·
            In
                connection with whole-loan sales and securitizations, we are required
                to
                make customary representations and warranties regarding us and the
                loans.  A loan that does not comply with these representations
                and warranties may not be securitizable or saleable, or saleable
                only at a
                discount.  If the loan is securitized or sold before we detect
                non-compliance with these requirements, we may be obligated to repurchase
                the loan and bear any associated loss, or we may be obligated to
                indemnify
                the purchaser against that loss.  While we create allowances in
                our financial statements for defective loans, we cannot provide assurances
                that such allowances will be sufficient to reflect actual losses
                that we
                may incur;





·
            The
                leveling off or decline in the value of residential properties could
                have
                a significant impact on our origination levels and/or financial position
                and results of operations.  The increase in home prices over the
                last several years contributed to the growth in our origination volume,
                as
                well as reducing the risk of losses by improving LTV or combined
                LTV
                (“CLTV”) ratios.  The slowing of home-price growth, or decline
                in values in some markets, could have a significant impact on our
                mortgage
                loan origination growth, amounts of losses incurred on REO properties,
                as
                well as impact our prepayment speed and credit loss assumptions on
                the
                mortgage loans held for investment and the corresponding allowance
                for
                loan losses;





·
            The
                risk that any material decline in real estate values would weaken
                our
                collateral and LTV ratios and increase the possibility of loss if
                a
                borrower defaults.  In such an event, we would be subject to the
                risk of loss on such mortgage asset arising from borrower defaults
                to the
                extent not covered by a third-party credit enhancement.  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;





·
            We
                are subject to risks in connection with the level of our allowance
                for
                loan losses.  A variety of factors could cause our borrowers to
                default on their loan payments and the collateral securing such loans
                to
                be insufficient to pay any remaining indebtedness.  In such an
                event, we could experience significant loan losses.  In the
                process of originating a loan, we make various assumptions and judgments
                about the ability of the borrower to repay it, based on the
                creditworthiness of the borrower and the value of the real estate,
                among
                other factors.  We establish an allowance for loan losses
                through an assessment of probable losses in our loan
                portfolio.  Several factors are considered in this process,
                including historical and projected default rates and loss
                severities.  If our assumptions and judgments regarding these
                matters are incorrect, our allowance for loan losses might not be
                sufficient, and additional loan loss provisions might need to be
                made.  Depending on the amount of such loan loss provisions, the
                adverse impact on our earnings could be
                material;





·
            Our
                ability or inability to originate a sufficient amount of mortgage
                loans,
                and subsequent sale or securitization of such loans, to remain profitable
                and to grow our business;





·
            Our
                ability or inability to continue to employ on-balance sheet
                securitizations to generate cash flows and earnings from net interest
                income;





·
            Our
                ability or inability to manage interest rate risk.  Our primary
                interest rate exposure relates to our mortgage loans and variable-rate
                debt, as well as the interest rate swaps and caps that we use for
                risk
                management purposes.  Changes in interest rates may affect our
                net interest income, which is the difference between the interest
                income
                we earn on our interest-earning assets and the interest expense we
                incur
                on our interest-bearing liabilities.  Changes in the level of
                interest rates also can affect our ability to originate or acquire
                mortgage loans, the value of our assets and our ability to realize
                gains
                from the sale of our assets.  In a period of rising short-term
                interest rates, such as the current environment, our interest expense
                could increase while the interest we earn on our interest-earning
                assets
                would not change as rapidly.  We generally finance
                loans prior
                to securitization or whole-loan sales through warehouse
                financing.  The net income we receive on these mortgage loans is
                the difference between the interest income we receive from the borrower
                on
                the mortgage loan, less the sub-servicing fee and interest expense
                we
                pay.  The warehouse financing is based upon one-month
                LIBOR.  An increase in one-month LIBOR, without a corresponding
                increase in the rates at which we lend, would reduce our net
                income;




·
            The
                impact of changes in our accounting policies, including our change
                to
                on-balance sheet treatment of our
                securitizations;





·
            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;





·
            Any
                change to or elimination of loan products we offer (including the
                states
                in which we choose to originate loans) may have a significant effect
                on,
                including without limitation, the amount of loans we originate, our
                ability to complete securitizations, the credit ratings of the
                asset-backed securities and the amount of loans we sell.  The
                changes or eliminations may also effect our financial position, our
                results of operations and our ability to securitize or sell our
                loans;





**70**


·
            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 42.1% and 41.6% of our
                loans
                were originated during the three and nine months ended September
                30, 2007,
                respectively.  Any sustained period of increased delinquencies,
                foreclosure, losses or increased costs could further adversely affect
                our
                ability to securitize or sell loans in the secondary market and may
                cause
                us to sustain a reduction in our net income or incur
                losses.  More detailed delinquency information regarding the
                loans collateralizing each of our securitizations (which comprise
                our
                mortgage loans held for investment – securitized portfolio) is available
                on our website at
                www.deltafinancial.com/regAB.htm;




·
            Competition
                within our markets, particularly in the wholesale loan channel, where
                a
                large number of lenders are competing for business from independent
                mortgage brokers.  In the event that we are not successful in
                maintaining or expanding our broker relationships, our wholesale
                loan
                origination volume may decrease which could significantly harm our
                business, financial condition, liquidity and results of
                operations;





·
            A
                significant source of our mortgage loan production volume are cash-out
                refinancings.  The demand for these types of loans decreases as
                interest rates rise or as market values of homes decline.  The
                rise in interest rates generally reduce the number of borrowers who
                would
                otherwise qualify for or elect to pursue a cash-out refinancing,
                thus
                potentially decrease that origination source.  Similarly, the
                decline in the market value of homes reduces the amount of equity
                available to be borrowed against in a cash-out refinance, thus potentially
                decreasing that origination source.  A significant decline in
                the volume of cash-out refinancings could harm our results of operations,
                financial condition and business
                prospects;





·
            Some
                of 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.  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
                to pay a
                reduced principal and interest payment for the first 10
                years.  These loan products, in addition to possibly having
                increased payment defaults, also may 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 a loan that amortizes evenly throughout
                its
                term;





·
            The
                scope of our business exposes us to risks of noncompliance with an
                increasing and, in some cases, inconsistent body of complex laws,
                rules
                and regulations at the federal, state and local levels.  We must
                comply with the laws, rules and regulations, as well as judicial
                and
                administrative decisions, in all of the jurisdictions in which we
                are
                licensed to originate mortgage loans, as well as an extensive body
                of
                federal laws, rules and regulations.  Moreover, our lending
                business is subject to extensive government regulation, supervision
                and
                licensing requirements by various state departments of banking or
                financial services, and the cost of compliance with these regulations
                may
                hinder our ability to operate
                profitably;





·
            Management
                has identifiedseveral accounting policies as being “critical” as they require us
                to make subjective or complex judgments about matters that are inherently
                uncertain.  The estimates and assumptions made by management
                related to these critical accounting policies are inherently uncertain
                and
                may result in different amounts being recorded under different conditions
                or using different estimates or assumptions.  We cannot provide
                any assurance that we will not make significant subsequent adjustments
                to
                our estimates or assumptions that may result in changes to the amounts
                recorded and also effect our financial position, and results of
                operations;




·
            There
                may be negative impacts that the adoption of new, or amendments to,
                federal, state or local lending laws and regulations and the application
                of these laws and regulations may have on our ability, or willingness,
                to
                originate loans on a national, state or local level, or to ultimately
                sell
                those loans through securitization, or on a whole-loan
                basis.  In some instances, as a result of these laws and
                regulations, we may choose or be forced to severely limit, or even
                cease,
                our lending activities in a particular area.  The federal
                government and many states and local municipalities have adopted
                and/or
                are considering adopting laws that are intended to further regulate
                our
                industry.  We anticipate that the level of regulatory activity
                at the federal and state level is likely to increase in the short
                term, in
                light of higher defaults and reports of unprecedented numbers of
                consumers
                at risk to lose their homes.  Many of these laws and regulations
                seek to impose broad restrictions on certain commonly accepted lending
                practices, including some of our practices.  In addition,
                federal, state and local laws could impact O/C requirements set by
                the
                rating agencies, which could decrease the cash proceeds we may receive
                from our securitizations;





·
            The
                increasing number of federal, state and local “anti-predatory” lending and
                consumer protection laws may restrict our ability to originate, or
                increase our risk of liability with respect to, some types of mortgage
                loans and could increase our cost of doing business.  In recent
                years, several federal, state and local laws, rules and regulations
                have
                been adopted, or are under consideration for adoption, that are intended
                to eliminate so-called “predatory” lending practices and provide consumers
                with additional protections.  These laws, rules and regulations
                impose restrictions on mortgage loans on which certain points and
                fees,
                interest rate, or the annual percentage rate (“APR”) exceed specified
                amounts.  Some of these restrictions expose lenders to the risk
                of litigation and penalties no matter how carefully a loan is
                underwritten.  In addition, an increasing number of these laws,
                rules and regulations seek to impose liability for violations on
                purchasers of loans, as well as on other secondary market participants
                such as underwriters and investors, regardless of whether a purchaser
                or
                participants knew of or participated in the violation.  The U.S.
                Federal Reserve Board announced that it would hold hearings to consider
                new regulations in the subprime mortgage sector, and U.S. Congress
                has
                also announced that it is conducting hearings to consider new
                legislation.  Further, other federal regulatory agencies have
                introduced guidance restricting certain products offered by depository
                institutions that state banking regulators may adopt and require
                non-depository mortgage lenders to follow as well.  As the
                result of these laws, rules, regulation, and guidance, we may choose
                to
                severely limit, or even cease, our lending activities in some
                jurisdictions.  In addition, we may find it difficult, if not
                impossible, to sell or securitize loans since purchasers and secondary
                market participants may be reluctant to risk such
                liability;




**71**
 ·
              The
                    increasing number of state foreclosure prevention programs, such
                    as in
                    Maryland, Massachusetts and Ohio, could have the potential of
                    substantially decreasing the return earned by investors in our
                    mortgage
                    loan 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 these laws and regulations, licenses,
                environmental compliance, the adoption of new, or changes in, accounting
                policies and practices and the application of these 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
                or
                investigatory actions against us;





·
            Potentially
                unfavorable outcomes related to pending legal matters, including
                those
                matters described above in “Item 1. - Legal
                Proceedings;”





·
            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 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 securitized loan portfolio, as well as our ability to sell
                or
                securitize loans.  Ocwen Loan Servicing, LLC, a third-party
                mortgage loan servicer, presently services our loan
                portfolio.  Poor servicing by Ocwen Loan Servicing, LLC (or its
                parent, Ocwen Financial Corporation, or subsidiaries, collectively
                referred to as “Ocwen”) or any other third-party servicer who services our
                loans could harm the value of our mortgage loans and our ability
                to sell
                or securitize them.  Additionally, regulatory actions and class
                action lawsuits against these servicers could harm the value of our
                securitized loans and our ability to sell or securitize
                loans.  Ocwen has been named as a defendant in a number of
                purported class action and other lawsuits that challenge its servicing
                practices under applicable federal and state laws.  In addition,
                on November 29, 2005, a jury in County Court for Galveston County,
                Texas,
                returned a verdict of $11.5 million in compensatory and punitive
                damages
                and attorneys' fees against Ocwen, in favor of a plaintiff borrower
                who
                defaulted on a mortgage loan it serviced.  The plaintiff claimed
                that Ocwen’s foreclosure on the loan violated the Texas Deceptive Trade
                Practices Act and other state statutes and common law.  On
                February 9, 2006, the trial court reduced the jury verdict and entered
                judgment in the amount of approximately $1.8 million.  Ocwen has
                indicated in its public filings that it believes the judgment was
                against
                the weight of evidence and contrary to law and that the attorneys’ fees
                award, which comprises approximately $1.1 million of the judgment,
                should
                be reduced as impermissibly excessive.  Ocwen also has indicated
                in its public filings that it has appealed the decision and intends
                to
                continue to vigorously defend this matter.  Further, according
                to its public filings, Ocwen maintains high levels of
                indebtedness.  Ocwen is a non-investment grade company and in
                2004 terminated its banking subsidiary's status as a federal savings
                bank
                under supervision of the Office of Thrift Supervision (“OTS”) and Federal
                Deposit Insurance Corporation (“FDIC”).  Ocwen is now licensed
                and regulated primarily at the state and local level.  On
                September 13, 2006, a complaint was filed in the United States Bankruptcy
                Court in Delaware against Ocwen and other parties by the Chapter
                7 Trustee
                of American Business Financial Services, Inc. and its subsidiaries
                (collectively, “ABFS”) alleging various improper activities and conduct
                that have harmed ABFS.  Claims against Ocwen include damages
                resulting from improperly servicing mortgage loans included in
                ABFS-sponsored securitizations and from actions relating to the
                acquisition of servicing rights from ABFS on those
                securitizations.  Ocwen believes the claims made by ABFS are
                without merit and intends to vigorously defend the matter.  If
                Ocwen’s operations are impaired as a result of litigation, judgments,
                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;





·
            Changes
                in the
                deductibility of mortgage interest and real estate taxes could decrease
                our loan production and harm our business.Members of
                Congress and government officials have from time to time suggested
                the
                elimination of deductions for mortgage interest and real estate taxes
                for
                federal income tax purposes, either entirely or in part.  The
                competitive advantages of tax deductible interest and real estate
                taxes,
                when compared to alternative sources of financing, could be eliminated
                or
                seriously impaired by this change.  Accordingly, the reduction
                or elimination of these tax benefits could reduce the demand for
                our
                mortgage 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;





·
            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.  A loan
                obtained as a result of a material misrepresentation is typically
                unsaleable or subject to repurchase if it is sold prior to detection
                of
                the misrepresentation;





**72**


·
            Our
                ability to securitize or sell certain of the mortgage loans we originate
                depends upon the acceptance of those products by various parties
                in the
                market, including, among others, underwriters or purchasers of our
                asset-backed securities, ratings agencies, bond insurers and/or whole-loan
                purchasers.  Any one of these or other parties can determine
                that certain of the loan products that we originate (now or in the
                future)
                are undesirable or problematic, which can make it more difficult
                to
                securitize these loans or sell them at par in the future.  Our
                inability to securitize or sell certain types of loan products in
                the
                future may cause us to (1) retain such loans in our portfolio, which
                may
                have an adverse impact on our cash position or generate losses, or
                (2)
                sell them at a significant discount, which may generate losses and
                adversely effect cash flows.  Recent bankruptcies, and
                regulatory and legal actions affecting the subprime sector may cause
                our
                loans to be viewed as less desirable for securitization.  In the
                recent past, other subprime mortgage lenders have encountered substantial
                difficulties in completing securitizations of these mortgage loans,
                and we
                cannot assure you that we will be able to complete any additional
                securitizations;





·
            Our
                ability or inability to adapt to and implement technological changes
                to
                become and/or remain competitive and/or
                efficient;





·
            Our
                ability or inability to find alternative methods of generating retail
                leads and originating retail loans in light of the Federal Trade
                Commission (“FTC”) and various state “do not call” registries, which were
                implemented beginning 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;





·
            In
                light of a recent United States Supreme Court decision, federally
                regulated institutions, including national banks, are potentially
                not
                subject to comply with some of the state rules that we must comply
                with,
                which could have an adverse impact on ability to compete in certain
                states.  In addition, the absence of prepayment penalties on
                some of our loans also could adversely impact our securitizations
                and
                related profitability;





·
            The
                risk that we will be subject to claims under environmental
                laws;





·
            Geopolitical
                risks, such as terrorist attacks in the United States or other parts
                of
                the world, conflicts involving the United States or its allies, or
                military or trade disruptions, may harm our business,
                the
                U.S. economy and capital markets, and in particular the asset-backed
                market.  These types of events could cause, among other
                things, the delay or cancellation of plans to finance a mortgage
                with us
                on the part of our customers or potential customers, or could negatively
                impact the capital markets and the asset-backed market in
                particular.  Any of these events could cause business and
                consumer confidence and spending to decrease further, resulting in
                increased volatility in the United States and worldwide financial
                markets
                and potentially an economic recession in the United States and
                internationally, which could harm our
                business;





·
            Natural
                disasters may adversely affect the performance of mortgage loans
                in a
                variety of ways, including but not limited to, impacting borrowers’
                abilities to repay their loans, displacing the homeowners due to
                severe
                damage to the properties, and decreasing the value of the mortgaged
                property, which may result in increased losses to us.  Standard
                homeowner insurance policies generally do not provide coverage for
                natural
                disasters, such as hurricanes and floods.  Furthermore,
                nonconforming borrowers are not likely to have special hazard
                insurance.  To the extent that borrowers do not have insurance
                coverage for natural disasters, they may not be able to repair the
                property or may stop paying their mortgages if the property is
                damaged.  Additionally, claims for insurance recoveries may be
                disputed if insured parties and their insurers disagree in their
                assessments or type of insurable damage, causing the timing and receipt
                of
                insurance payments for damages to be delayed or made at amounts lower
                than
                expected, if at all.  We may not be able to readily determine
                the particular nature of such economic effects, how long any of these
                effects may last, or the impact on the performance of mortgage loans
                affected by the natural disaster;





·
            The
                risk that using Insured Automated Valuation Models (“Insured AVMs”) in
                lieu of appraisals could increase our losses.  An AVM may be
                considered a less accurate measure to value a property than a full
                appraisal with an interior inspection performed by a licensed
                appraiser.  We utilized an Insured AVM on approximately 13.5%
                and 14.0% of the loans we originated during the three and nine months
                ended September 30, 2007, respectively.  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;





·
            Unpredictable
                delays or difficulties in the development of new product
                programs;





·
            The
                effect that an interruption in, or breach of, our information systems
                could have on our business.  The possibility of failure of our
                operating facilities, computer systems and communication systems
                during a
                catastrophic event;





**73**


·
            We
                rely heavily upon communications and information systems to conduct
                our
                business.  Any material interruption or breach in security of
                our communication or information systems or the third-party systems
                on
                which we rely could cause underwriting or other delays and could
                result in
                fewer loan applications being received, slower processing of applications
                and reduced efficiency in loan servicing.  Additionally, in
                connection with our loan file due diligence reviews, we have access
                to the
                personal financial information of the borrowers, which is highly
                sensitive
                and confidential, and subject to significant federal and state
                regulation.  If a third party were to misappropriate this
                information, we potentially could be subject to both private and
                public
                legal actions.  Our policies and safeguards may not be
                sufficient to prevent the misappropriation of confidential information,
                or
                prevent us from becoming noncompliant with existing federal or state
                laws
                or regulations governing privacy, or with those laws or regulations
                that
                may be adopted in the future;





·
            The
                unanticipated expenses of assimilating newly acquired businesses,
                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;





·
            A
                portion of the income we received from our ownership interests in
                a REMIC
                securitization is referred to as “excess inclusion.”  In
                addition, all or a portion of the dividends we receive from our REIT
                subsidiary may be considered excess inclusion income, resulting from
                the
                subsidiary’s ownership of the securitization trusts (that are classified
                as a taxable mortgage pool).  With limited exceptions, excess
                inclusion is always subject to tax because it cannot be offset by
                other
                deductions or by net operating losses.  If the total amount of
                excess inclusion income exceeds our regular taxable income, our liquidity
                would be impacted as our cash payments for federal income taxes would
                exceed the amount that would otherwise be
                required;





·
            Our
                inability to comply with REIT qualification tests for our REIT subsidiary
                on a continuous basis would subject our securitization trusts owned
                by our
                REIT subsidiary to federal income tax as a corporation (as a taxable
                mortgage pool) and not allow its tax returns 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 September 30, 2007, members of the Miller family (considered one
                stockholder under the attribution rule applicable to the ownership
                of REIT
                stock) own approximately 33.0% of the common stock (including employee
                stock options and unvested stock awards as required by the Internal
                Revenue Code (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.  Failure to remain
                compliant would result in the imposition of a tax upon our securitization
                trusts and 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
                addition, it would result in an event of default, unless waived,
                under our
                warehouse and certain other credit facilities.  Accordingly, a
                failure to remain compliant with the REIT qualification tests may
                reduce
                our profitability and cash flow and have a material adverse impact
                on
                us;





·
            The
                value of our deferred tax asset and our ability to use such
                deductions/losses may be significantly limited.  These built in
                losses could provide significant future tax savings to us if we are
                able
                to use them.  However, our ability to use these tax benefits may
                be impacted, restricted or eliminated by a number of factors including,
                but not limited to:




•     our
      ability to generate sufficient net income to utilize these built in
      losses;




•     a future ownership change of us within the
      meaning of Section 382 of the Code; and




•     future
      changes in laws or regulations, which changes may have retroactive effect,
      relating to the use of these built in losses.




To
      the
      extent that we are unable to utilize these built in losses, our results of
      operations, liquidity and financial condition could be adversely affected in
      a
      significant manner.  Under Section 382 of the Code, a corporation is
      limited in its ability to use existing net operating losses carryforwards and
      net unrealized built in losses once that corporation experiences an "ownership
      change" (as that term is defined in the Code and its
      regulations).  More specifically, corporations are limited in their
      ability to use net built in losses and net operating losses carryforwards that
      are in existence prior to an "ownership change" to offset taxable income they
      receive after an "ownership change."






**74**




Any
      future equity offering(s) and/or changes in our major stockholders during the
      look back period resulting in a change in ownership within the meaning of
      Section 382 of the Code may limit the amount of net built in losses and net
      operating loss carryforwards that exist as of the date of change that we may
      claim in future periods which may result in higher taxable income for the
      company (and a significantly higher tax cost to us as compared to the situation
      where these tax benefits are preserved);





·
            The
                amounts we have recorded as deferred tax assets are reliant upon
                current
                corporate income tax rates, which may change in the future.  Any
                change in the maximum corporate income tax rates affects our deferred
                tax
                assets and the provision for income taxes in the period of
                change.  If the maximum corporate federal income tax rate is
                reduced, our deferred tax assets would decrease and our income tax
                expense
                would increase, thus affecting our results from operations, liquidity
                and
                financial condition possibly in a significant
                manner.  Additionally, if we fail to remain
                profitable in
                the future, a valuation allowance against our deferred tax asset
                may be
                necessary;





·
            Our
                executive officers (specifically, members of the Miller family)
                collectively own a large percentage of our shares of common stock
                and
                could influence matters requiring stockholder
                approval.  Accordingly, if members of the Miller family were to
                act in concert, they would have the ability to exercise significant
                influence over us with respect to matters submitted to a stockholder
                vote,
                including the approval of fundamental corporate transactions, such
                as
                mergers and acquisitions, consolidations and asset sales, and electing
                members of our Board of Directors.  As long as the Miller family
                controls such a substantial percentage of our shares, third parties
                may
                not be able to gain control of us through purchases of our common
                stock.  In addition, members of the Miller family hold positions
                as executive officers of our Company, including Chairman, President
                and
                Chief Executive Officer, Executive Vice President (Chief Credit Officer)
                and Executive Vice President (General
                Counsel);





·
            The
                investors in our August 2007 financings, Angelo Gordon Entities and
                PIF
                Investors, beneficially own a significant portion of our outstanding
                shares (or warrants, which if exercised, would constitute a significant
                portion of our then-outstanding common stock), and therefore, they
                could
                also exercise significant influence as to the matters described
                above;





·
            Compliance
                with the Sarbanes-Oxley Act of 2002 and proposed and recently enacted
                changes in securities laws and regulations are likely to increase
                our
                operating costs; and





·
            Future
                sales of shares of our common stock, including shares of common stock
                held
                by our insiders, may negatively impact the price of our common
                stock.  In addition, in our August 2007 financing, we issued
                convertible notes, which were converted into an additional 2.0 million
                shares of common stock in October 2007, and issued warrants for an
                additional 10.0 million shares of our common stock.  We are
                obligated to register the shares related to the convertible note
                for
                resale, while the warrant holders were granted registration
                rights.  We have filed a registration statement providing for
                the resale of all of the shares issued upon conversion of the convertible
                notes, and for a substantial portion of the shares issuable upon
                exercise
                of the warrants.  The market price of our common stock may
                decline if a substantial number of shares of our common stock is
                sold, or
                the perception that those sales might occur.  We are unable to
                predict whether significant numbers of shares will be sold in the
                open
                market in anticipation of or following a sale by
                insiders.


**75**


**Item
      4.  Submission of Matters to a Vote of Security
      Holders**




On October 4, 2007 we held a special meeting of our stockholders.  At
      the meeting, our stockholders approved both proposals presented at a special
      meeting of stockholders, relating to our August 2007
      financings.  First, the stockholders approved the issuance of 5.4
      million shares of our common stock upon the exercise of warrants held by the
      Angelo Gordon Entities.  As a result of the approval, all of the
      warrants are now exercisable for a total of 10.0 million shares of our common
      stock, at an exercise price of $5.00 per share.  Second, the
      stockholders approved the issuance of 2.0 million shares of our common stock
      to
      the PIF Investors.  The result of the stockholder vote was as
      follows:





§
            Votes
                cast in favor of the
                warrants to issue 5.4 million shares of our common stock to the Angelo
                Gordon Entities totaled 18,147,995, while 199,193 votes were cast
                against
                and 35,263 votes were
                withheld.





§
            Votes
                cast in favor of the
                issuance of our common stock to the PIF Investors totaled 18,191,841;
                while 156,210 votes were cast against and 34,375 votes were
                withheld.





As
      a result of this second approval, the
      $10.0 million of convertible notes issued to the PIF Investors in August 2007
      were automatically converted into 2.0 million shares of common stock as of
      October 4, 2007, resulting in an increase in our capital.





**Item
      6.  Exhibits**





**Exhibit
                No.**
            
            **Filed**
            
            **Description**10.1
            
            (a)
            
            Securities
                Repurchase Agreement. Dated August 13, 2007, by and between Renaissance
                REIT Investment Corp. and Delta Funding Corporation, as Sellers,
                the
                Registrant, as Guarantor, and AG Delta Holdings, LLC, as
                Buyer10.2
            
            (a)
            
            Warrant
                Acquisition Agreement, dated August 13, 2007, between the Registrant
                and
                AG Delta Holdings, LLC10.3
            
            (a)
            
            Form
                of Warrant issued to Affiliates of Angelo, Gordon &
                Co.10.4
            
            (a)
            
            Form
                of Investor Rights Agreement, dated August 13, 2007, between the
                Registrant and AG Delta Holdings, LLC10.5
            
            (a)
            
            Form
                of Purchase Agreement, dated August 13, 2007, relating to the issuance
                of
                $10,000,000 in aggregate principal amount senior convertible notes,
                between the Registrant and the Purchasers named therein10.6
            
            (b)
            
            Twelfth
              Amendment to Lease Agreement between Delta Funding Corporation and
              Lake
              Park 1000 Woodbury LLC and CLK HP 1000 Woodbury LLC31.1
            
            (b)
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Executive
                Officer31.2
            
            (b)
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Financial
                Officer32.1
            
            (b)
            
            Section
                1350 Certification of the Chief Executive Officer32.2
            
            (b)
            
            Section
                1350 Certification of the Chief Financial
                Officer








(a)    
Incorporated
        by reference from the Registrant’s Current Report on Form 8-K, filed on August
        16, 2007.
 (b)    Filed
          herewith.




**76**





**SIGNATURES**





Pursuant
      to the requirements of the
      Securities Exchange Act of 1934, as amended, the Registrant has duly caused
      this
      report to be signed on its behalf by the undersigned thereunto duly
      authorized.





**Dated:**November
      8, 2007








**DELTA
      FINANCIAL
      CORPORATION**


(Registrant)








By:/s/ Hugh
      Miller_________________________


**Hugh
      Miller**


President
      and Chief
      Executive Officer





By:/s/
      Richard Blass________________________


**Richard
      Blass**


Executive Vice President and Chief Financial Officer









**77**