**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 endedMarch
                31, 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 May
      7, 2007, 23,580,961 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 March
                31, 2007 (unaudited) and December 31, 2006
            1Consolidated
                Statements of Operations for
                the Three Months Ended March 31, 2007 and 2006
                (unaudited)
            2Consolidated
                Statement of Changes in
                Stockholders’ Equity for the Three Months Ended March 31, 2007
                (unaudited)
            3Consolidated
                Statements of Cash Flows for the Three
                Months Ended March 31, 2007 and 2006 (unaudited)
            4Notes
                to Consolidated Financial Statements
                (unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of
                Financial Condition and Results of Operations
            23Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            45Item
                4.
            Controls
                and Procedures
            49**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            49Item
                1A.
            Risk
                Factors
            52Item
                6.
            Exhibits
            59Signatures
            60











**PART
      I - FINANCIAL INFORMATION**





**Item
      1 - Financial Statements.**


**DELTA
      FINANCIAL CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE
      SHEETS**


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




**At**
                **March
                  31, 2007****
              
              **At**
                **December
                  31, 2006***(Unaudited)***Assets:**Cash
                  and cash equivalents
              
              $
              7,007
              
              $
              5,741Mortgage
                  loans held for investment, net of discounts and deferredorigination
                  fees
              
              
              7,033,655
              
              
              6,413,687Less:
                  Allowance for loan losses
              
              
              (60,868
              )
              
              (55,310
              )Mortgage
                  loans held for investment, net
              
              
              6,972,787
              
              
              6,358,377Trustee
                  receivable
              
              
              76,789
              
              
              73,361Accrued
                  interest receivable
              
              
              44,394
              
              
              41,684Excess
                  cashflow certificates
              
              
              --
              
              
              1,209Equipment,
                  net
              
              
              7,981
              
              
              8,287Accounts
                  receivable
              
              
              15,324
              
              
              4,872Prepaid
                  and other assets
              
              
              52,115
              
              
              49,836Deferred
                  tax asset
              
              
              36,930
              
              
              45,760Total
                  assets
              
              $
              7,213,327
              
              $
              6,589,127**Liabilities
                  and Stockholders’ Equity****Liabilities:**Bank
                  payable
              
              $
              1,935
              
              $
              1,557Warehouse
                  financing
              
              
              457,081
              
              
              335,865Financing
                  on mortgage loans held for investment, net
              
              
              6,506,954
              
              
              6,017,947Other
                  borrowings
              
              
              6,271
              
              
              5,970Accrued
                  interest payable
              
              
              27,669
              
              
              25,052Accounts
                  payable and other liabilities
              
              
              62,014
              
              
              53,160Total
                  liabilities
              
              
              7,061,924
              
              
              6,439,551**Stockholders’
                  Equity:**Common
                  stock, $.01 par value. Authorized 49,000,000 shares;23,699,761
                  and 23,607,611 shares issued and 23,582,961 and
                23,490,811
                  shares outstanding at March 31, 2007 and December 31,2006,
                  respectively
              
              
              234
              
              
              234Additional
                  paid-in capital
              
              
              142,472
              
              
              141,984Retained
                  earnings
              
              
              13,901
              
              
              10,180Accumulated
                  other comprehensive loss
              
              
              (3,886
              )
              
              (1,504
              )Treasury
                  stock, at cost (116,800 shares)
              
              
              (1,318
              )
              
              (1,318
              )Total
                  stockholders’ equity
              
              
              151,403
              
              
              149,576Total
                  liabilities and stockholders’ equity
              
              $
              7,213,327
              
              $
              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 March 31,****2007**
              
              **2006**Interest
                  income
              
              $
              140,960
              
              $
              101,973Interest
                  expense
              
              
              100,522
              
              
              67,266Net
                  interest income
              
              
              40,438
              
              
              34,707Provision
                  for loan losses
              
              
              10,645
              
              
              6,404Net
                  interest income after provision for loan losses
              
              
              29,793
              
              
              28,303Non-interest
                  income:Net
                  gain on sale of mortgage loans
              
              
              7,840
              
              
              7,061Other
                  income
              
              
              1,823
              
              
              3,376Total
                  non-interest income
              
              
              9,663
              
              
              10,437Non-interest
                  expense:Payroll
                  and related costs
              
              
              17,217
              
              
              17,030General
                  and administrative
              
              
              13,672
              
              
              11,162Loss
                  (gain) on derivative instruments
              
              
              96
              
              
              (275
              )Total
                  non-interest expense
              
              
              30,985
              
              
              27,917Income
                  before income tax expense
              
              
              8,471
              
              
              10,823Provision
                  for income tax expense
              
              
              3,584
              
              
              4,237Net
                  income
              
              $
              4,887
              
              $
              6,586**Comprehensive
                  Income**:Other
                  comprehensive (loss) income
              
              
              (2,382
              )
              
              4,070Comprehensive
                  income
              
              $
              2,505
              
              $
              10,656**Per
                  Share Data:**Basic
                  - weighted average number of shares outstanding
              
              
              23,292,385
              
              
              20,497,408Diluted
                  - weighted average number of shares outstanding
              
              
              24,076,959
              
              
              21,360,176Net
                  income applicable to common shares
              
              $
              4,887
              
              $
              6,586Basic
                  earnings per share - net income
              
              $
              0.21
              
              $
              0.32Diluted
                  earnings per share - net income
              
              $
              0.20
              
              $
              0.31







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 Three Months Ended March, 2007**


*(Dollars
      in thousands)*





**Common
                Stock**
            
            **Additional**
              **Paid-in
                Capital**
            
            **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
            
            
            --
            
            
            40
            
            
            --
            
            
            --
            
            
            --
            
            
            40Excess
                tax benefit related to share-based compensation
            
            
            --
            
            
            52
            
            
            --
            
            
            --
            
            
            --
            
            
            52Share-based
                compensationexpense
            
            
            --
            
            
            396
            
            
            --
            
            
            --
            
            
            --
            
            
            396Dividend
                declared and payable
            
            
            --
            
            
            --
            
            
            (1,166
            )
            
            --
            
            
            --
            
            
            (1,166
            )Change
                in net unrealized lossesfrom
                derivatives, net of tax
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,382
            )
            
            --
            
            
            (2,382
            )Net
                income
            
            
            --
            
            
            --
            
            
            4,887
            
            
            --
            
            
            --
            
            
            4,887Balance
                at March 31, 2007
            
            $
            234
            
            $
            142,472
            
            $
            13,901
            
            $
            (3,886
            )
            $
            (1,318
            )
            $
            151,403





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)*





**Three
                Months Ended March 31,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            4,887
            
            $
            6,586Adjustments
                to reconcile net income to net cash provided by operatingactivities:Provision
                for loan losses
            
            
            10,645
            
            
            6,404Provision
                for recourse loans, premium recapture and secondary marketing
                losses
            
            
            345
            
            
            410Depreciation
                and amortization
            
            
            945
            
            
            791Deferred
                tax expense
            
            
            10,353
            
            
            2,611Deferred
                origination income
            
            
            (4,396
            )
            
            (3,514
            )Gain
                on change in fair value of excess cashflow certificates
            
            
            (1,560
            )
            
            (3,261
            )Gain
                on sale of mortgage loans, net
            
            
            (8,104
            )
            
            (7,471
            )Gain
                on sale of mortgage servicing rights
            
            
            (250
            )
            
            (46
            )Amortization
                of deferred debt issuance costs and premiums
            
            
            (1,319
            )
            
            (3,137
            )Cash
                  flows received from excess cashflow certificates, net of
                  accretion
            
            
            1,719
            
            
            5,994Proceeds
                from sale of excess cashflow certificates
            
            
            1,050
            
            
            --Proceeds
                from sale of mortgage servicing rights, net
            
            
            8,550
            
            
            6,387Stock-based
                compensation expense
            
            
            396
            
            
            188Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            (10,452
            )
            
            1,077Increase
                in trustee receivable
            
            
            (3,428
            )
            
            (17,351
            )Increase
                in accrued interest receivable
            
            
            (2,682
            )
            
            (2,377
            )(Increase)
                decrease in prepaid and other assets
            
            
            (5,994
            )
            
            1,017Increase
                in accrued interest payable
            
            
            2,617
            
            
            3,188Increase
                in accounts payable and other liabilities
            
            
            8,021
            
            
            2,810Net
                cash provided by operating activities
            
            
            11,343
            
            
            306Cash
                flows from investing activities:Origination
                of mortgage loans held for investment, net of repayments
            
            
            (802,152
            )
            
            (625,751
            )Proceeds
                from sale of mortgage loans
            
            
            185,186
            
            
            172,182Purchase
                of equipment
            
            
            (639
            )
            
            (1,059
            )Net
                cash used in investing activities
            
            
            (617,605
            )
            
            (454,628
            )Cash
                flows from financing activities:Proceeds
                from (repayment of) warehouse financing, net
            
            
            121,216
            
            
            (99,666
            )Proceeds
                from financing on mortgage loans held for investment, net
            
            
            486,705
            
            
            556,125Proceeds
                from (repayment of) other borrowings, net
            
            
            301
            
            
            (585
            )Increase
                (decrease) in bank payable
            
            
            378
            
            
            (72
            )Cash
                dividends paid on common stock
            
            
            (1,164
            )
            
            (1,030
            )Excess
                tax benefit related to share-based compensation
            
            
            52
            
            
            435Proceeds
                from exercise of stock options
            
            
            40
            
            
            137Net
                cash provided by financing activities
            
            
            607,528
            
            
            455,344Net
                increase in cash and cash equivalents
            
            
            1,266
            
            
            1,022Cash
                and cash equivalents at beginning of period
            
            
            5,741
            
            
            4,673Cash
                and cash equivalents at end of period
            
            $
            7,007
            
            $
            5,695





**4**






**Three
                  Months Ended March 31,****2007**
              
              **2006**Supplemental
                  Information:Cash
                  paid (received) during the period for:Interest
              
              $
              96,010
              
              $
              63,593Income
                  taxes(1)
              
              $
              (5
              )
              $
              1,736Non
                  cash transactions:Transfer
                  of mortgage loans held for investment to REO, net
              
              $
              13,455
              
              $
              5,442Dividends
                  payable
              
              $
              1,166
              
              $
              1,038




(1)The
      amount shown for cash received for income taxes for the three months ended
      March
      31, 2007 is net of $33,000 of taxes paid during the same
      period.





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
      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 months ended March 31, 2007 are not necessarily
      indicative of the results that should be expected for the entire
      year.





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.





**(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 $6.5 million and $5.1 million of interest-bearing deposits
      with
      select financial institutions at March 31, 2007 and December 31, 2006,
      respectively.





Additionally, cash and cash equivalents as of March 31, 2007 and December 31,
      2006 included restricted cash held for various reserve accounts totaling $1.2
      million and $604,000, respectively.





**(b)
      Mortgage Loans Held for Investment, Net**





Mortgage
      loans held for investment, net represents fixed-rate and adjustable-rate
      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.





**6**


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 Statement of Financial
      Accounting Standards (“SFAS”) No. 140, “ Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities - a replacement of FASB Statement No. 125,” the discount is measured
      using the relative fair values of the mortgage loans and MSRs to allocate the
      carrying value between the two assets. The MSRs
      are generally sold to a third-party servicer. The resulting discount is accreted
      to interest income on a level-yield basis over the estimated life of the related
      loans, on a per securitization basis, using the interest method
      calculation.





Additionally,
      in accordance with SFAS No. 91, “ Accounting
      for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
      and Initial Direct Costs of Leases - an amendment of FASB Statements No. 13,
      60,
      and 65 and a rescission of FASB Statement No. 17,” the
      net
      deferred origination fees or costs associated with our mortgage loans held
      for
      investment are amortized to income on a level-yield basis over the 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.





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. Any 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 sold.





**(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 to
      be
      incurred in the foreseeable future. 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, we estimate losses using a detailed analysis
      of historical loan performance by product type, origination year and
      securitization issuance. We
      stratify the 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.





**7**


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 were such that we were
      required 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 March 31,
      2007, we have a specific reserve of $754,000 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 the 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.





**(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 represent one
      or
      all of the following assets: (1) residual interest (“BIO”) certificates; (2) P
      certificates (prepayment penalty fees); (3) payments from our interest rate
      cap
      providers; and (4) net interest margin (“NIM”) owner trust certificates. Our
      excess cashflow certificates 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 is reduced for cash distributions received, and is
      adjusted for income accretion and subsequent changes in the fair value. Any
      changes in fair value are recorded as a component of “other income” in our
      consolidated statement of operations. For the three months ended March 31,
      2007
      and 2006, we recorded $1.6 million and $3.3 million, respectively, of other
      income due to an increase in the fair value of excess cashflow certificates.
      During the three months ended March 31, 2007, we sold all of our remaining
      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.





**8**


Depreciation
      and amortization are included in “non-interest expense - general and
      administrative” in our consolidated statements of operations, and amounted to
      approximately $945,000 and $791,000 for the three months ended March 31, 2007
      and 2006, respectively. Accumulated depreciation and amortization totaled $16.7
      million and $16.0 million at March 31, 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 values. 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 $34.1
      million and $29.6 million of REO properties as of March 31, 2007 and December
      31, 2006, respectively. Included in “general
      and administrative expenses” on our statements of operations are provisions for the decrease in the fair value of the REO properties of $2.2
      million and $131,000 recognized during the three months ended March 31, 2007
      and
      2006, respectively. During
      the three months ended March 31, 2007 and the year ended December 31, 2006,
      we
      sold $6.0 million and $8.8 million, respectively, of REO
      properties.





**(h)
      Warehouse Financing**





Warehouse
      financing represents the outstanding balance of our borrowings collateralized
      by
      mortgage loans held prior to securitization. Generally, warehouse financing
      facilities are used as interim, short-term financing which bears 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 recognized as a component of
“non-interest expense - general and administrative” over the term of the
      warehouse agreement, 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 purchase and sale
      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 10 - “Derivative Instruments” for
      further information regarding hedging securitization financing).





**9**


Our securitizations 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 each
      securitization.





Under SFAS
      No.
      140, the securitizations 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 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)
      securitization accrued bond interest (income received from the securitization
      trust for fixed-rate asset-backed securities at the time of securitization
      settlement); (d) excess cashflow certificate income; (e) interest earned on
      bank
      accounts; (f) prepayment penalty fees; and (g) amortized discounts, deferred
      costs and fees recognized on a level-yield basis.





Interest
      on mortgage loans is recognized as revenue when earned according to the
      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 principal and interest
      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; and (c)
      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)
      Gain on Sale of Mortgage Loans**





Gains
      and
      losses on the sale of mortgage loans are recognized at settlement date and
      are
      determined by the difference between the selling price and the carrying value
      of
      the loans sold. These transactions are treated as sales in accordance with
      SFAS
      No. 140.  Any
      unamortized origination fees or costs at the date of sale are reflected as
      an
      adjustment to gain on sale.





We
      generally sell loans on a servicing-released basis and as such, the risk of
      loss
      or default by the borrower has generally been assumed by the purchaser. However,
      we are generally required to make certain representations and warranties 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, we may be required to repurchase loans or indemnify these
      purchasers for any losses from borrower defaults.





**10**


During
      the three months ended March 31, 2007 and 2006, we sold $177.1 million and
      $164.7 million, respectively, of whole loans on a non-recourse basis. 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. We also establish a secondary marketing 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 reserves are
      recorded as liabilities on our consolidated balance sheets when the mortgage
      loans are sold, based on our historical experience. The provisions recorded
      for
      the premium recapture and secondary marketing 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 $694,000 and $958,000 at March 31, 2007 and December 31, 2006,
      respectively. The secondary marketing reserve totaled $454,000 and $512,000
      at
      March 31, 2007 and December 31, 2006, respectively.





**(m)
      Mortgage Servicing Rights Sales**





We
      generally sell the MSRs to a third-party as of the securitization date. Upon
      the
      sale, we allocate a portion of the accounting basis of the mortgage loans held
      for investment to the MSRs based upon the relative fair values of the mortgage
      loans and the MSRs, which results in a discount to the mortgage loans held
      for
      investment. That discount is accreted as an adjustment to yield on the mortgage
      loans over the estimated life of the related loans, on a pool-by-pool basis,
      using the interest rate method. For the three months ended March 31, 2007 and
      2006, we received $8.5 million and $6.4 million, respectively, from a
      third-party servicer for the right to service the mortgage loans collateralizing
      our securitizations that were structured to be accounted for as secured
      financings.





**(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.” Effective
      January 1, 2006, we adopted 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. The
      consolidated financial statements for periods prior to adoption are not restated
      for the effects of adopting SFAS No. 123(R). Additionally, under this method,
      compensation cost recognized for the three months ended March 31, 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).





Prior
      to
      January 1, 2006, employee stock options were accounted for under the intrinsic
      value method in accordance with Accounting Principles Board (“APB”) Opinion No.
      25, “Accounting for Stock Issued to Employees,” and its related interpretations,
      including FASB Interpretation (“FIN”) No. 44, “Accounting for Certain
      Transactions Involving Stock Compensation, an Interpretation of APB Opinion
      No.
      25,” as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” No
      stock option compensation cost was recognized in our consolidated statements
      of
      operations prior to January 1, 2006, as all options granted had an exercise
      price equal to the market value of the underlying common stock on the grant
      date. Additionally, the adoption of SFAS No. 123(R) did not have a material
      impact on our consolidated statements of operations related to restricted stock
      awards. Prior to the adoption of SFAS No. 123(R), compensation expense was
      being
      recognized over the restricted stock award’s vesting period, which is in
      accordance with how such expense is being recognized under 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.


**11**


**(o)
      Derivative Instruments**





We
      regularly issue asset-backed securities in our securitizations that are
      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 certificates are issued. Our strategy is to use derivative
      instruments, in the form of interest rate swap contracts, in an effort to
      effectively lock in a pre-determined interest rate on designated portions of
      our
      prospective future securitization financings. We also use corridors
      (corresponding purchase and sale 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 within the
      securitization by maintaining minimum margins. Both the interest rate swaps
      and
      corridors are derivative instruments that trade in liquid markets, and neither
      is used by us for speculative purposes.





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.





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. 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 different counterparties other than the reporting
      entity.





If
      and
      when hedge accounting is discontinued, typically when it is determined that
      the
      hedge no longer qualifies for hedge accounting, the derivative will continue
      to
      be recorded on the balance sheet at its fair value, with gains or losses being
      recorded in earnings.





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
      corridors goes above 125% or falls below 80%) 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. An assessment analysis is
      then
      prepared by management to determine the prospective treatment of the hedges
      that
      failed the retrospective test to determine if any portion of the derivative
      may
      still qualify for hedge accounting treatment. If the analysis indicates future
      effectiveness for a portion of the hedge, the original hedge will effectively
      be
      allocated into two pieces, a trading security (ineffective portion) and “new
      hedge relationship” (effective portion).





**12**


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.





**(q)
      Income Taxes**





On
      January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”)
      Interpretation (“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 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 statements of operations. During the three months ended March 31, 2007,
      we
      recorded approximately $65,000 in interest expense related to current audits.
      We
      have accrued interest and penalties totaling approximately $1.5 million at
      March
      31, 2007. During the three months ended March 31, 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 2003
      tax
      return year and forward. Our various state income tax returns are generally
      open
      from the 2003 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 Option for Financial Assets and Financial Liabilities* .
      In
      February 2007, ** FASB
      issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities - Including an amendment of FASB Statement No. 115,” which permits
      entities to choose 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.





**13**


*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**





We
      have
      three stock benefit plans outstanding at March 31, 2007, of which two may still
      issue awards. The 2005 Stock Incentive Plan (“2005 Plan” or “SIP”) provides for
      the granting of stock options, restricted stock, restricted stock units, stock
      appreciation rights and dividend equivalent rights (collectively referred to
      as
“awards”). A total of 1,000,000 shares of our common stock are reserved for
      issuance under the 2005 Plan, subject to adjustment only in the event of a
      stock
      split, stock or other extraordinary dividend, or other similar change in our
      common stock or capital structure. Incentive stock options may be granted only
      to employees. Awards other than incentive stock options may be granted to
      employees, directors and consultants. The term of any award granted under the
      2005 Plan may not exceed 10 years (or five years in the case of an incentive
      stock option granted to any participant who owns stock representing more than
      10% of the combined voting power of our company or any parent or subsidiary
      of
      ours), excluding any period for which the participant has elected to defer
      the
      receipt of the shares or cash issuable pursuant to the award.


In addition to the 2005 Plan, we have one other outstanding stock benefit
        plan,
        the 2001 Stock Option Plan (the "2001 Plan"). The 2001 Plan authorized the
        reserve of 1,500,000 shares of unissued common stock for issuance. We also
        have
        options outstanding from our 1996 Stock Option Plan (the "1996 Plan" and
        collectively with the 2001 Plan, the "Option Plans").  Substantially all of
        the options issued under the Option Plans vest over a five-year period at
        20%
        per year and expire seven years from the grant date. Upon
        the
        exercise of a stock option, we will issue new shares of our common stock
        from
        authorized but unissued shares.




*Stock Options* - In
        accordance with SFAS No. 123(R), our income before income tax expense and
        net
        income for the three months ended March 31, 2007 included stock option
        compensation cost of $114,000 and $70,000, respectively, which had no impact
        on
        basic and diluted earnings per share for the first quarter of 2007. Our income
        before income tax expense and net income for the three months ended March
        31,
        2006 included stock option compensation cost of $106,000 and $65,000,
        respectively, which had no impact on basic and diluted earnings per share
        for
        the first quarter of 2006.





No
      stock
      options were granted during the three months ended March 31, 2007 or 2006.
      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.





**14**


The
        following table summarizes the option activity regarding the Option Plans
        for
        the three months ended March 31, 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
            
            
            19,650
            
            
            2.08Options
                expired
            
            
            --
            
            
            --Options
                forfeited
            
            
            7,000
            
            
            8.50March
                31, 2007 balance
            
            
            1,755,100
            
            $
            3.22
            
            
            2.6
                years
            
            $
            9,004Options
                fully vested and exercisable
            
            
            1,419,000
            
            $
            2.35
            
            
            2.1
                years
            
            $
            8,439





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 March 31,
      2007 and 2006 was $144,000 and $1.1 million, respectively. As
      of
      March 31, 2007 and 2006, there was $698,000 and $1.0 million, respectively,
      of
      total unrecognized compensation cost, net of estimated forfeitures, related
      to
      non-vested options under the Option Plans. The unrecognized compensation cost
      at
      March 31, 2007 is expected to be recognized over a weighted-average period
      of
      2.4 years.





Cash
      received from option exercises under the Option Plans for the three months
      ended
      March 31, 2007 and 2006, was $40,000 and $137,000, respectively. The actual
      tax
      benefit for the tax deductions from option exercises totaled $52,000 and
      $432,000, respectively, for the three months ended March 31, 2007 and 2006.
      The
      fair value of the shares that vested during the three months ended March 31,
      2007 and 2006, totaled $230,000 and $231,000, respectively.





*Restricted
      Stock* - Our
      income before income tax expense and net income for the three months ended
      March
      31, 2007, included a restricted stock award compensation cost (recorded as
      a
      component of non-interest expense - payroll and related costs) of $282,000
      and
      $172,000, respectively, which reduced by $0.01 our basic and diluted earnings
      per share for the first quarter of 2007. Our income before income tax expense
      and net income for the three months ended March 31, 2006, included restricted
      stock award compensation cost of $82,000 and $50,000, respectively, which had
      no
      impact on basic earnings per share and diluted earnings per share for the first
      quarter of 2006. The actual tax benefit for the tax deductions from vested
      restricted stock awards totaled $60,000 for the three months ended March 31,
      2007. We had no tax benefit for the three months ended March 31, 2006, as we
      had
      no restricted stock awards vesting during that period.





**15**


The
        status of our non-vested restricted stock awards as of March 31, 2007, and
        changes during the three months ended March 31, 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
            
            
            72,500
            
            
            8.53Vested
            
            
            18,125
            
            
            8.53Forfeited
            
            
            --
            
            
            --Non-vested
                restricted stock awards at March 31, 2007
            
            
            258,150
            
            $
            8.15




As
      of
      March 31, 2007 and 2006, there was $1.6 million and $1.0 million, respectively,
      of total unrecognized compensation costs related to non-vested restricted stock
      awards granted under the 2005 Plan. The unrecognized compensation cost at March
      31, 2007 is expected to be recognized over a weighted-average period of 2.4
      years.





**(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 (denoted as mortgage loans held for
      investment - securitized) or are pending delivery into future securitizations
      (denoted 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 is comprised of the mortgage loans
      collateralizing our outstanding financings on mortgage loans held for
      investment. During the three months ended March 31, 2007 and 2006, we closed
      securitization transactions totaling $916.3 million and $848.3 million,
      respectively, which were structured to be accounted for as secured financings
      and were collateralized by $950.0 million and $875.0 million, respectively,
      of
      mortgage loans held for investment - securitized. Mortgage loans held for
      investment - securitized had a weighted-average interest rate of 8.25% and
      8.19%
      per annum at March 31, 2007 and December 31, 2006, respectively.





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 March 31, 2007 and
      December 31, 2006, was approximately $464.4 million and $335.9 million,
      respectively, of these mortgages 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 8.73%
      per annum at March 31, 2007 and December 31, 2006.





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





*(Dollars
                in thousands)*
            
            **At
                March 31,**
              **2007**
            
            **At
                December 31, 2006**Mortgage
                loans held for investment - securitized(1)
            
            $
            6,565,995
            
            $
            6,051,996Mortgage
                loans held for investment - pre-securitization(2)
            
            
            528,889
            
            
            417,818Discounts
                (MSR related)
            
            
            (41,345
            )
            
            (36,933
            )Net
                deferred origination fees
            
            
            (19,884
            )
            
            (19,194
            )Allowance
                for loan losses
            
            
            (60,868
            )
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            $
            6,972,787
            
            $
            6,358,377





*(1)*  *Included
      in the* *outstanding balance of the mortgage loans held for investment - securitized
      at
      March 31, 2007 and December 31, 2006 were $715,000 and $1.1 million,
      respectively, of impaired loans.*





*(2)*  *Included
      in the* *outstanding balance of the mortgage loans held for investment - pre-securitized
      at March 31, 2007 and December 31, 2006 were $2.4 million and $1.5 million,
      respectively, of impaired loans.*





**16**


For
      the
      three months ended March 31, 2007 and 2006, we recorded interest income related
      to our mortgage loans held for investment - securitized of $123.0 million and
      $89.1 million, respectively. For the three months ended March 31, 2007 and
      2006,
      we recorded interest income related to our mortgage loans held for investment
      -
      pre-securitization of $14.1 million and $9.3 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 months ended
      March 31, 2007 and 2006:





**For
                the Three Months Ended March 31,***(Dollars
                in thousands)*
            
            **2007**
            
            **2006**Beginning
                balance
            
            $
            55,310
            
            $
            36,832Provision(1)
            
            
            10,645
            
            
            6,404Charge-offs
            
            
            (5,087
            )
            
            (1,325
            )Ending
                balance
            
            $
            60,868
            
            $
            41,911





*(1)*  *The
      provision for loan losses for the three months ended March 31, 2007 and 2006
      includes a recovery of specific provision of $259,000 and a specific provision
      of $11,000, respectively,* *related
      to probable losses attributable to impaired loans.*





The
      allowance for loan losses at March 31, 2007 and December 31, 2006 contains
      $754,000 and $1.0 million, respectively, of specific reserves related to
      impaired loans. Our recorded investment in impaired loans at March 31, 2007
      and
      December 31, 2006 was $3.1 million and $2.5 million, respectively. A portion
      of
      the specific reserve relates to the significant effect Hurricanes Katrina and
      Rita had on a select portion of our loan portfolio. 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 specific reserves related to the
      mortgage loans in the affected areas. Additionally, the average recorded
      investment in impaired loans for the three months ended March 31, 2007 and
      2006
      was $3.1 million and $3.6 million, respectively. We recorded $27,000 and $65,000
      of interest income, based upon the cash received on the loans classified as
      impaired during the three months ended March 31, 2007 and 2006,
      respectively.





As
      of
      March 31, 2007, December 31, 2006 and March 31, 2006, we had $406.9 million
      (including $780,000 of impaired loans that are less than 90 days delinquent
      but
      on non-accrual status), $324.1 million and $151.7 million, respectively, of
      mortgage loans held for investment that were 90 days or more delinquent under
      their payment terms, all of which were on non-accrual status. If the non-accrual
      mortgage loans held for investment at March 31, 2007 and 2006 performed in
      accordance with their contractual loan terms, we would have recognized an
      additional $5.7 million and $2.2 million of interest income during the three
      months ended March 31, 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.


**17**


**(7)**  **Excess
      Cashflow Certificates**





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





*(Dollars
                in thousands)*
            
            **For
                the Three**
              **Months
                Ended**
              **March
                31, 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 regularly analyze and review our assumptions
      to determine that the actual rate of return (interest income) on our excess
      cashflow certificates is within our expected rate of return. The expected rate
      of return is recorded as a component of interest income. Any return that either
      is greater than or less than the expected rate of return is reflected as a
      fair
      value adjustment and is recorded as a component of “other income” in the
      consolidated statements of operations. For the three months ended March 31,
      2007
      and 2006, we recorded interest income related to our excess cashflow
      certificates of $17,000 and $243,000, respectively. For the three months ended
      March 31, 2007 and 2006, we recorded a fair value gain in other income related
      to our excess cashflow certificates of $1.6 million and $3.3 million,
      respectively. Additionally, during the three months ended March 31, 2007 we
      sold
      all of our remaining excess cashflow certificates at fair value for $1.1
      million.





**(8)**  **Warehouse
      Financing**





Our
      warehouse credit facilities are collateralized by specific mortgage loans held
      for investment - pre-securitization at March 31, 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. 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.





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


*(Dollars
                  in thousands)*
              
              
              
              
              
              **Balance
                  Outstanding****Warehouse
                  Credit Facility**
              
              **Facility
                  Amount**(1)
              
              **Interest
                  Rate**
              
              **At**
                **March
                  31, 2007**
              
              **At**
                **December
                  31, 2006**
              
              **Expiration
                  Date**Deutsche
                  Bank
              
              $                        
                   350,000
              
              Margin
                  over LIBOR
              
              $                           
                   214,173
              
              $                                         
                   --
              
              October
                  2007RBS
                  Greenwich Capital
              
              350,000
              
              Margin
                  over LIBOR
              
              118,849
              
              24,570
              
              November
                  2007Citigroup(2)
              
              350,000
              
              Margin
                  over LIBOR
              
              75,510
              
              234,578
              
              May
                  2007Bank
                  of America
              
              350,000
              
              Margin
                  over LIBOR
              
              48,549
              
              76,717
              
              August
                  2007JPMorgan
                  Chase(2)
              
              350,000
              
              Margin
                  over LIBOR
              
              --
              
              --
              
              May
                  2007Total
              
              $                      
                  1,750,000
              
              
              
              $                           
                   457,081
              
              $                               
                   335,865





(1)The
      warehouse facility amount shown is as of March 31, 2007, and was the same amount
      as of December 31, 2006.  The committed portion of the warehouse facility
      amount totaled approximately $1.1 billion at March 31, 2007 and December 31,
      2006.




(2)In
      May
      2007, the warehouse facilities with Citigroup and JPMorgan Chase were extended
      to May 2008.





**18**


As
      securitization transactions are completed, a substantial portion of the proceeds
      from the long-term debt issued in the securitization is 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 than the $457.1 million we had outstanding at March 31, 2007,
      as
      our mortgage production and securitization programs continue.





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 71 basis points to an average of 5.32%
      for
      the three months ended March 31, 2007, compared to an average of 4.61% for
      the
      three months ended March 31, 2006. Partially offsetting the increase in the
      benchmark rate was a decrease in the average margin over the benchmark index
      charged by our warehouse creditors during the same period. For the three months
      ended March 31, 2007 and 2006, we recorded interest expense related to our
      warehouse financing of $12.0 million and $7.9 million,
      respectively.





The
      terms
      of our warehouse agreements require us to comply with various operating and
      financial covenants, which are customary for agreements of this type. The
      continued availability of funds provided to us under these agreements is subject
      to, among other conditions, our continued compliance with these covenants.
      We
      believe that we are in compliance with such covenants as of March 31,
      2007.





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





For
      the
      13 securitizations completed since the beginning of 2004, 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. Accordingly, the securitization loans are recorded
      as
      an asset on our consolidated balance sheet under “mortgage loans held for
      investment, net” and the corresponding securitization debt is recorded as a
      liability under “financing on mortgage loans held for investment, net.” Since
      these securitizations were structured as financings, we record interest income
      from the securitized loans and interest expense from the asset-backed securities
      issued in connection with each securitization over the life of the
      securitization. Deferred securitization debt issuance costs are amortized on
      a
      level-yield basis over the estimated life of the asset-backed securities. Any
      discounts on the financing are amortized on a level-yield basis over the
      estimated life of the debt issued using the interest method.





We
      primarily finance our mortgage loans through the securitization market, issuing
      asset-backed securities. We expect to continue to build our loan portfolio
      and
      fund our mortgage loans using asset-backed securities issued in the
      securitization market. We believe that issuing asset-backed securities provides
      us a low cost method of financing our mortgage loan portfolio. In addition,
      it
      allows us to reduce our interest rate risk on our fixed-rate loans by
      securitizing them. Our ability to issue asset-backed securities depends on
      the
      overall performance of our assets, as well as the continued general demand
      for
      securities backed by non-conforming mortgage loans.





At
      March
      31, 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 five basis points to 5.65% at March 31, 2007 from
      5.60% at December 31, 2006.


**19**


The
      following table summarizes the expected maturities on our secured financings
      at
      March 31, 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)
            
            $
            6,506,954
            
            $
            2,112,100
            
            $
            2,279,170
            
            $
            973,710
            
            $
            1,141,974





*(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 March 31, 2007 and 2006, we recorded interest expense related
      to our securitization debt of $88.4 million and $59.1 million, respectively.
      Included in financing on mortgage loans held for investment, net at March 31,
      2007 and December 31, 2006, are $11.2 million and $6.3 million, respectively,
      of
      unamortized discounts.





**(10)**  **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 our interest payments on securitization variable-rate debt,
      while we utilize interest rate swaps to hedge uncertain cash flows associated
      with future securitization financing. At March 31, 2007 and December 31, 2006,
      the fair value of our corridors totaled $1.2 million and $2.5 million,
      respectively, and the fair value of our interest rate swaps (including
      amortizing notional balance interest rate swaps) totaled losses of $729,000
      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
      March 31, 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 total, net of tax, losses of $467,000,
      $444,000 and $3.0 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 total, 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 $80,000 and a gain of $60,000 for the three months
      ended March 31, 2007 and 2006, respectively.





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 March 31, 2007 and December 31, 2006, we classified $206,000
      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 March 31, 2007
      and 2006, a loss of $16,000 and a gain of $215,000, respectively, was recorded
      to earnings on the changes in fair value of the hedges (specifically corridors)
      held as trading securities.


**20**


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
      March 31, 2007:





*(Dollars
                in thousands)*
            
            **Total**
            
            **One****Year**
            
            **Two
                Years**
            
            **Three
                Years**
            
            **Four
                Years**
            
            **Five
                Years & Thereafter**Caps
                bought - notional
            
            $
            676,627
            
            $
            423,062
            
            $
            115,219
            
            $
            34,554
            
            $
            26,545
            
            $
            77,247Weighted-averagestrike
                rate
            
            
            7.14%
            
            
            6.84%
            
            
            7.47%
            
            
            7.47%
            
            
            7.43%
            
            
            7.39%Caps
                sold - notional
            
            $
            676,627
            
            $
            423,062
            
            $
            115,219
            
            $
            34,554
            
            $
            26,545
            
            $
            77,247Weighted-averagestrike
                rate
            
            
            9.26%
            
            
            9.24%
            
            
            9.30%
            
            
            9.27%
            
            
            9.28%
            
            
            9.31%Amortizing
                notional balance interest rate swaps:Notional
            
            $
            307,283
            
            $
            130,306
            
            $
            107,128
            
            $
            69,849
            
            $
            --
            
            $
            --Weighted-average
                rate
            
            
            5.11%
            
            
            5.12%
            
            
            5.09%
            
            
            5.02%
            
            
            --
            
            
            --





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.





**(11)
      Accumulated Other Comprehensive Loss**





In
      accordance with SFAS No. 130, “Reporting Comprehensive Income,” the components
      of OCI for the three months ended March 31, 2007 and 2006 are as
      follows:




*(Dollars
                in thousands)*
            
            **Before
                Tax**
              **Amount**
            
            **Tax
                Benefit (Expense)**
            
            **After
                Tax**
              **Amount**For
                the three months ended March 31, 2007:Net
                unrealized holding losses on derivatives arising during the
                period
            
            $
            (3,498
            )
            $
            1,365
            
            $
            (2,133
            )Reclassification
                adjustment for losses on derivatives included in net income
            
            
            (408
            )
            
            159
            
            
            (249
            )Other
                comprehensive loss
            
            $
            (3,906
            )
            $
            1,524
            
            $
            (2,382
            )For
                the three months ended March 31, 2006:Net
                unrealized holding gains on derivatives arising during the
                period
            
            $
            5,092
            
            $
            (1,986
            )
            $
            3,106Reclassification
                adjustment for gain on derivatives included in net income
            
            
            1,580
            
            
            (616
            )
            
            964Other
                comprehensive loss
            
            $
            6,672
            
            $
            (2,602
            )
            $
            4,070





**21**


**(12)**  **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 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.





**For
                the Three Months**
              **Ended
                March 31,***(Dollars
                in thousands, except share and per share data)*
            
            **2007**
            
            **2006**Net
                income
            
            $
            4,887
            
            $
            6,586Less
                preferred stock dividends
            
            
            --
            
            
            --Net
                income available to common stockholders
            
            $
            4,887
            
            $
            6,586Basic
                - weighted-average shares
            
            
            23,292,385
            
            
            20,497,408Basic
                EPS
            
            $
            0.21
            
            $
            0.32Basic
                - weighted-average shares
            
            
            23,292,385
            
            
            20,497,408Incremental
                shares-options(1)(2)
            
            
            784,574
            
            
            862,768Diluted
                - weighted-average shares
            
            
            24,076,959
            
            
            21,360,176Diluted
                EPS(1)(2)
            
            $
            0.20
            
            $
            0.31




*(1)*  *For
      the three months ended March 31, 2007, the weighted average of approximately
      2.0
      million in-the-money employee stock options and approximately 258,000 restricted
      stock awards are included in the calculation of diluted EPS, while the weighted
      average of approximately 20,000 of out-of-the-money employee stock options
      have
      been excluded* *since
      their effect is anti-dilutive.*





*(2)*  *For
      the three months ended March 31, 2006, the weighted average of approximately
      1.9
      million in-the-money employee stock options and approximately 157,000 restricted
      stock awards are included in the calculation of diluted EPS, while the weighted
      average of approximately 70,000 of out-of-the-money employee stock options
      have
      been excluded* *since
      their effect is anti-dilutive* *.*





**(13)**  **Subsequent
      Events**





We
      paid a
      cash dividend of $0.05 per share of common stock on April 6, 2007 to
      stockholders of record as of the close of business on March 29,
      2007.


During the later part of April and the beginning of May 2007, all five of
        our
        warehouse credit facility providers increased each of their credit facilities
        with us by $150.0 million to $500.0 million each. We now have a total warehouse
        credit facility capacity of $2.5 billion in the aggregate ($1.5 billion of
        which
        is committed), which is a $750.0 million increase over the amount that existed
        at March 31, 2007. No material terms or features were changed from those
        that
        existed at March 31, 2007, except that two of the facilities (Citigroup and
        JPMorgan Chase) that were set to expire in May 2007 were extended to May
        2008.


**22**


**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.*





**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
      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. Since the first quarter
      of
      2004, we have structured 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. Prior
      to
      2004, we structured our securitizations to be accounted for as sales, which
      required us to record cash and non-cash revenues as gain-on-sale at the time
      the
      securitizations were completed. When we sell loans on a whole-loan basis, we
      record the premiums received upon sale as revenue, net of any premium recapture
      or secondary marketing (indemnification) reserves. (See
      “Origination of Mortgage Loans - Securitizations and Whole-Loan
      Sales”).





**Origination
      of Mortgage Loans**





We
      originate mortgage loans through two distribution channels, wholesale and
      retail. The majority of the mortgage loans we originate occur in 34 states.
      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 offices in Phoenix, Arizona;
      Jacksonville, Florida; and Dallas, Texas. We also purchase closed loans on
      a
      limited basis from other lenders.


**23**


For
      the
      three months ended March 31, 2007 and 2006, we originated the following loans
      by
      origination channel and by loan type:


**For
                    the Three Months****Ended
                    March 31,***(Dollars
                    in thousands)*
                
                **2007**
                
                **2006**Originations
                    by channel:Wholesale
                
                $
                661,771
                
                $
                518,031Retail
                
                
                579,003
                
                
                426,693Total
                    originations
                
                $
                1,240,774
                
                $
                944,724Loan
                    type:Fixed
                    rate
                
                
                94.3%
                
                
                83.6%Adjustable-rate
                
                
                5.7
                
                
                16.4Total
                
                
                100.0%
                
                
                100.0%





For
      the
      three months ended March 31, 2007, we originated $1.2 billion of loans, an
      increase of 31.3% over the $944.7 million of loans originated during the three
      months ended March 31, 2006. Loan originations for the three months ended March
      31, 2007 were comprised of approximately $661.8 million of wholesale loans,
      representing 53.3% of total loan production, and $579.0 million of retail loans,
      representing 46.7% of total loan production. This compares to originations
      for
      the three months ended March 31, 2006 of $518.0 million of wholesale loans,
      representing 54.8% of total loan production, and $426.7 million of retail loans,
      representing 45.2% of total loan production.





**Securitizations
      and Whole-Loan Sales.**  As
      a
      fundamental part of our present business and financing strategy, we securitize
      most of the mortgage loans we originate. We also sell a portion of our loans
      as
      whole loans. We select the outlet (securitization or whole-loan sale) depending
      on market conditions, relative profitability and cash flows. During
      the three months ended March 31, 2007 and 2006, whole-loan sales comprised
      approximately 15.7%
      and
      15.8% ,
      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 months ended March
      31, 2007 and 2006:





**For
                the Three Months Ended March 31,***(Dollars
                in thousands)*
            
            **2007**
            
            **2006**Loan
                securitizations - portfolio based
            
            $
            950,000
            
            $
            875,000Whole-loan
                sales
            
            
            177,082
            
            
            164,711Total
                loan securitizations and whole-loan sales
            
            $
            1,127,082
            
            $
            1,039,711





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





**Securitizations.**  In
      a
      securitization, we pool together loans, typically each quarter, and convey
      these
      loans to a newly formed securitization trust. These trusts are established
      for
      the limited purpose of receiving our mortgage loans and are bankruptcy remote
      -
      meaning that purchasers of asset-backed securities may rely only on the cash
      flows generated from the assets held by the securitization trust for payment
      and
      not upon us for payment; likewise, the assets held by the securitization trust
      are not available to our general creditors, although 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.





**24**


Each
      of
      our securitizations contains an overcollateralization (“O/C”) provision, which
      is a credit enhancement that is designed to protect 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 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, as defined by the rating agencies and/or the bond insurer
      insuring the securitization.





The
      securitization we completed during the three months ended March 31, 2007
      required an O/C of 3.6% 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.





Over
      the
      past several years, we have issued 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 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, 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 in the case of the NIM notes - the cash flows generated by the
      excess cashflow 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 18 to 24 months from the date the NIM note(s) or the Class N
      Notes
      were issued. We ultimately will hold the excess cashflow or owner trust
      certificates after the holder of the NIM note(s) or the Class N Notes has been
      paid in full.





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. This helps offset a substantial portion
      of
      our cost to originate the loans included in the transaction. We intend to
      continue to issue NIM notes or Class N Notes 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 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.





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 were structured and
      accounted for as secured financings, as they do not meet the 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 .
      We
      refer to the recordation of these transactions as
      “portfolio accounting.” Securitization
      transactions consummated prior to 2004 met the QSPE criteria under SFAS No.
      140
      and were accounted for, recognized and recorded as sales.





**25**


With
      portfolio accounting, (1) the mortgage loans we originate remain on our
      consolidated balance sheet 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
      asset-backed security series completed since the first quarter of 2004, at
      March
      31, 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
              
              $
              183,367
              
              $
              175,6672004-2
              
              
              June
                  29, 2004
              
              
              219,077
              
              
              202,8932004-3
              
              
              September
                  29, 2004
              
              
              257,012
              
              
              240,3722004-4
              
              
              December
                  29, 2004
              
              
              291,982
              
              
              275,0172005-1
              
              
              March
                  31, 2005
              
              
              401,832
              
              
              379,4942005-2
              
              
              June
                  29, 2005
              
              
              458,739
              
              
              436,8192005-3
              
              
              September
                  29, 2005
              
              
              543,231
              
              
              519,8932005-4
              
              
              December
                  30, 2005
              
              
              614,719
              
              
              593,4812006-1
              
              
              March
                  30, 2006
              
              
              669,612
              
              
              654,9412006-2
              
              
              June
                  29, 2006
              
              
              717,416
              
              
              709,8592006-3
              
              
              September
                  29, 2006
              
              
              769,435
              
              
              768,4952006-4
              
              
              December
                  29, 2006
              
              
              611,155
              
              
              614,4092007-1
              
              
              March
                  29, 2007
              
              
              950,000
              
              
              946,824Total
              
              
              
              
              $
              6,687,577
              
              $
              6,518,164





*(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 $11.2 million at March 31,
      2007.*





**Securitizations
      Structured as a Sale.** ** Prior
      to
      2004, we structured our securitizations to be accounted for as sales under
      SFAS No. 140 ,
      which
      is known as “gain-on-sale accounting.” With gain-on-sale accounting, we recorded
      an upfront gain at the time of securitization and recorded the fair value of
      the
      excess cashflow certificates on our balance sheet. The excess cashflow
      certificates are trading securities and are carried at their fair value. 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 a certificate evidencing our
      ownership in the distributions from the trust (an excess cashflow
      certificate).





We
      no
      longer hold any excess cashflow certificates at March 31, 2007. The fair value
      of the excess cashflow certificates held at December 31, 2006 totaled $1.2
      million.





**26**


**Securitizations
      Structured as Real Estate Mortgage Investment Conduits and Owner-Trusts for
      Income Tax Purposes.** Prior to
      2005, we
      typically structured our securitizations as Real Estate Mortgage Investment
      Conduits (“REMICs”), which for tax purposes required us to recognize a gain at
      the time of the securitization. Beginning in 2005, we began structuring our
      securitizations as owner-trust transactions and issued our securitizations
      using
      our Real Estate Investment Trust (“REIT”) subsidiary. For federal tax purposes,
      owner-trust transactions are accounted for as borrowing transactions
      (debt-for-tax treatment), 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 over time. Although we intend to continue
      to
      structure most of our securitizations as owner-trust transactions, we may engage
      in REMIC securitizations 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, which could have negative tax
      consequences to us and possibly negatively impact our stock price.





**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. We have found that, from time-to-time, we can receive better economic
      results by selling some of our mortgage loans on a whole-loan basis, without
      retaining servicing rights, generally in private transactions to financial
      institutions or consumer finance companies. We recognize a gain or loss when
      we
      sell loans on a whole-loan basis equal to the difference between the cash
      proceeds received for the loans and our investment in the loans, including
      any
      unamortized loan origination fees and costs. We generally sell these loans
      without recourse, except that we provide standard representations and warranties
      to the purchasers of such loans. During the three months ended March 31, 2007
      and 2006, we sold whole-loans without recourse to third-party purchasers (with
      the exception of a premium recapture and secondary marketing reserves described
      below) and on a servicing-released basis of $177.1 million and $164.7 million,
      respectively. The average gross premium we received for the whole loans sold
      during the three months ended March 31, 2007 was 3.37%, compared to 3.44% for
      the three months ended March 31, 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 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 March 31, 2007 and 2006, we recorded a premium recapture reserve
      provision of $88,000 and $235,000, respectively, for the refunding of premiums
      to whole-loan sale investors. The premium recapture reserve is recorded as
      a
      liability on the 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 of future interest rate changes may have on early repayments.
      The
      premium recapture reserve totaled $694,000 and $958,000 at March 31, 2007 and
      December 31, 2006, respectively.





We
      also
      maintain a secondary market reserve related to our estimated exposure to losses
      arising from loan repurchases, or net settlements, related to representation
      and
      warranty claims by investors. 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
      March 31, 2007 and 2006 we recorded a secondary market reserve provision of
      $177,000 and $175,000, respectively, for losses that arise in connection with
      loans that we may be required to repurchase from whole-loan sale investors.
      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 reserve totaled $454,000 and $512,000 at March
      31, 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.




**27**


**Accounting
      for Hedging Activities.** We
      regularly issue securitization asset-backed securities, backed by fixed- and
      adjustable-rate mortgage loans. As a result of this activity, we are exposed
      to
      interest rate risk beginning when our mortgage loans close and are recorded
      as
      assets until permanent financing is arranged, such as when the asset-backed
      securities are issued. Our strategy is to use interest rate swap contracts
      in an
      effort to lock in a pre-determined base interest rate on designated portions
      of
      our prospective future securitization financing. At times, we also use corridors
      ( corresponding
      purchase and sale 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 within the securitization to maintain minimum margins, with
      the
      possibility of allowing us to increase margins in lower than anticipated
      interest rate environments. Both the interest rate swaps and corridors are
      derivative instruments that trade in liquid markets, and we do not use either
      of
      them for speculative purposes.





In accordance with SFAS No. 133, “Accounting for Derivative Instruments and
      Hedging Activities,” we record all of our derivatives on our consolidated
      balance sheet at fair value. For derivative financial instruments not designated
      as hedging instruments, gains or losses resulting from a change in fair value
      are recognized in current period earnings. When derivatives are used as hedges,
      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 different counterparties other than
                the
                reporting entity.





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 cash flow
      hedge accounting. An assessment analysis is then prepared by management to
      determine the subsequent treatment of the hedges that failed the retrospective
      test to determine if any portion of the hedge may still qualify for cash flow
      hedge accounting treatment. If the analysis indicates future effectiveness
      for a
      portion of the hedge, the original hedge will effectively be allocated into
      two
      pieces, a trading security (ineffective portion) and “new hedge relationship”
(effective portion).





**28**


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 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.”





**Accounting
      for Income Taxes.** Significant management judgment is required in developing our provision for
      income taxes, including the determination of deferred tax assets and liabilities
      and any valuation allowances that might be required against the deferred tax
      asset. Management
      needs to consider the relative impact of negative and positive evidence related
      to the ability to recognize a deferred tax asset. This evaluation takes into
      consideration our recent earnings history, current tax position and estimates
      of
      taxable income in the near term. If actual results differ from these estimates,
      we may be required to record a valuation allowance on our deferred tax assets,
      which could negatively impact our consolidated financial position and results
      from operations. We recognize all of our deferred tax assets if we believe,
      on a
      more likely than not basis, that all of the benefits of the deferred tax assets
      will be realized. Management believes that, based upon on the 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 March 31, 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 in  an
      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 based on our estimate of losses to
      be
      incurred in the foreseeable future. Provisions for loan losses are made for
      loans to the extent that 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 losses on mortgage loans
      held
      for investment, we estimate losses using a detailed analysis of historical
      mortgage loan performance data. This data is analyzed for loss performance
      and
      prepayment performance by product type, origination year and securitization
      issuance. The results of that analysis are then applied to the current long-term
      mortgage portfolio held for investment, 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.





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 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.





**29**


**Amortization
      of Deferred Loan Origination Fees and Costs.** Interest
      income is recorded on our mortgage loans held for investment portfolio based
      upon a combination of interest accruals based on the outstanding balance and
      contractual terms of the mortgage loans, adjusted by the amortization of net
      deferred origination fees or costs accounted for in accordance with SFAS No.
      91.
      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 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.





**Amortization
      of Deferred Debt Issue Discounts and Transaction Costs.** Interest
      expense on our securitization financing is comprised of the accrual of interest
      based on the contractual terms, cash receipts and amortization related to our
      cash flow hedges (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. 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.





**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 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 March 31, 2007 Compared to Three Months Ended March 31,
      2006**





**General**





Our
      net
      income for the three months ended March 31, 2007 was $4.9 million, or $0.21
      per
      share basic and $0.20 per share diluted, compared to net income of $6.6 million,
      or $0.32 per share basic and $0.31 per share diluted, for the three months
      ended
      March 31, 2006. As described in more detail below, the primary drivers of the
      decrease in net income were a $3.1 million increase in non-interest expense
      primarily related to general and administrative expenses associated with a
      period-over-period increase of 31.3% in loan originations and a 12.5% increase
      in personnel, and an increase in REO related expenses. Additionally contributing
      to the decrease was a $1.6 million decrease in other income, primarily relating
      to the $1.7 million decrease in the amount of fair value change recorded on
      our
      excess cashflow certificates for the three months ended March 31, 2007 compared
      to the three months ended March 31, 2006. These decreases were partially offset
      by:





**30**


(1)
            An
                increase in net interest income after provision for loan losses of
                $1.5
                million, or 5.3%, during the three months ended March 31, 2007 from
                $28.3
                million recorded during the three months ended March 31, 2006. The
                increase in net interest income after provision for loan losses reflects
                the net effect of recognizing interest income on a 37.3% larger amount
                of
                mortgage loans held for investment, net and recognizing interest
                expense
                on a 36.1% larger amount of mortgage loan related financing (including
                warehouse credit financing), coupled with a 66.2% increase in the
                provision for loan losses. Our net interest income, which continues
                to
                grow,represented
                75.5%of
                our net revenue for thethree
                months ended March 31, 2007,
                compared to 73.1% for thethree
                months ended March 31, 2006;
                and





(2)
            An
                increase in net gain on sale of mortgage loans of $779,000, or 11.0%,
                to
                $7.8 million on the sale of $177.1 million of mortgage loans on a
                whole-loan basis, from a $7.1 million gain during the three months
                ended
                March 31, 2006 on sales on a whole-loan basis of $164.7 million of
                mortgage loans. Whole loan sales represented 14.3% and 17.4% of total
                loans originated for the quarters ended March 31, 2007 and March
                31, 2006,
                respectively. While the percentage of whole loan sales to loans originated
                within the quarter declined period-over-period, the 31.3% increase
                in loan
                originations for the quarter ended March 31, 2007 as compared to
                the
                quarter ended March 31, 2006, resulted in a7.5% increase in the amount of whole loans sold and the increase
                in the
                gains recorded from our whole-loan sales during thethree
                months ended March 31, 2007compared to thethree
                months ended March 31, 2006.





We
      originated $1.2 billion of mortgage loans during the three months ended March
      31, 2007, representing a $296.1 million, or 31.3%, increase from $944.7 million
      of mortgage loans originated during the three months ended March 31, 2006.
      We
      securitized and/or sold $1.1 billion of loans during the three months ended
      March 31, 2007, an increase of 8.4% compared to the $1.0 billion of loans
      securitized and/or sold during the three months ended March 31,
      2006.





**Net
      Interest Income**





We
      recorded net interest income of $40.4 million during the three months ended
      March 31, 2007, an increase of $5.7 million, or 16.5%, from the $34.7 million
      recorded in the same period in 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, during
      the
      three months ended March 31, 2007 compared to the three months ended March
      31,
      2006. 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 $39.0 million, or 38.2%, to $141.0 million for the three months
      ended March 31, 2007, from $102.0 million for the three months ended March
      31,
      2006. The increase is primarily due to (1) a $33.9 million increase in interest
      income earned on our loans held for investment - securitized, which totaled
      $6.6
      billion at March 31, 2007, compared to $5.0 billion at March 31, 2006; coupled
      with a 38 basis point increase in the average interest rate over the same
      period, (2) a $4.8 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
      three months ended March 31, 2007 compared to the three months ended March
      31,
      2006; and (3) the increase in pass-through interest received from securitization
      trusts on fixed-rate asset-backed securities at the time of settlement, due
      to
      the increase in fixed-rate asset-backed securities issued during the three
      months ended March 31, 2007, compared to the asset-backed securities issued
      during the three months ended March 31, 2006. These increases were partly offset
      by a decrease in interest income earned on our excess cashflow certificates
      due
      to the sale of our remaining excess cashflow certificates during the three
      months ended March 31, 2007.


**31**


The
      following table is a summary of interest income for the three months ended
      March
      31, 2007 and 2006:




**For
                the Three Months Ended**
              **March
                31,***(Dollars
                in thousands)*
            
            **2007**
            
            **2006**Interest
                income on mortgage loans held for investment - securitized, net(1)
            
            $
            122,965
            
            $
            89,055Interest
                income on mortgage loans held for investment - pre-securitization,
                net
            
            
            14,130
            
            
            9,301Securitization
                pass-through interest
            
            
            3,763
            
            
            3,374Interest
                income on excess cashflow certificates
            
            
            17
            
            
            243Miscellaneous
                interest income
            
            
            85
            
            
            --Total
                interest income
            
            $
            140,960
            
            $
            101,973





*(1)
      The amounts for the three months ended March 31, 2007 and 2006 include $5.5
      million and $4.2 million, respectively, of income from prepayment penalty
      fees.*





***Interest
      Expense.*** Interest
      expense increased by $33.2 million, or 49.4%, to $100.5 million for the three
      months ended March 31, 2007, from $67.3 million for the three months ended
      March
      31, 2006. The increase was primarily due to the increase in interest expense
      related to the securitization debt and, to a lesser extent, the increase in
      loans originated and financed during the three months ended March 31, 2007
      on
      our warehouse facilities, compared to the three months ended March 31, 2006.
      The
      weighted average cost of our financing on mortgage loans held for investment
      increased by 45 basis points from 5.20% at March 31, 2006 to 5.65% at March
      31,
      2007. To a lesser extent, the increase in interest expense was also caused
      by
      higher warehouse financing costs due to a higher average one-month LIBOR rate,
      which is the benchmark index used to determine our cost of borrowed funds.
      The
      index rate increased 71 basis points to an average of 5.32% for the three months
      ended March 31, 2007, compared to an average of 4.61% for the three months
      ended
      March 31, 2006.





The
      following is a summary of the components of interest expense for the three
      months ended March 31, 2007 and 2006:





**For
                the Three Months Ended**
              **March
                31,***(Dollars
                in thousands)*
            
            **2007**
            
            **2006**Interest
                expense on mortgage loans held for investment financing(1)
            
            $
            88,387
            
            $
            59,113Interest
                expense on warehouse financing
            
            
            11,952
            
            
            7,883Interest
                expense on other borrowings
            
            
            118
            
            
            105Other
                interest expense
            
            
            65
            
            
            165Total
                interest expense
            
            $
            100,522
            
            $
            67,266





*(1)*  *The
      amounts for the three months ended March 31, 2007 and 2006 include $2.3 million
      and $744,000, respectively, of deferred securitization debt issuance cost
      amortization and trustee expenses recognized during the period, net of hedge
      amortization.*





**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 $10.6 million (including a recovery of $259,000 of a specific
      provision related to impaired loans)
      and $6.4 million (including a $11,000 specific provision related to impaired loans)
      for the three months ended March 31, 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.


**32**


**Non-Interest
      Income**





Total non-interest income decreased by $774,000, or 7.4%, to $9.7 million for
      the three months ended March 31, 2007, from $10.4 million for the three months
      ended March 31, 2006. The decrease in non-interest income resulted from a
      decrease of $1.7 million in the amount of fair value gains recorded on our
      excess cashflow certificates, offset partially by a $779,000 increase in the
      net
      gain on sale of mortgage loans during the three months ended March 31, 2007
      as
      compared to the three months ended March 31, 2006.





***Net Gain on Sale of Mortgage Loans.*** Net gain
      on sale of mortgage loans 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 reserves. During the three months ended March
      31, 2007, the net gain on the sale of mortgage loans increased $779,000, or
      11.0%, to $7.8 million on the sale of $177.1 million of mortgage loans on a
      whole-loan basis, from the $7.1 million gain recorded during the three months
      ended March 31, 2006 on of the sale of $164.7 million of mortgage loans on
      a
      whole-loan basis.





The
      following table is a summary of our net gain on sale of mortgage loans for
      the
      three months ended March 31, 2007 and 2006:





**For
                the Three Months Ended March 31,***(Dollars
                in thousands)*
            
            **2007**
            
            **2006**Net
                Gain on Sale of Mortgage Loans:Loans
                sold
            
            $
            177,082
            
            $
            164,711Gain
                on whole-loan sales
            
            $
            5,972
            
            $
            5,671Premium
                recapture reserve(1)
            
            
            (88
            )
            
            (235
            )Secondary
                marketing (indemnification) reserve
            
            
            (177
            )
            
            (175
            )Net
                loan origination fees
            
            
            2,133
            
            
            1,800Net
                gain on sale recorded
            
            $
            7,840
            
            $
            7,061Average
                whole-loan sales premium
            
            
            3.37%
            
            
            3.44%Average
                whole-loan sales premium, net of reserves
            
            
            3.22%
            
            
            3.19%Average
                net gain on sale ratio
            
            
            4.43%
            
            
            4.29%





*(1)*  *The
      premium recapture reserve amount shown for the three months ended March 31,
      2007
      was comprised of a provision of $317,000 related to the loans sold during the
      three months ended March 31, 2007 and a recovery of $229,000 related to reserve
      adjustments for loan sales from prior year periods.*





During
      the three months ended March 31, 2007 and 2006, we recorded a secondary market
      reserve provision of $177,000 and $175,000, respectively, as a reduction of
      our
      gain on sale of mortgage loans. The secondary market reserve covers our
      estimated exposure to losses arising from loan repurchases, or the net
      settlement, related to representation and warranty claims by
      investors.





The
      average whole-loan sales premium, net of reserves, for the three months ended
      March 31, 2007 and 2006 was 3.22% and 3.19%, 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 reserves,
      by
      the total amount of loans sold. The average net gain on sale ratio for the
      three
      months ended March 31, 2007 and 2006 was 4.43% and 4.29%, respectively. The
      average net gain on sale ratio is calculated by dividing the net gain on sale
      by
      the total amount of loans sold.





**33**


***Other
      Income.*** Other
      income decreased $1.6 million, or 46.0%, to $1.8 million for the three months
      ended March 31, 2007, from $3.4 million for the three months ended March 31,
      2006. The decrease in other income primarily relates to a $1.7 million, or
      52.2%, decline in the amount of the fair value change recorded on our excess
      cashflow certificates period over period. During the three months ended March
      31, 2007, we recorded a fair value adjustment gain of $1.6 million, compared
      to
      a $3.3 million fair value adjustment gain for the three months ended March
      31,
      2006. The
      decrease in the amount of fair value adjustment gains recorded during the
      three
      months ended March 31, 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 held during the
      same
      period .
      As the
      cash flows are received, the value of the excess cashflow certificates
      declines.





Also
      included in other income are the gains recognized on the sale of MSRs. During the
      three
      months ended March 31, 2007, we
      recorded a gain of $250,000 on the sale of our MSRs to a third-party, an
      increase of $203,000 over the amount recognized during the
      three
      months ended March 31, 2006 .
      The
      increase in the gain on sale of MSRs is due to changes in the composition of
      the
      relative fair values of the MSRs and the related mortgage loans used in the
      gain
      calculation during the
      three
      months ended March 31, 2007 as
      compared to the
      three
      months ended March 31, 2006 .





**Non-interest
      Expense**





Total non-interest expense increased by $3.1 million, or 11.0%, to $31.0 million
      for the three months ended March 31, 2007, from $27.9 million for the three
      months ended March 31, 2006. The increase primarily is due to an increase in
      general and administrative expenses reflecting the impact of the 31.3% increase
      in our mortgage loan production and 12.5% increase in personnel, and increased
      REO related expenses. Additionally contributing to the increase in non-interest
      expense was an $187,000 increase in payroll and related costs and a $371,000
      increase in the loss on derivative instruments recorded period over period.
      During the three months ended March 31, 2007, we recorded a $96,000 loss on
      derivative instruments relating to the ineffective portion of our derivatives
      that is recognized through current earnings, as compared to a $275,000 gain
      recorded during the three months ended March 31, 2006.





***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
      loan production related employees. Payroll
      and related costs increased by $187,000, or 1.1%, to $17.2 million for the
      three
      months ended March 31, 2007, from $17.0 million for the three months ended
      March
      31, 2006. The slight increase was primarily the result of higher compensation
      and related payroll cost associated with an increase in our staff and increased
      loan production, offset nearly completely by the increase in SFAS No. 91 related
      deferrals in the same period. As of March 31, 2007, we employed 1,489 full-
      and
      part-time employees, an increase of 12.5% over our 1,323 full- and part-time
      employees as of March 31, 2006. Additionally, payroll and related costs,
      specifically for loan production related personnel, were higher due to the
      31.3%
      increase in loan production during the three months ended March 31, 2007
      compared to the three months ended March 31, 2006. The amount of payroll and
      related costs deferred under SFAS No. 91 increased $3.7 million, or 29.4%,
      during the three months ended March 31, 2007, compared to the three months
      ended
      March 31, 2006, due to the increase in loan production and the composition
      of
      the originations (more wholesale channel originations).





Also
      contributing to the increase in payroll and related costs during the
      three
      months ended March 31, 2007 was the
      $208,000 increase in stock-based compensation expense, primarily due to the
      impact of the expense related to the restricted stock awards that have been
      granted since March 31, 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 $2.5 million, or 22.5%, to $13.7 million
      for the
      three
      months ended March 31, 2007 ,
      from
      $11.2 million for the
      three
      months ended March 31, 2006 . The
      increase primarily was due to an increase in expenses associated with our 31.3%
      increase in loan production during the three months ended March 31, 2007,
      compared to the three months ended March 31, 2006 (which includes slightly
      higher fees and licenses, and loan servicing fees related to pre-securitization
      loans), the consequent 12.5% increase in personnel related to our ongoing
      expansion of our wholesale and retail divisions (which resulted in a $268,000
      increase in rent and depreciation expenses) and the impact of a $2.7 million
      increase in REO-related expenses. These increases were partially offset by
      an
      $801,000 decrease in professional fees (legal, accounting and
      consulting).





**34**


The
      increase in REO-related expenses in the three months ended March 31, 2007 was
      due to the expected increase in REO activity as the mortgage loan portfolio
      became more seasoned. As the portfolio of REO properties increases, the expenses
      arising from the operation and disposal of those properties will also generally
      increase.





***Loss
      (Gain) on Derivative Instruments.*** The gain
      or loss on derivative instruments recorded during the three months ended March
      31, 2007 and 2006 represented the (1) 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)
      ineffective portion related to the change in the fair value of our corridors
      we
      use to protect the variable-rate financing, and (3) c hanges
      in
      the fair value of the derivative instruments classified as trading
      securities.





During
      the three months ended March 31, 2007, we recorded a loss on derivative
      instruments of $96,000, as compared to a net gain on derivatives instruments
      of
      $275,000 during the three months ended March 31, 2006. During the three months
      ended March 31, 2007, we recorded a loss of $80,000 on the ineffective portion
      of corridors and interest rate swaps, compared to a gain of $60,000 recorded
      on
      the ineffective portion of corridors and interest rate swaps during the three
      months ended March 31, 2006. Additionally, at
      March
      31, 2007 and 2006, we held $206,000 and $1.3 million, 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 March 31, 2007 and
      2006, we recorded a loss of $16,000 and a gain of $215,000, respectively, to
      earnings for the changes in the fair value of the hedges (specifically
      corridors) held as trading securities.





**Provision
      for Income Tax Expense**





We
      recorded an income tax expense of $3.6 million on pre-tax income of $8.5 million
      for the three months ended March 31, 2007 (an effective tax rate of
      approximately 42.3%). The increase in the effective tax rate for the three
      months ended March 31, 2007, was
      a
      result of our estimate for a lower overall effective tax rate for 2007 and
      subsequent years. As a result of lowering our estimated future overall effective
      tax rate, we had to reduce our deferred tax asset, which resulted in an increase
      in our tax provision of $287,000 during the three months ended March 31, 2007. The
      effective tax rate, excluding the effect of the rate reduction in the deferred
      tax asset, would have been 38.9% for the three months ended March 31, 2007.
      We
      recorded an income tax expense of $4.2 million on pre-tax income of $10.8
      million for the three months ended March 31, 2006 (an effective tax rate of
      approximately 39.1%).





**Financial
      Condition**





**March
      31, 2007 Compared to December 31, 2006**





***Cash
      and Cash Equivalents.*** Cash and
      cash equivalents increased $1.3 million, or 22.1%, to $7.0 million at March
      31,
      2007, from $5.7 million at December 31, 2006. This increase was primarily
      related to timing of cash received and disbursed from normal
      operations.





***Mortgage
      Loans Held for Investment, Net*** **.** Mortgage
      loans held for investment, net increased $614.4 million, or 9.7%, to $7.0
      billion at March 31, 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) or are pending delivery into future securitizations or sale on
      a
      whole-loan basis (recorded as mortgage loans held for investment -
      pre-securitization), net of discounts, deferred fees and allowance for loan
      losses.


**35**


The
      following table sets forth a summary of mortgage loans held for investment,
      net
      at March 31, 2007 and December 31, 2006:





*(Dollars
                in thousands)*
            
            **At
                March 31,**
              **2007**
            
            **At
                December 31, 2006**Mortgage
                loans held for investment - securitized
            
            $
            6,565,995
            
            $
            6,051,996Mortgage
                loans held for investment - pre-securitization(1)
            
            
            528,889
            
            
            417,818Discounts
                (MSR related)
            
            
            (41,345
            )
            
            (36,933
            )Net
                deferred origination fees
            
            
            (19,884
            )
            
            (19,194
            )Allowance
                for loan losses
            
            
            (60,868
            )
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            $
            6,972,787
            
            $
            6,358,377





*(1)*  *Included
      in our mortgage loans held for investment - pre-securitization at March 31,
      2007
      and December 31, 2006 was approximately $464.4 million and $335.9 million,
      respectively, of mortgage loans that were pledged as collateral for our
      warehouse financings at March 31, 2007 and December 31, 2006,
      respectively.*





During
      the three months ended March 31, 2007, we originated $1.2 billion of mortgage
      loans and sold $177.1 million of loans on a whole-loan basis. The increase
      in
      mortgage loans held for investment is driven by the volume of our originations,
      net of principal repayments and whole-loan sales for the three months ended
      March 31, 2007. The
      increase in the mortgage loans held for investment - pre-securitization was
      impacted by our decision at the end of 2006 to carry additional loans into
      the
      first quarter of 2007, coupled with the increased level of originations during
      the three months ended March 31, 2007. These pre-securitization loans were
      primarily financed through our warehouse credit facilities.





We
      maintain an allowance for loan losses based on our estimate of losses to be
      incurred in the foreseeable future (generally an 18 to 24 month period) on
      our
      mortgage loans held for investment. At March 31, 2007 and December 31, 2006,
      we
      established an allowance for loan losses totaling $60.9 million and $55.3
      million, respectively, based upon our analysis of the mortgage loans held for
      investment portfolio, including a $754,000 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 March 31, 2007.





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





*(Dollars
                in thousands)*
            
            **For
                the Three Months Ended**
              **March
                31, 2007**
            
            **For
                the**
              **Year
                Ended**
              **December
                31, 2006**Allowance
                for loan losses - beginning of year
            
            $
            55,310
            
            $
            36,832Provision
                for loan losses(1)
            
            
            10,645
            
            
            29,085Charge-offs(2)
            
            
            (5,087
            )
            
            (10,607
            )Allowance
                for loan losses - end of period/year(3)
            
            $
            60,868
            
            $
            55,310





*(1)*  *The
      provision for loan losses for the three months ended March 31, 2007 and year
      ended December 31, 2006 includes a specific provision which consisted of a
      $259,000 recovery and a $377,000 recovery, respectively. The specific provisions* *relates
      to probable losses attributable to impaired loans.*





*(2)*  *None
      of the charge-offs for the three months ended March 31, 2007 related to impaired
      loans. The charge-offs for the year ended December 31, 2006 includes a $342,000
      (net of $10,000 of recoveries), respectively, 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 March 31, 2007 and December 31, 2006 includes
      a
      specific allowance for impaired loans of $754,000 and $1.0 million,
      respectively. A portion of the specific allowance, or $413,000 and $675,000,
      relates to impaired loans located in Hurricanes Katrina and Rita disaster areas
      at March 31, 2007 and December 31, 2006, respectively.*





**36**


Our
      specific allowance for loan losses at March 31, 2007 and December 31, 2006
      is
      based upon our probable loss exposure attributable to 18 and 17 properties,
      respectively, securing a total unpaid principal balance (impaired loans) of
      $3.1
      million and $2.5 million, respectively. The impaired loan totals at March 31,
      2007 and December 31, 2006 include approximately $940,000 (of which $225,000
      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 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 increased $3.4 million, or 4.7%, to $76.8 million at March 31, 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 March 31, 2007 and December 31, 2006
      totaled $70.2 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 March 2007 remittance
      cut-off date will be remitted to us in April 2007).





***Accrued
      Interest Receivable.*** Accrued
      interest receivable increased $2.7 million, or 6.5%, to $44.4 million at March
      31, 2007, from $41.7 million at December 31, 2006. The increase is due to (1)
      the 8.5% increase in mortgage loans held for investment - securitized from
      December 31, 2006, (2) the 26.6% increase in mortgage loans held for investment
      - pre-securitization during the same period, and, to a lesser extent, (3) the
      effect of an increase in the weighted-average interest rates on the mortgage
      loans held for investment - securitized of six basis points from December 31,
      2006 to March 31, 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 contractual terms of the mortgage at March 31, 2007 compared
      to
      December 31, 2006.





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





*(Dollars
                in thousands)*
            
            **For
                the Three Months Ended**
              **March
                31, 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 three months ended March 31, 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 $306,000, or 3.7%, to $8.0 million at March 31, 2007,
      from $8.3 million at December 31, 2006. The decrease is primarily due to the
      depreciation recognized during the three months ended March 31, 2007 exceeding
      the amount of equipment purchases made during the same period. 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 over that period time. The computer
      equipment and office furnishings purchased are being depreciated over a three-
      to five-year period from the date acquired, while the leasehold improvements
      are
      depreciated generally over the shorter of the life of the lease or the estimated
      useful life.





**37**


***Accounts
      Receivable.***  Accounts
      receivable increased $10.4 million to $15.3 million at March 31, 2007, from
      $4.9
      million at December 31, 2006. The
      increase primarily is due to an $6.8 million increase in current taxes
      receivable and an increase in servicer receivables on loans held for investment
      - pre-securitization. The increase in the current taxes receivable is primarily
      attributable to the sale of our remaining excess cashflow certificates (which
      also resulted in a decrease in our deferred tax asset, as described
      below) during the three months ended March 31, 2007. The increase in
      servicer receivables relates to a $3.5 million increase in loan payments
      received by our third-party loan servicer during March 2007, which was remitted
      to us in April 2007.





***Prepaid
      and Other Assets.*** Prepaid
      and other assets increased $2.3 million, or 4.6%, to $52.1 million at March
      31,
      2007, from $49.8 million at December 31, 2006. The increase primarily is due
      to
      the $4.5 million increase in REO properties due to the expected seasoning of
      the
      loan portfolio, partially offset by a $2.2 million net decrease in the fair
      value of our derivative instruments used to hedge our securitization debt during
      the three months ended March 31, 2007.





At
      March
      31, 2007 and December 31, 2006, we held $34.1 million and $29.6 million,
      respectively, of REO properties, which we carry at the lower of cost or fair
      value, less estimated selling costs.  A
      provision of $2.2 million and $131,000 was made during the three months ended
      March 31, 2007 and 2006, respectively, for decreases in the fair value of the
      REO properties.





***Deferred
      Tax Asset.***  The
      deferred tax asset decreased by $8.9 million, or 19.3%, to $36.9 million at
      March 31, 2007, from $45.8 million at December 31, 2006. The decrease primarily
      relates 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), (2) capitalized origination
      fees
      and related costs, and (3) realized gains and losses on derivatives (interest
      rate swaps) associated with hedging the securitization debt issuance (financing
      costs). These decreases were partially offset by increased deferred tax assets
      related to the timing of loan losses (allowance for loan losses) and non-accrual
      interest, coupled with a $1.5 million increase in deferred taxes related to
      the
      fair value of the hedge instruments within accumulated OCI.





Commencing
      in the first quarter of 2005, we began issuing our securitizations from a
      subsidiary that we elected to treat as a REIT (also referred to as a “Captive
      REIT”) under the Code. The securitization was structured as a “debt-for-tax”
transaction. Our prior securitizations were all structured as “sale-for-tax”
transactions. The tax structure was changed to more closely conform to the
      GAAP
      accounting treatment.





***Bank
      Payable.*** Bank
      payable increased $378,000, or 24.3%, to $1.9 million at March 31, 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 $121.2 million, or 36.1%, to $457.1 million at
      March 31, 2007, from $335.9 million at December 31, 2006. The increase was
      primarily due to a $111.1 million, or 26.6%, increase in the amount of mortgage
      loans held for investment - pre-securitization from December 31, 2006 to March
      31, 2007. The increase in warehouse financing relates to our decision at the
      end
      of 2006 to carry additional loans into the first quarter of 2007, coupled with
      the increased level of originations during the three months ended March 31,
      2007. We have continued to carry additional loans financed through our warehouse
      credit facilities rather than through securitization debt in order to take
      advantage of the favorable interest rate spreads that exist on our warehouse
      credit facilities at March 31, 2007. Additionally impacting the amount of
      outstanding borrowings under our warehouse credit facilities was the decrease
      in
      the amount of self-funded loans from December 31, 2006 to March 31, 2007. At
      March 31, 2007, we self-funded $71.8 million ($7.3 million which are pledged
      as
      collateral on our warehouse credit facilities) of these mortgage loans, as
      compared to $82.0 million at December 31, 2006.





**38**


***Financing
      on Mortgage Loans Held for Investment, Net.*** Our
      financing on mortgage loans held for investment, net increased $489.0 million,
      or 8.1%, to $6.5 billion at March 31, 2007, from $6.0 billion at December 31,
      2006. This increase in the issuance of asset-backed securities corresponds
      to
      the increase in loans held for investment - securitized during the three months
      ended March 31, 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 increased $301,000, or 5.0%, to $6.3 million at March 31, 2007 from
      $6.0 million at December 31, 2006. The increase in other borrowings was due
      to
      an increase in the amount of financed equipment during the three months ended
      March 31, 2007. The increase in the need for equipment, and the resulting
      equipment financing, was due to the 6.7% increase in personnel from December
      31,
      2006 and the effect of the expansion of several of our mortgage origination
      offices during the later part of 2006.





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





*(Dollars
                in thousands*)**Equipment
                Financing**
            
            **Range
                of****Interest
                Rates**
            
            **Balance**
            
            **Range
                of Expiration Dates**At
                March 31, 2007
            
            6.69%
                to 8.95%
            
            $                                
                 6,271
            
            April
                2007 to April 2010At
                December 31, 2006
            
            6.26%
                to 8.95%
            
            $                                 
                5,970
            
            January
                2007 to November 2009





***Accrued
      Interest Payable.*** Accrued
      interest payable increased $2.6 million, or 10.4%, to $27.7 million at March
      31,
      2007, from $25.1 million at December 31, 2006. The increase was primarily
      related to (1) the 8.1% increase in financing on mortgage loans held for
      investment, net, (2) the 36.1% increase in warehouse financing, and (3) the
      impact of the five basis point (5.65% at March 31, 2007 from 5.60% at December
      31, 2006) increase in the weighted-average cost on mortgage loans held for
      investment financing, immaterially offset by with a one basis point decrease
      in
      the index that is utilized to calculate the interest expense on our warehouse
      financing.





***Accounts
      Payable and Other Liabilities.*** Accounts
      payable and other liabilities increased $8.8 million, or 16.7%, to $62.0 million
      at March 31, 2007, from $53.2 million at December 31, 2006. The increase was
      primarily due to (1) a $7.2 million increase in accrued servicer payables
      related primarily to our growth in our mortgage loans held for investment
      portfolio, and (2) a $1.6 million increase in payroll accruals for payroll
      related items ( *i.e.* ,
      salary
      and commissions) due primarily to the increase in origination volume during
      the
      three months ended March 31, 2007, coupled with a 6.7% increase in personnel
      since December 31, 2006. These increases were partially offset by a $232,000
      decrease in accrued professional fees, primarily related to the timing of
      payments from December 31, 2006 to March 31, 2007.





***Stockholders’
      Equity.*** Stockholders’ equity increased $1.8 million, or 1.2%, to $151.4 million at March
      31, 2007 from $149.6 million at December 31, 2006. This increase is primarily
      due to (1) the recording of $4.9 million in net income for the three months
      ended March 31, 2007, (2) the $40,000 of proceeds and $52,000 of excess tax
      benefits we received from the exercise of 19,650 stock options from authorized
      but unissued shares during the three months ended March 31, 2007, and (3) the
      $396,000 impact of stock-based compensation recorded during the period. These
      increases were offset by decreases of $2.4 million, net of tax, in the
      accumulated OCI related to the net unrealized losses from derivatives, and
      the
      accrual of $1.2 million in common stock dividends that were declared on March
      29, 2007 and paid on April 6, 2007.




**39**


**Contractual
      Obligations**





The
      following table summarizes our material contractual obligations as of March
      31,
      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)
            
            $
            6,506,954
            
            $
            2,112,100
            
            $
            2,279,170
            
            $
            973,710
            
            $
            1,141,974Operating
                leases
            
            $
            20,843
            
            $
            7,086
            
            $
            8,741
            
            $
            5,016
            
            $
            --Equipment
                financing
            
            $
            6,271
            
            $
            324
            
            $
            4,904
            
            $
            1,043
            
            $
            --





*(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.*





**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, but
      no
      locked-in interest rate. We quote interest rates to customers, which are
      generally subject to change. 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
      March
      31, 2007 and December 31, 2006, we had outstanding origination commitments
      to
      fund approximately $181.2 million and $117.1 million, respectively, in mortgage
      loans.





**Off-Balance
      Sheet Arrangements**





Prior
      to
      2004, we structured our securitizations as off-balance sheet transactions,
      retaining excess cashflow certificates on-balance sheet to reflect our ownership
      interest in these securitizations. Beginning in 2004, we began to account for
      our securitizations as secured financings (on-balance sheet). During the three
      months ended March 31, 2007, we sold our remaining excess cashflow certificates.
      We have no obligation to provide funding support to either the third-party
      investors or the off-balance sheet trusts. The third-party investors or the
      trusts have no recourse to our assets or us and 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 three months ended March
      31,
      2007 and 2006:


**For
                  the Three Months Ended March 31,***(Dollars
                  in thousands)*
              
              **2007**
              
              **2006**Net
                  cash provided by (used in):Operating
                  activities
              
              $
              11,343
              
              $
              306Investing
                  activities
              
              $
              (617,605
              )
              $
              (454,628
              )Financing
                  activities
              
              $
              607,528
              
              $
              455,344




**40**


*Operating
      Activities* -
      The
      net ** cash
      provided by operating activities was $11.3 million for the three months ended
      March 31, 2007, compared to $306,000 for the three months ended March 31, 2006.
      The increase for the three months ended March 31, 2007 primarily reflects the
      net impact of the $10.6 million increase in accrued interest payable, accounts
      payable and other liabilities, the $4.9 million of net income recorded, the
      $10.6 million provision for loan losses, the $8.6 million of proceeds received
      from the sale of MSRs, the $2.8 million of cash received related to our excess
      cashflow certificates (including proceeds from sales) and the $10.4 million
      of
      deferred tax expense accrued. Partially offsetting these increases was the
      impact of the $22.6 million increase in trustee receivable, accrued interest
      receivable, accounts receivable and prepaid and other assets, the $8.1 million
      of gains recorded on mortgage loan sales, the $4.4 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 $617.6 million for the three months ended
      March 31, 2007, compared to $454.6 million for the three months ended March
      31,
      2006. The increase in net cash used in investing activities during the three
      months ended March 31, 2007 primarily related to the $802.2 million in net
      originations of mortgage loans held for investment, offset by $185.2 million
      in
      proceeds received from the sale of mortgage loans.





*Financing
      Activities* - The net
      cash provided by financing activities was $607.5 million for the three months
      ended March 31, 2007, compared to $455.3 million for the three months ended
      March 31, 2006. The increase net cash provided during the three months ended
      March 31, 2007 primarily related to the $121.2 million in net proceeds received
      from warehouse financing, and by $486.7 million in the net proceeds received
      from the 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 planned dividend payments. We
      generate 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 are not likely
      to be
      significantly affected by a relatively substantial change in our loan
      origination volume. If we can continue to originate a sufficient amount of
      mortgage loans and continue our practice of securitizations, we expect to
      generate sufficient cash proceeds from our securitization financings, whole-loan
      sales and the cash flows from our growing portfolio of mortgage loans held
      for
      investment to largely offset our current cost structure and cash uses. However,
      we may choose to not sell MSRs or reduce the amount of securitization debt
      we
      issue, which will negatively impact our cash flow in any period in which this
      occurs. 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, decreasing interest rates could
      adversely impact our cash flow in future periods.





We
      believe we must generate sufficient cash from the following in order to sustain
      our current level of working capital:





·
            the
                proceeds we receive from selling or financing asset-backed securities
                (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.





**41**
 Currently, our primary uses of cash include the funding
        of:


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





·
            interest
                expense on warehouse credit financings, financing of mortgage loans
                held
                for investment, interest rate swap payments and other
                financings;





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





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





·
            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 all, or a portion, of the
                dividends received from our REIT subsidiary;
                and





·
            common
                stock dividends.




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 $384,000 and $387,000 at March 31, 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
      $159,000 and $81,000 at March 31, 2007 and December 31, 2006, respectively.
      We
      did not repurchase any loans that were sold with recourse under our existing
      repurchase agreements during the three months ended March 31, 2007 or during
      the
      year ended December 31, 2006.




Subject
      to our ability to execute our business strategy and the various uncertainties
      described in this section and described in “Part II. Item 1A. - Risk Factors,”
we anticipate that we will have sufficient cash flows from operations,
      short-term funding and capital resources to meet our liquidity obligations
      for
      at least the next 12 months; however, there can be no assurance that we will
      be
      successful in this regard.





**Financing
      Facilities**





We need to borrow substantial sums of money each quarter to originate mortgage
      loans. We have relied upon a limited number of counterparties to provide us
      with
      the financing facilities to fund our loan originations. Our ability to fund
      current operations and accumulate loans for securitization depends to a large
      extent upon our ability to secure short-term financing on acceptable terms.
      There can be no assurance that we will be able to either renew or replace our
      warehouse facilities at their maturities at terms satisfactory to us or at
      all.
      If we are not able to obtain financing, we will not be able to originate new
      loans and our business and results of operations will be negatively
      impacted.





To
      originate and accumulate loans for securitization, we borrow money on a
      short-term basis 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. 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
      March
      31, 2007 (including any subsequent changes thereto) are as follows:





**42**


**Deutsche Bank Warehouse Credit Facility.** We have
      a $350.0 million facility ($200.0 million of which is committed) with Deutsche
      Bank which bears interest based upon a fixed margin over one-month LIBOR. The
      facility provides us with the ability to borrow at the lower of 98% of fair
      market value or 100% of the par amount of the mortgage loans between 0 to 29
      days delinquent and a limited amount of mortgage loans between 30 to 89 days
      delinquent. This facility expires in October 2007. As of March 31, 2007, the
      outstanding balance under the facility was $214.2 million.





**RBS
      Greenwich Capital Warehouse Credit Facility.** We have
      a $350.0 million facility ($200.0 million of which is committed) with RBS
      Greenwich Capital Financial Products, Inc., which bears interest based upon
      a
      fixed margin over one-month LIBOR. The facility provides the ability to borrow
      at the lower of 98% of fair market value or 100% of the par amount of the
      mortgage loans between 0 to 59 days delinquent. Mortgage loans between 60 to
      89
      days delinquent may be financed at lower borrowing percentages. This facility
      expires in November 2007. As of March 31, 2007, the outstanding balance under
      the facility was $118.8 million.





**Citigroup
      Warehouse Credit Facility.** We have
      a $350.0 million committed facility with Citigroup Global Markets Realty Corp.,
      which bears interest based upon a fixed margin over one-month LIBOR. The
      facility provides us with the ability to borrow at the lower of 98% of fair
      market value or 100% of the par amount of the mortgage loans between 0 to 59
      days delinquent. Mortgage loans between 60 to 89 days delinquent may be financed
      at lower borrowing percentages. This facility expires in May 2007. As of March
      31, 2007, the outstanding balance under the facility was $75.5
      million.





**Bank
      of America Warehouse Credit Facility.** We have
      a $350.0 million facility ($175.0 million of which is committed) with Bank
      of
      America, LLC which bears interest based upon a fixed margin over one-month
      LIBOR. The facility provides us with the ability to borrow at the lower of
      98%
      of fair market value or 100% of the par amount of the mortgage loans between
      0
      to 59 days delinquent and a limited amount of mortgage loans between 60 to
      89
      days delinquent. This facility expires in August 2007. As of March 31, 2007,
      the
      outstanding balance under the facility was $48.5 million.





**JPMorgan
      Chase Warehouse Credit Facility.** We have
      a $350.0 million facility ($200.0 million of which is committed) with JPMorgan
      Chase which bears interest based upon a fixed margin over one-month LIBOR.
      The
      facility provides us with the ability to borrow at the lower of 98% of fair
      market value or 100% of the par amount of the mortgage loans between 0 to 59
      days delinquent and a limited amount of mortgage loans between 60 to 89 days
      delinquent. This facility expires in May 2007. As of March 31, 2007, we had
      no
      outstanding balance under the facility.





Our
      warehouse agreements require us to comply with various operating and financial
      covenants. The continued availability of funds provided to us under these
      agreements is subject to, among other conditions, our continued compliance
      with
      these covenants. We believe we were in compliance with these covenants as of
      March 31, 2007.





**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 75.5% and 73.1% of
      our
      net revenues (net interest income and non-interest income, less provision for
      loan loss) during the three months ended March 31, 2007 and 2006, respectively.
      Accordingly, the interest rate environment has a substantial impact on our
      earnings. 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.





**43**


**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
      standard representations or warranties we make in connection with these
      whole-loan sales. During the three months ended March 31, 2007 and the year
      ended December 31, 2006, we repurchased or net settled $2.1 million 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 March 31, 2007,
      approximately 24.4%, 10.4%, 7.0% and 6.8%, based upon principal balance, of
      the
      mortgage loans we originated were on properties located in New York, Florida,
      Illinois and New Jersey, respectively, with no other state representing more
      than 5% of the originations.





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.





**E** **nvironmental
      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.


**44**


**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 such
      periods of reduced mortgage loan production, the associated profit margins
      also
      decline due to increased competition among loan originators and higher unit
      costs, thus 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 Option for Financial Assets and Financial Liabilities* .
      In
      February 2007, ** FASB
      issued SFAS No. 159, which permits entities to choose 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.





*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 in  accordance
      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.





**45**


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 in the case of
      securitizations and an expected gain on sale to be booked at the time of their
      sale, our exposure to decreases in the fair value of the mortgage loans rises
      when moving from a lower to a higher interest rate environment, such as the
      current 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 purchase and sale 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”).





**Interest
      Rate/Market Risk**





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





**Loan Price Volatility** .
      Under
      our current mode of operation, we 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 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.





**46**


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
      income in changing interest rate environments.





Management primarily uses financing sources where the interest rate resets
      frequently. As of March 31, 2007, the adjustable-rate borrowings under all
      of
      our financing arrangements adjust daily ( *i.e.* ,
      our
      warehouse credit facilities) or monthly ( *i.e.,* portions
      of our securitization debt). On the other hand, most of the mortgage loans
      we
      own are fixed rate; the remainder contains features where rates are fixed for
      some period of time and then adjust frequently thereafter (typically every
      six
      months). For example, one of our loan products is the “3/27” loan. This 30-year
      loan has a fixed interest rate for its first three years and then adjusts every
      six months thereafter.





While
      short-term borrowing rates are low and long-term asset rates are high, this
      portfolio structure enhances our net interest income during the relevant period.
      However, if short-term interest rates rise rapidly, the earnings potential
      is
      significantly affected, as the asset rate resets would lag behind the borrowing
      rate resets.





**Interest Rate Sensitivity Analysis.** To
      assess interest sensitivity as an indication of exposure to interest rate risk,
      management relies on models of financial information in a variety of interest
      rate scenarios. Using these models, the fair value and interest rate sensitivity
      of each financial instrument, or groups of similar instruments, is estimated
      and
      then aggregated to form a comprehensive picture of the risk characteristics
      of
      the 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 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.” Second, 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 tables present 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 March 31,
      2007:





**47**


*(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)
            
            $
            159,278
            
            $
            154,659
            
            $
            150,189
            
            $
            164,121
            
            $
            169,360Percentage
                change from base
            
            
            
            
            
            (2.90)%
            
            
            (5.71)%
            
            
            3.04%
            
            
            6.33%***Three-Year
                Projection:***Net
                interest income(1)(2)
            
            $
            341,653
            
            $
            334,574
            
            $
            327,158
            
            $
            349,223
            
            $
            358,288Percentage
                change from base
            
            
            
            
            
            (2.07)%
            
            
            (4.24)%
            
            
            2.22%
            
            
            4.87%





*(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 June 30, 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 and management
      strategies, among other factors.





**Hedging** .
      From an
      interest rate risk management perspective, we use interest rate swaps and
      corridors in an effort to offset the potential adverse effects of our exposure
      during a period of rising rates, such as the current environment. 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 given a variety of
      potentially adverse circumstances. Accordingly, the hedging program addresses
      income preservation, as discussed in the first part of this
      section.





Corridors are legal contracts between us and a third-party firm or
“counterparty.” The counterparty agrees to make payments to us in the future
      (net of the in-the-money interest rate cap sold as part of the corridor) should
      the one- or three-month LIBOR interest rate rise above the strike rate specified
      in the net purchased 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. However, interest rate swap agreements
      allow us to pay a fixed rate of interest while receiving a rate that adjusts
      with one-month LIBOR.


**48**


**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 March 31, 2007:





*(Dollars
                in thousands,**except
                weighted-**average
                strike*
              *price
                and rate)*
            
            **Total**
            
            **One****Year**
            
            **Two
                Years**
            
            **Three
                Years**
            
            **Four
                Years**
            
            **Five
                Years & Thereafter**Caps
                bought - notional
            
            $
            676,627
            
            $
            423,062
            
            $
            115,219
            
            $
            34,554
            
            $
            26,545
            
            $
            77,247Weighted-average
                strikeprice
            
            
            7.14%
            
            
            6.84%
            
            
            7.47%
            
            
            7.47%
            
            
            7.43%
            
            
            7.39%Caps
                sold - notional
            
            $
            676,627
            
            $
            423,062
            
            $
            115,219
            
            $
            34,554
            
            $
            26,545
            
            $
            77,247Weighted-average
                strikeprice
            
            
            9.26%
            
            
            9.24%
            
            
            9.30%
            
            
            9.27%
            
            
            9.28%
            
            
            9.31%Amortizing
                notional balance interest rate swaps:Notional
            
            $
            307,283
            
            $
            130,306
            
            $
            107,128
            
            $
            69,849
            
            $
            --
            
            $
            --Weighted-average
                rate
            
            
            5.11%
            
            
            5.12%
            
            
            5.09%
            
            
            5.02%
            
            
            --
            
            
            --





**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 March 31, 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
      March 31, 2007 that materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting.





**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:





**49**


·
            In
                or about November 1998, we received notice that we had been named
                in a
                lawsuit filed in the United States District Court for the Eastern
                District
                of New York. In December 1998, the plaintiffs filed an amended complaint
                alleging that we had violated theHome
                Ownership and Equity Protection Act of 1994,
                the federalTruth-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
                or about March 1999, we received notice that we and certain of our
                officers and directors had been named in a lawsuit filed in the Supreme
                Court of the State of New York, New York County, alleging that we
                had
                improperly charged certain borrowers processing fees. The complaint
                sought: (a) certification of a class of plaintiffs, (b) an accounting
                and
                (c) unspecified compensatory and punitive damages, including attorneys’
                fees, based upon alleged (i) unjust enrichment, (ii) fraud and (iii)
                deceptive trade practices. In April 1999, we filed an answer to the
                complaint. In September 1999, we filed a motion to dismiss the complaint,
                which was opposed by the plaintiffs, and in February 2000, the Court
                denied the motion to dismiss. In April 1999, we filed a motion to
                change
                venue and the plaintiffs opposed the motion. In July 1999, the Court
                denied the motion. We appealed, and in March 2000, the Appellate
                Court
                granted our appeal to change venue from New York County to Nassau
                County.
                In August 1999, the plaintiffs filed a motion for class certification,
                which we opposed in July 2000. In or about September 2000, the Appellate
                Court granted the plaintiffs’ motion for class certification, from which
                we appealed. The Appellate Court denied our appeal in December 2001.
                In or
                about June 2001, we filed a motion for summary judgment to dismiss
                the
                complaint, which was denied by the Court in October 2001. We appealed
                that
                decision, but the Appellate Court denied our appeal in November 2002.
                We
                filed a motion to reargue in December 2002, which was denied by the
                Appellate Court in January 2003. Discovery continued in the lower
                Court.
                In October 2006, 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 Court preliminarily approved the settlement
                and
                scheduled a fairness hearing in March 2007, at which the Court granted
                final approval of the settlement agreement. The settlement is now
                being
                administered.





**50**


·
            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.





·
            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.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.





**51**


·
            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
                theFair
                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. We have not yet filed an
                answer
                to the complaint. 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. We believe that we have meritorious
                defenses and intend to vigorously defend this suit, but at this early
                stage of the litigation, we cannot estimate with any certainty our
                ultimate legal or financial liability, if any, with respect to the
                alleged
                claims.





**Item
      1A. Risk Factors.**





Certain
      information contained in this Quarterly Report constitutes 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 to,” “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 and liquidity requirements,
      the future performance of our loan portfolios, our plans to grow originations,
      the impact of changes in interest rates, our future hedging strategy, the
      anticipated impact to our financial statements of our change to our accounting
      for securitizations, 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:





**52**


·
            Our
                ability or inability to earn a sufficient spread between our cost
                of funds
                and our average mortgage rates to generate sufficient revenues and
                cash
                flows to offset our current cost structure and cash
                uses;





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





·
            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;





·
            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 such
                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
                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;





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





·
            In
                accordance with SFAS No. 123(R), we measure compensation cost for
                stock
                awards at fair value and recognize compensation over the service
                period
                the awards are expected to vest. The determination of compensation
                cost
                requires us to make many assumptions regarding volatility, expected
                option
                life and forfeiture rates. In addition, changes in our stock price
                or
                prevailing interest rates will also impact the determination of fair
                value
                and compensation cost. If any of our assumptions used to determine
                fair
                value change significantly, future share-based compensation may differ
                materially from that recorded in the current
                period;





·
            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
                retain such loans in our portfolio, which may have an adverse impact
                on
                our cash position or generate losses, or sell them at a significant
                discount, which may generate losses. Recent bankruptcies, and regulatory
                and legal actions affecting the subprime sector may cause our loans
                to be
                viewed as less desirable for
                securitization;





**53**


·
            Any
                significant change in the credit quality of our loan portfolio would
                have
                a significant effect on our financial position, results of operations
                and
                our ability to securitize or sell our
                loans;





·
            Our
                ability or inability to continue to access 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 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;





·
            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 could force us to redeploy our assets in a manner which may
                not be
                favorable to us, and if we are not able to satisfy a margin call,
                could
                result in the loss of the related line of credit and a default under
                our
                other credit facilities;





·
            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 loan-to-value (“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, 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;





·
            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 43.5% of our loans were originated during the
                three
                months ended March 31, 2007, respectively. Any sustained period of
                increased delinquencies, foreclosure, losses or increased costs could
                adversely affect our ability to securitize or sell loans in the secondary
                market 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;





·
            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;





**54**


·
            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;





·
            The
                effect 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 such 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. 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;





·
            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
                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 risks 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.
                In May
                2007, the U.S. Federal Reserve Board announced that it would hold
                hearings
                to consider new regulations in the subprime mortgage sector. As the
                result
                of such laws we may choose to severely limit, or even cease, our
                lending
                activities in particular 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;





·
            Costs
                associated with litigation and rapid or unforeseen escalation of
                the cost
                of regulatory compliance, generally including, but not limited to,
                the
                adoption of new, or changes in, federal, state or local lending laws
                and
                regulations and the application of such laws and regulations, licenses,
                environmental compliance, the adoption of new, or changes in, accounting
                policies and practices and the application of such policies and practices.
                Failure to comply with various federal, state and local regulations,
                accounting policies and/or environmental compliance can lead to the
                loss
                of approved status, rights of rescission for mortgage loans, class
                action
                lawsuits, demands for indemnification or loan repurchases by purchasers
                of
                our loans and administrative, enforcement or investigatory actions
                against
                us;





**55**


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





·
            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 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 ourbusiness,
                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 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;





**56**


·
            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 14.3% of the loans we originated during
                the
                three months ended March 31, 2007. 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;





·
            In
                connection with the sale and securitization of our loans, 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;





·
            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;





·
            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;





·
            The
                risk that we may need to repurchase loans securitized or sold on
                a
                whole-loan basis if we breach the representations and warranties
                that we
                make in connection with the sales;





·
            The
                risks of defaults on the loans that we make to non-prime credit borrowers,
                and that our underwriting and loan quality monitoring systems will
                not be
                sufficient to minimize the impact from these
                defaults;





·
            The
                risk that demand for cash-out refinancing may decrease as interest
                rates
                rise and the prices of homes decline, which would reduce our origination
                volumes for this type of
                refinancing;





·
            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;





**57**


·
            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 the loans we originate could harm
                the
                value of securitized mortgage loans and our ability to sell or securitize
                loans. Additionally, regulatory actions and class action lawsuits
                against
                these servicers could harm the value of our securitized loans and
                our
                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 they have 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;





·
            The
                effect that an interruption in, or breach of, our information systems
                could have on our business;





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





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





·
            The
                possibility of failure of our operating facilities, computer systems
                and
                communication systems during a catastrophic
                event;





·
            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;





**58**


·
            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 is 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 it to be filed as part of consolidated
                income
                tax return with any other corporation. The REIT rules require compliance
                with asset, income, distribution and ownership tests. The ownership
                test
                prohibits five or fewer stockholders from owning more than 50% of
                our
                common stock. As of March 31, 2007, members of the Miller family
                (considered one stockholder under the attribution rule applicable
                to the
                ownership of REIT stock) own approximately 33.7% of the common stock
                (including employee stock options as required by 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;





· Our
      executive officers (specifically, members of the Miller family) collectively
      own
      a large percentage of our shares of common stock and could influence or control
      matters requiring stockholder approval. Accordingly, if members of the Miller
      family were to act in concert, they would have the ability to exercise
      significant control 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 all
      of
      the 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 Senior Vice President (General
      Counsel);





·
            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.
                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.





**Item
      6. Exhibits.**





**Exhibit
                No.**
            
            **Filed**
            
            **Description**10.1
            
            (a)
            
            Employment
                Agreement by and between the Registrant and Hugh Miller, dated March
                29,
                200731.1
            
            (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
                March 29, 2007.


(b)
            Filed
                herewith.








**59**


**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:** May
      10,
      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







**60**