**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 ended June 30,
                2007





**or**





**[
                ]**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the transition period from  _____________ to
                _____________








**Commission
      File Number: 1-12109**










**DELTA
      FINANCIAL CORPORATION**





(Exact
      name of registrant as specified in its charter)





**Delaware**
            **11-3336165**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





**1000
      Woodbury Road, Suite 200, Woodbury, New York 11797**





(Address
      of principal executive offices)





**(516)
      364 - 8500**





(Registrant’s
      telephone number, including area code)





**No
      Change**





(Former
      name, former address and former fiscal year, if changed since last
      report)





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





Yes
      [ x
      ]                                No
      [   ]





Indicate
      by check mark whether the
      registrant is a large accelerated filer, an accelerated filer, or a
      non-accelerated filer.  See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
      one):





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





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


Yes
      [   ]                                No
      [ x ]





As
      of August 6, 2007, 23,604,761 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 Sheetsas of June 30, 2007
                (unaudited) and December 31, 2006
            1Consolidated
                Statements of Operationsfor the Three
                and Six Months Ended June 30, 2007 and 2006 (unaudited)
            2Consolidated
                Statement of Changes in Stockholders’
                Equityfor the Six Months Ended June
                30, 2007 (unaudited)
            3Consolidated
                Statements of Cash Flowsfor the Six
                Months EndedJune
                30, 2007 and 2006 (unaudited)
            4Notes
                to Consolidated Financial Statements(unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            26Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            57Item
                4.
            Controls
                and Procedures
            61**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            61Item
                1A.
            Risk
                Factors
            63Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            71Item
                6.
            Exhibits
            71Signatures
            72











**PART
      I – FINANCIAL INFORMATION**





**Item
      1 – Financial Statements.**





**DELTA
      FINANCIAL CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


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





**At**
              **June
                30,**
              **2007**
            
            
            **At**
              **December
                31,2006***(Unaudited)***Assets:**Cash
                and cash equivalents
            
            $
            6,477
            
            
            $
            5,741Mortgage
                loans held for investment, net of discounts and deferredorigination
                fees
            
            
            7,741,762
            
            
            
            6,413,687Less:  Allowance
                for loan losses
            
            
            (66,864
            )
            
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            
            7,674,898
            
            
            
            6,358,377Trustee
                receivable
            
            
            63,533
            
            
            
            73,361Accrued
                interest receivable
            
            
            51,846
            
            
            
            41,684Excess
                cashflow certificates
            
            
            --
            
            
            
            1,209Equipment,
                net
            
            
            7,319
            
            
            
            8,287Accounts
                receivable
            
            
            16,717
            
            
            
            4,872Prepaid
                and other assets
            
            
            68,523
            
            
            
            49,836Deferred
                tax asset
            
            
            36,108
            
            
            
            45,760Total
                assets
            
            $
            7,925,421
            
            
            $
            6,589,127**Liabilities
                and Stockholders’ Equity****Liabilities:**Bank
                payable
            
            $
            1,521
            
            
            $
            1,557Warehouse
                financing
            
            
            754,664
            
            
            
            335,865Financing
                on mortgage loans held for investment, net
            
            
            6,903,729
            
            
            
            6,017,947Other
                borrowings
            
            
            5,529
            
            
            
            5,970Accrued
                interest payable
            
            
            31,291
            
            
            
            25,052Accounts
                payable and other liabilities
            
            
            74,638
            
            
            
            53,160Total
                liabilities
            
            
            7,771,372
            
            
            
            6,439,551**Stockholders’
                Equity:**Common
            stock, $.01 par value. Authorized 49,000,000 shares; 23,717,161
            and 23,607,611 sharesissued
                and 23,600,361
            and 23,490,811
                shares outstanding at June 30, 2007 and December 31,2006,
            respectively
            
            
            235
            
            
            
            234Additional
                paid-in capital
            
            
            142,884
            
            
            
            141,984Retained
                earnings
            
            
            13,511
            
            
            
            10,180Accumulated
                other comprehensive loss
            
            
            (1,263
            )
            
            
            (1,504
            )Treasury
                stock, at cost (116,800 shares)
            
            
            (1,318
            )
            
            
            (1,318
            )Total
                stockholders’ equity
            
            
            154,049
            
            
            
            149,576Total
                liabilities and stockholders’ equity
            
            $
            7,925,421
            
            
            $
            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
                June 30,**
            
            
            **For
                the Six Months**
              **Ended
                June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Interest
                income
            
            $
            148,655
            
            
            $
            112,736
            
            
            $
            289,615
            
            
            $
            214,709Interest
                expense
            
            
            109,638
            
            
            
            76,294
            
            
            
            210,160
            
            
            
            143,560Net
                interest income
            
            
            39,017
            
            
            
            36,442
            
            
            
            79,455
            
            
            
            71,149Provision
                for loan losses
            
            
            13,276
            
            
            
            6,998
            
            
            
            23,921
            
            
            
            13,402Net
                interest income after provision for loan losses
            
            
            25,741
            
            
            
            29,444
            
            
            
            55,534
            
            
            
            57,747Non-interest
                income:Net
                gain on sale of mortgage loans
            
            
            8,027
            
            
            
            7,038
            
            
            
            15,867
            
            
            
            14,099Other
                income
            
            
            261
            
            
            
            4,256
            
            
            
            2,084
            
            
            
            7,632Total
                non-interest income
            
            
            8,288
            
            
            
            11,294
            
            
            
            17,951
            
            
            
            21,731Non-interest
                expense:Payroll
                and related costs
            
            
            17,565
            
            
            
            16,563
            
            
            
            34,782
            
            
            
            33,593General
                and administrative
            
            
            15,244
            
            
            
            12,421
            
            
            
            28,916
            
            
            
            23,583(Gain)
                loss on derivative instruments
            
            
            (83
            )
            
            
            (148
            )
            
            
            13
            
            
            
            (423
            )Total
                non-interest expense
            
            
            32,726
            
            
            
            28,836
            
            
            
            63,711
            
            
            
            56,753Income
                before income tax expense
            
            
            1,303
            
            
            
            11,902
            
            
            
            9,774
            
            
            
            22,725Provision
                for income tax expense
            
            
            526
            
            
            
            4,661
            
            
            
            4,110
            
            
            
            8,898Net
                income
            
            $
            777
            
            
            $
            7,241
            
            
            $
            5,664
            
            
            $
            13,827**Comprehensive
                Income**:Other
                comprehensive income
            
            
            2,623
            
            
            
            1,009
            
            
            
            241
            
            
            
            5,079Comprehensive
                income
            
            $
            3,400
            
            
            $
            8,250
            
            
            $
            5,905
            
            
            $
            18,906**Per
                Share Data:**Basic
                - weighted average number of sharesoutstanding
            
            
            23,335,936
            
            
            
            22,903,098
            
            
            
            23,313,648
            
            
            
            21,706,899Diluted
                - weighted average number of sharesoutstanding
            
            
            24,178,759
            
            
            
            23,696,358
            
            
            
            24,127,377
            
            
            
            22,535,209Net
                income applicable to common shares
            
            $
            777
            
            
            $
            7,241
            
            
            $
            5,664
            
            
            $
            13,827Basic
                earnings per share – net income
            
            $
            0.03
            
            
            $
            0.32
            
            
            $
            0.24
            
            
            $
            0.64Diluted
                earnings per share – net income
            
            $
            0.03
            
            
            $
            0.31
            
            
            $
            0.23
            
            
            $
            0.61







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 Six Months Ended June 30, 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
            
            
            1
            
            
            
            115
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            116Excess
                tax benefit related to share-based compensation
            
            
            --
            
            
            
            102
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            102Share-based
                compensationexpense
            
            
            --
            
            
            
            683
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            683Cash
                dividend paid
            
            
            --
            
            
            
            --
            
            
            
            (1,166
            )
            
            
            --
            
            
            
            --
            
            
            
            (1,166
            )Dividend
                declared and payable
            
            
            --
            
            
            
            --
            
            
            
            (1,167
            )
            
            
            --
            
            
            
            --
            
            
            
            (1,167
            )Change
                in net unrealized lossesfrom
                derivatives, net of tax
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            241
            
            
            
            --
            
            
            
            241Net
                income
            
            
            --
            
            
            
            --
            
            
            
            5,664
            
            
            
            --
            
            
            
            --
            
            
            
            5,664Balance
                at June 30, 2007
            
            $
            235
            
            
            $
            142,884
            
            
            $
            13,511
            
            
            $
            (1,263
            )
            
            $
            (1,318
            )
            
            $
            154,049





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)*





**Six
                Months Ended 
              June 30,****2007**
            
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            5,664
            
            
            $
            13,827Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for loan losses
            
            
            23,921
            
            
            
            13,402Provision
                for recourse loans, premium recapture and secondary marketing
                losses
            
            
            1,059
            
            
            
            712Depreciation
                and amortization
            
            
            1,879
            
            
            
            1,626Deferred
                tax expense
            
            
            9,489
            
            
            
            4,803Deferred
                origination income
            
            
            (7,191
            )
            
            
            (7,325
            )Gain
                on change in fair value of excess cashflow certificates
            
            
            (1,560
            )
            
            
            (7,449
            )Gain
                on sale of mortgage loans
            
            
            (12,588
            )
            
            
            (11,095
            )Gain
                on sale of mortgage servicing rights
            
            
            (491
            )
            
            
            (94
            )Amortization
                of deferred debt issuance costs and premiums
            
            
            (500
            )
            
            
            (5,406
            )Cash
                flows received from excess cashflow certificates, net of
                accretion
            
            
            1,719
            
            
            
            10,695Proceeds
                from sale of excess cashflow certificates
            
            
            1,050
            
            
            
            1,500Proceeds
                from sale of mortgage servicing rights, net
            
            
            16,285
            
            
            
            12,657Stock-based
                compensation expense
            
            
            683
            
            
            
            416Changes
                in operating assets and liabilities:(Increase)
                in accounts receivable
            
            
            (11,845
            )
            
            
            (3,251
            )Decrease
                (increase) in trustee receivable
            
            
            9,828
            
            
            
            (4,938
            )Increase
                in accrued interest receivable
            
            
            (10,163
            )
            
            
            (6,276
            )Increase
                in prepaid and other assets
            
            
            (20,387
            )
            
            
            (7,143
            )Increase
                in accrued interest payable
            
            
            6,239
            
            
            
            6,168Increase
                in accounts payable and other liabilities
            
            
            20,416
            
            
            
            4,724Net
                cash provided by operating activities
            
            
            33,507
            
            
            
            17,553Cash
                flows from investing activities:Origination
                of mortgage loans held for investment
            
            
            (2,593,609
            )
            
            
            (1,915,336
            )Repayment
                of mortgage loans held for investment
            
            
            867,349
            
            
            
            685,449Proceeds
                from sale of mortgage loans
            
            
            395,049
            
            
            
            329,813Purchase
                of equipment
            
            
            (910
            )
            
            
            (2,230
            )Net
                cash used in investing activities
            
            
            (1,332,121
            )
            
            
            (902,304
            )Cash
                flows from financing activities:Proceeds
                from warehouse financing
            
            
            2,623,055
            
            
            
            1,877,215Repayment
                of warehouse financing
            
            
            (2,204,256
            )
            
            
            (2,010,848
            )Proceeds
                from financing on mortgage loans held for investment, net
            
            
            1,782,158
            
            
            
            1,717,173Repayment
                of financing on mortgage loans held for investment
            
            
            (899,018
            )
            
            
            (717,941
            )(Repayment
                of) proceeds from other borrowings, net
            
            
            (441
            )
            
            
            759(Decrease)
                increase in bank payable
            
            
            (36
            )
            
            
            52Cash
                dividends paid on common stock
            
            
            (2,330
            )
            
            
            (2,068
            )Excess
                tax benefit related to stock-based compensation
            
            
            102
            
            
            
            768Proceeds
                from issuance of common stock in secondary offering, net
            
            
            --
            
            
            
            19,370Proceeds
                from exercise of stock options
            
            
            116
            
            
            
            247Net
                cash provided by financing activities
            
            
            1,299,350
            
            
            
            884,727Net
                increase (decrease) in cash and cash equivalents
            
            
            736
            
            
            
            (24
            )Cash
                and cash equivalents at beginning of period
            
            
            5,741
            
            
            
            4,673Cash
                and cash equivalents at end of period
            
            $
            6,477
            
            
            $
            4,649


**4**





**Six
                  Months Ended 
                June 30,****2007**
              
              
              **2006**Supplemental
                  Information:Cash
                  paid during the period for:Interest
              
              $
              200,171
              
              
              $
              137,103Income
                  taxes
              
              $
              2,593
              
              
              $
              9,941Non-cash
                  transactions:Transfer
                  of mortgage loans held for investment to REO, net
              
              $
              33,768
              
              
              $
              10,787Dividends
                  payable
              
              $
              1,167
              
              
              $
              1,160





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 and six months ended
      June 30, 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 $5.6
      million and $5.1 million of interest-bearing deposits with select financial
      institutions at June 30, 2007 and December 31, 2006, respectively.





Additionally, cash and cash equivalents as of June 30, 2007 and December 31,
      2006 included restricted cash held for various reserve accounts totaling
      $507,000 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 confirmed over the 18 to 24 month period following the analysis
      date of June 30, 2007.  Provisions for loan losses are made for loans
      to the extent that we bear probable losses on these loans.  Provision
      amounts are charged as a current period expense to operations.  We
      charge-off uncollectible loans at the time we deem they are not probable of
      being collected.  In order to estimate an appropriate allowance for
      loan losses on mortgage loans held for investment (both securitized and
      pre-securitized), we estimate losses using a detailed analysis of historical
      loan performance by product type, origination year and securitization issuance,
      which is updated each quarter.  We stratify the mortgage loans held
      for investment into separately identified loan pools based upon seasoning
      criteria.  In accordance with SFAS No. 5, “Accounting for
      Contingencies,” we believe that pooling of mortgages with similar
      characteristics is an appropriate methodology by which to calculate or estimate
      the allowance for loan losses.  The results of that analysis are then
      applied to the current long-term mortgage portfolio, and an allowance for loan
      losses estimate is created to take into account both known and inherent losses
      in the loan portfolio.  Losses incurred are written-off against the
      allowance for loan losses.





**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 June 30, 2007, we have a specific reserve of $606,000 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
      represented one or more of the following assets: (1) residual interest (“BIO”)
      certificates; (2) P certificates (prepayment penalty fees); (3) payments from
      our interest rate cap providers; and (4) net interest margin (“NIM”) owner trust
      certificates.  Our excess cashflow certificates were classified as
“trading securities” in accordance with SFAS No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities.”  The amount initially
      recorded for the excess cashflow certificates at the date of a securitization
      structured as a sale reflected their then allocated estimated fair
      value.  The amount recorded for the excess cashflow certificates was
      reduced for cash distributions received, and adjusted for income accretion
      and
      subsequent changes in the fair value.  Any changes in fair value were
      recorded as a component of “other income” in our consolidated statements of
      operations.  During the three months ended March 31, 2007, we sold all of
      our remaining excess cashflow certificates, and consequently, no longer record
      any interest income or other income related to changes in fair value of the
      excess cashflow certificates.  For the three months ended June 30,
      2006, we recorded $4.2 million of other income due to an increase in the fair
      value of excess cashflow certificates.  For the six months ended June
      30, 2007 and 2006, we recorded $1.6 million and $7.4 million, respectively,
      of
      other income due to an increase in the fair value of excess cashflow
      certificates.





**8**





**(f)
      Equipment, Net**





Equipment,
      including leasehold improvements, is stated at cost, less accumulated
      depreciation and amortization.  Depreciation of equipment is computed
      using the straight-line method over the estimated useful lives of three to
      seven
      years.  Leasehold improvements are amortized over the lesser of the
      terms of the lease or the estimated useful lives of the
      improvements.  Ordinary maintenance and repairs are charged to expense
      as incurred.





Depreciation
      and amortization are included in “non-interest expense - general and
      administrative” in our consolidated statements of operations, and amounted to
      approximately $934,000 and $835,000 for the three months ended June 30, 2007
      and
      2006, respectively, and $1.9 million and $1.6 million for the six months ended
      June 30, 2007 and 2006, respectively.  Accumulated depreciation and
      amortization totaled $17.6 million and $16.0 million at June 30, 2007 and
      December 31, 2006, respectively.





**(g)
      Real Estate Owned**





Real
      estate owned (“REO”) represents properties acquired through, or in lieu of,
      foreclosure.  REO properties are recorded at the lower of cost or fair
      value less estimated selling costs.  The fair value of an REO property
      is determined based upon values (*i.e*., appraisal or broker price
      opinion) obtained by the third-party servicer.  REO properties are
      evaluated periodically for recoverability and any subsequent declines in value
      are reserved for through a provision.  Any costs incurred to maintain
      the REO properties are expensed as incurred.  Gains or losses on the
      sale of REO properties are recognized upon disposition.





In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” we classify our REO as “held for sale” at the date of
      foreclosure.  The REO properties held are actively marketed for sale
      by our third-party servicer at a price that is deemed reasonable in relation
      to
      the properties’ current fair 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 $46.2
      million and $29.6 million of REO properties as of June 30, 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 $2.4 million and $415,000 recognized during
      the
      three months ended June 30, 2007 and 2006, respectively.  During the
      six months ended June 30, 2007 and 2006, we recorded a provision for the
      decrease in fair value of REO properties of $4.6 million and $546,000,
      respectively.  During the six months ended June 30, 2007 and the year
      ended December 31, 2006, we sold $12.0 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 and bear interest
      at a fixed margin over the one-month London Inter-Bank Offered Rate
      (“LIBOR”).  The outstanding balance of our warehouse financings will
      fluctuate based on our lending volume, cash flows from operations, whole-loan
      sales activity, other financing activities and equity
      transactions.  Any commitment fees paid to obtain the warehouse
      financing are capitalized and 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.





**9**





Any
      securitization debt issuance costs are deferred and amortized, along with any
      discounts on the financing, on a level-yield basis over the estimated life
      of
      the debt issued.  From time-to-time, we may utilize derivative
      instruments, such as interest rate swap contracts and corridors (corresponding
      purchases and sales of interest rate caps with similar notional balances at
      different strike prices), as cash flow hedges as defined in SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities” in an effort to
      maintain a minimum margin or to lock in a pre-determined base interest rate
      on
      designated portions of our prospective future securitization financing
      (collectively, the hedged risk).  (See – Note 3(o) – “Derivative
      Instruments” and Note 10 – “Derivative Instruments” for further information
      regarding hedging securitization financing).





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
      that
      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 (through the first quarter
      of 2007); (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.





**10**





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.





During
      the three months ended June 30, 2007 and 2006, we sold $205.4 million and $154.0
      million, respectively, of whole loans on a non-recourse basis.  During
      the six months ended June 30, 2007 and 2006, we sold $382.5 million and $318.7
      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
      (indemnification) reserve based upon our estimated exposure to losses arising
      from loan repurchases, or net settlements, related to representation and
      warranty claims made by whole-loan sale investors.  The premium
      recapture and secondary marketing (indemnification) reserves are recorded as
      liabilities on our consolidated balance sheets when the mortgage loans are
      sold,
      based on our historical experience, coupled with our analysis of current market
      conditions.  The provisions recorded for the premium recapture and
      secondary marketing (indemnification) reserves are recognized at the date of
      sale and are included in the consolidated statements of operations as a
      reduction of gain on sale of mortgage loans.  The premium recapture
      reserve totaled $699,000 and $958,000 at June 30, 2007 and December 31, 2006,
      respectively.  The secondary marketing (indemnification) reserve
      totaled $712,000 and $512,000 at June 30, 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 June 30, 2007 and 2006, we received $7.7 million and
      $6.3
      million, respectively, from a third-party servicer for the right to service
      the
      mortgage loans collateralizing our securitizations that were structured to
      be
      accounted for as secured financings.  For the six months ended June
      30, 2007 and 2006, we received $16.3 million and $12.7 million, respectively,
      from a third-party servicer for the right to service the mortgage loans
      collateralizing our securitizations.





**(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 and six months ended June 30, 2007
      and 2006 includes compensation cost for all options granted prior to, but not
      yet vested as of January 1, 2006, and all options granted subsequent to January
      1, 2006, based on the grant date fair value estimated in accordance with the
      provisions of SFAS No. 123(R).





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 Financial Accounting Standards Board (“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 as a result of our 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).





**11**





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





**(o)
      Derivative Instruments**





Our
      hedging strategy revolves around two principal activities; (a) the issuance
      of
      our prospective securitization financing which is collateralized by the
      origination of mortgage loans, and (b) the issuance of variable-rate
      securitization debt (financing).  As a result of these activities, we
      are exposed to interest rate risk beginning when our mortgage loans close and
      are recorded as assets until permanent financing is arranged, such as when
      the
      asset-backed securities are issued.  We utilize hedges to mitigate our
      interest rate exposure.  After we originate mortgage loans, our
      strategy is to generally use a series of duration matched interest rate swap
      contracts (i.e., two, three and five-year tenor contracts) in an effort to
      lock
      in a pre-determined base interest rate on designated portions of our prospective
      future securitization financing (i.e., the asset-backed securities that we
      expect to issue).  We also use corridors (corresponding purchases and
      sales of interest rate caps with similar notional balances at different strike
      prices) and/or amortizing notional balance interest rate swaps that are designed
      to limit our financing costs on the variable portion of the debt issued in
      the
      securitization.  The purpose of the hedge within the securitization is
      to maintain minimum margins over specific periods of time, with the possibility
      of allowing us to increase margins during periods in which prevailing interest
      rates are lower than anticipated.  Both the interest rate swaps (which
      generally have an expected life of 36 months) and corridors (which have a range
      of expected lives) are derivative instruments that trade in liquid markets,
      and
      we do not use either of them for speculative purposes.





In
      accordance with SFAS No. 133, all
      derivatives are recorded on the balance sheet at fair value.  When
      derivatives are used as hedges, certain criteria must be met in order to qualify
      for hedge accounting.  Under SFAS No. 133, cash flow hedge accounting
      is permitted only if a hedging relationship is properly documented and
      qualifying criteria are satisfied.  For derivative financial
      instruments not designated as hedging instruments, all gains or losses, whether
      realized or unrealized, are recognized in current period earnings.





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;





**12**





·      Forecasted
      transactions must be probable; and





·      Forecasted
      transactions must be made with different counterparties other than the reporting
      entity.





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





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





**(p)
      Earnings Per Share**





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





**(q)
      Income Taxes**





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





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





Our
      policy is to report interest and penalties as a component of income before
      taxes.  Penalties are recorded in “general and administrative expense”
and interest paid or received is recorded in interest expense or interest
      income, in the consolidated statements of operations.  During the
      three and six months ended June 30, 2007, we recorded approximately $65,000
      and
      $130,000, respectively, in interest expense related to current
      audits.  We have accrued interest and penalties totaling approximately
      $1.6 million at June 30, 2007.  During the six months ended June 30,
      2007, the unrecognized tax benefit remained unchanged, except for the
      aforementioned accrued interest.





**13**





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**





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





*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.





*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 June 30, 2007, under only two of which
      we 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.





**14**





In
      addition to the 2005 Plan, we have one other outstanding stock benefit plan
      under which we may issue awards, the 2001 Stock Option Plan (“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 (“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 June 30, 2007 included
        stock
        option compensation cost of $96,000 and $59,000, respectively, which had
        no
        impact on basic and diluted earnings per share for the three-month
        period.  Our income before income tax expense and net income for the
        three months ended June 30, 2006 included stock option compensation cost
        of
        $148,000 and $90,000, respectively, which had no impact on basic and diluted
        earnings per share for the three-month period.  Our income before
        income tax expense and net income for the six months ended June 30, 2007
        included stock option compensation cost of $211,000 and $129,000, respectively,
        which had a $0.01 impact on basic and diluted earnings per share for the
        six
        month period.  Our income before income tax expense and net income for
        the six months ended June 30, 2006 included stock option compensation cost
        of
        $253,000 and $154,000, respectively, which had a $0.01 impact on basic and
        diluted earnings per share for the six month period.





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





**For
                the Six Months Ended June 30, 2006**Expected
                dividend yield
            
            2.0%Expected
                volatility
            
            57.6%Risk-free
                interest rate
            
            5.0%Expected
                term
            
            3.7
                yearsAnnual
                forfeiture rate
            
            7.8%





The
        average grant date fair value of the stock options granted during the three
        and
        six months ended June 30, 2006 was $4.16.


**15**





The
      following table summarizes the option activity regarding the Option Plans for
      the six months ended June 30, 2007:





(*Dollars
                in thousands, except**weighted-average exercise
                price*)
            
            **Number
                of Options**
            
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**January
                1, 2007 balance
            
            
            1,781,750
            
            
            $
            3.23Options
                granted
            
            
            --
            
            
            
            --Options
                exercised
            
            
            37,300
            
            
            
            3.10Options
                expired
            
            
            800
            
            
            
            1.99Options
                forfeited
            
            
            7,500
            
            
            
            8.28June
                30, 2007 balance
            
            
            1,736,150
            
            
            $
            3.21
            
            2.3
                years
            
            $
            15,727Options
                fully vested and exercisable
            
            
            1,411,250
            
            
            $
            2.37
            
            1.9
                years
            
            $
            13,974





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
        June 30, 2007 and 2006 was $166,000 and $861,000, respectively.  The
        total intrinsic value of the stock options exercised during the six months
        ended
        June 30, 2007 and 2006 was $310,000 and $2.0 million,
        respectively.  As of June 30, 2007 and 2006, there was $602,000 and
        $927,000, respectively, of total unrecognized compensation cost, net of
        estimated forfeitures, related to non-vested options under the Option
        Plans.  The unrecognized compensation cost at June 30, 2007 is
        expected to be recognized over a weighted-average period of 1.8
        years.





Cash
        received from option exercises under the Option Plans for the three months
        ended
        June 30, 2007 and 2006 was $76,000 and $110,000, respectively.  Cash
        received from option exercises under the Option Plans for the six months
        ended
        June 30, 2007 and 2006 was $116,000 and $247,000, respectively.  The
        actual tax benefit for the tax deductions from option exercises totaled $50,000
        and $336,000, respectively, for the three months ended June 30, 2007 and
        2006.  The actual tax benefit for the tax deductions from option
        exercises totaled $102,000 and $768,000, respectively, for the six months
        ended
        June 30, 2007 and 2006.  The fair value of the shares that vested
        during the three months ended June 30, 2007 and 2006, totaled $33,000 and
        $82,000, respectively.  The fair value of the shares that vested
        during the six months ended June 30, 2007 and 2006 totaled $263,000 and
        $312,000, respectively.





*Restricted
      Stock* - Our income before income tax expense and net income for the three
      months ended June 30, 2007 included a restricted stock award compensation cost
      (recorded as a component of non-interest expense – payroll and related
      costs) of $192,000 and $117,000, respectively, which reduced by $0.01 our
      basic earnings per share and had no impact on diluted earnings per share for
      the
      three-month period.  Our income before income tax expense and net
      income for the three months ended June 30, 2006 included a restricted stock
      award compensation cost of $80,000 and $49,000, respectively, which had no
      impact on basic and diluted earnings per share for the quarter. Our income
      before income tax expense and net income for the six months ended June 30,
      2007
      included restricted stock award compensation cost of $473,000 and $290,000,
      respectively, which reduced by $0.01 our basic and diluted earnings per share
      for the six-month period.  Our income before income tax expense and
      net income for the six months ended June 30, 2006 included restricted stock
      award compensation cost of $162,000 and $99,000, respectively, which had no
      impact on basic and diluted earnings per share for the six-month
      period.  The actual tax benefit for the tax deductions from vested
      restricted stock awards totaled $60,000 for the six months ended June 30, 2007.
       We had no tax benefit for the three months ended June 30, 2007 and the
      three and six months ended June 30, 2006, as we had no restricted stock awards
      vesting during those periods.


**16**





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





**Number
                of Shares**
            
            
            **Weighted-Average
                Grant Date Fair Value Per Share**Non-vested
                restricted stock awards at January 1, 2007
            
            
            203,775
            
            
            $
            8.05Granted
            
            
            75,000
            
            
            
            8.63Vested
            
            
            18,125
            
            
            
            8.53Forfeited
            
            
            2,750
            
            
            
            9.20Non-vested
                restricted stock awards at June 30, 2007
            
            
            257,900
            
            
            $
            8.17





As
      of
      June 30, 2007 and 2006, there was $1.4 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 June 30, 2007 is expected to be recognized over a weighted-average
      period of 2.2 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 (recorded as mortgage loans
      held for investment – securitized) or are pending delivery into future
      securitizations (recorded as mortgage loans held for investment –
pre-securitization), net of discounts, deferred origination fees and allowance
      for loan losses.





Mortgage
      loans held for investment – securitized is comprised of the mortgage loans
      collateralizing our outstanding financings on mortgage loans held for
      investment.  During the three months ended June 30, 2007 and 2006, we
      closed securitization transactions totaling $818.6 million and $801.1 million,
      respectively.  These securitizations were structured to be accounted
      for as secured financings and were collateralized by $850.0 million and $825.0
      million, respectively, of mortgage loans held for investment -
      securitized.  During the six months ended June 30, 2007 and 2006, we
      closed securitization transactions totaling $1.8 billion and $1.7 billion,
      respectively.  These securitizations were structured to be accounted
      for as secured financings and were collateralized by $1.8 billion and $1.7
      billion, respectively, of mortgage loans held for investment -
      securitized.  Mortgage loans held for investment – securitized had a
      weighted-average interest rate of 8.31% and 8.19% per annum at June 30, 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 June 30, 2007 and December 31, 2006, was approximately
      $754.7 million and $335.9 million, respectively, of mortgage loans that were
      pledged as collateral for our warehouse financings at those same respective
      dates.  Mortgage loans held for investment – pre-securitization had a
      weighted-average interest rate of 9.16% and 8.73% per annum at June 30, 2007
      and
      December 31, 2006, respectively.





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





*(Dollars
                in thousands)*
            
            **At
                June 30,**
              **2007**
            
            
            **At December 31,2006**Mortgage
                loans held for investment – securitized (1)
            
            $
            6,992,217
            
            
            $
            6,051,996Mortgage
                loans held for investment – pre-securitization (2)
            
            
            821,858
            
            
            
            417,818Discounts
                (MSR related)
            
            
            (47,482
            )
            
            
            (36,933
            )Net
                deferred origination fees
            
            
            (24,831
            )
            
            
            (19,194
            )Allowance
                for loan losses
            
            
            (66,864
            )
            
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            $
            7,674,898
            
            
            $
            6,358,377





*(1)* *Included
      in the outstanding balance of the mortgage loans held for investment -
      securitized at June 30, 2007 and December 31, 2006 were $462,000 and $1.1
      million, respectively, of impaired loans.*





*(2)* *Included
      in the outstanding balance of the mortgage loans held for investment -
      pre-securitized at June 30, 2007 and December 31, 2006 were $1.8 million and
      $1.5 million, respectively, of impaired loans.*





**17**





For
      the
      three months ended June 30, 2007 and 2006, we recorded interest income related
      to our mortgage loans held for investment – securitized of $126.6 million and
      $101.1 million, respectively.  For the six months ended June 30, 2007
      and 2006, we recorded interest income related to our mortgage loans held for
      investment – securitized of $249.5 million and $190.1 million,
      respectively.  For the three months ended June 30, 2007 and 2006, we
      recorded interest income related to our mortgage loans held for investment
–
pre-securitization of $19.8 million and $8.4 million,
      respectively.  For the six months ended June 30, 2007 and 2006, we
      recorded interest income related to our mortgage loans held for investment
–
pre-securitization of $34.0 million and $17.7 million,
      respectively.





The
      following table presents a summary
      of the activity for the allowance for loan losses on all mortgage loans held
      for
      investment for the three and six months ended June 30, 2007 and
      2006:





*(Dollars
                in thousands)*
            
            **For
                the Three Months Ended
				June 30,**
            
            
            **For the Six Months Ended
              June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Beginning
                balance
            
            $
            60,868
            
            
            $
            41,911
            
            
            $
            55,310
            
            
            $
            36,832Provision
                (1)
            
            
            13,276
            
            
            
            6,998
            
            
            
            23,921
            
            
            
            13,402Charge-offs
            
            
            (7,280
            )
            
            
            (2,583
            )
            
            
            (12,367
            )
            
            
            (3,908
            )Ending
                balance
            
            $
            66,864
            
            
            $
            46,326
            
            
            $
            66,864
            
            
            $
            46,326




*(1)* *The
      provision for loan losses for the three months ended June 30, 2007 and 2006
      includes a recovery of specific provision of $93,000 and a specific provision
      of
      $11,000, respectively, related to probable losses attributable to impaired
      loans.  The provision for loan losses for the six months ended June
      30, 2007 and 2006 includes a recovery of specific provision of $352,000 and
      a
      specific provision of $22,000, respectively, related to probable losses
      attributable to impaired loans.*




The allowance for loan losses at June 30, 2007 and December 31, 2006 contains
      $606,000 and $1.0 million, respectively, of specific reserves related to
      impaired loans.  Our recorded investment in impaired loans at June 30,
      2007 and December 31, 2006 was $2.3 million and $2.5 million,
      respectively.  Additionally, the average recorded investment in
      impaired loans for the three months ended June 30, 2007 and 2006 was $2.9
      million and $3.6 million, respectively.  The average recorded
      investment in impaired loans for the six months ended June 30, 2007 and 2006
      was
      $3.0 million and $3.5 million, respectively.  We recorded $12,000 and
      $61,000 of interest income, based upon the cash received on the loans classified
      as impaired during the three months ended June 30, 2007 and 2006,
      respectively.  We recorded $39,000 and $121,000 of interest income,
      based upon the cash received on the loans classified as impaired during the
      six
      months ended June 30, 2007 and 2006, respectively.




The mortgage loans held for investment portfolio at June 30, 2007 and December
      31, 2006 are seasoned 13.3 months and 12.2 months, respectively, on
      average.  Seasoning refers to the length of time the loans have been
      outstanding from their origination date.  Historically, as the loan
      portfolio ages (becomes more seasoned), the delinquencies generally grow until
      peaking at some point within the 24th to 60th month of the
      loan pool’s life.


**18**





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


**At
                  June 30, 2007**
              
              **At
                  December 31, 2006***(Dollars
                  in thousands)*
              
              **Amount**
              
              
              **%**
              
              **Amount**
              
              
              **%**Delinquency
                  status:0
                  - 29 days
              
              $
              6,858,480
              
              
              
              87.8%
              
              $
              5,792,563
              
              
              
              89.5%30
                  - 59 days
              
              
              296,002
              
              
              
              3.8
              
              
              237,059
              
              
              
              3.760
                  - 89 days
              
              
              170,270
              
              
              
              2.2
              
              
              116,332
              
              
              
              1.890+
                  days
              
              
              489,323
              
              
              
              6.2
              
              
              323,860
              
              
              
              5.0Total
              
              $
              7,814,075
              
              
              
              100.0%
              
              $
              6,469,814
              
              
              
              100.0%


As
      of
      June 30, 2007, December 31, 2006 and June 30, 2006, we had $490.0 million
      (including $688,000 of impaired loans that are less than 90 days delinquent
      but
      on non-accrual status), $324.1 million (including $226,000 of impaired loans
      that are less than 90 days delinquent but on non-accrual status) and $192.3
      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 June
      30, 2007 and 2006 performed in accordance with their contractual loan terms,
      we
      would have recognized an additional $6.3 million and $2.0 million of interest
      income during the three months ended June 30, 2007 and 2006, respectively,
      and
      an additional $11.9 million and $4.2 million of interest income during the
      six
      months ended June 30, 2007 and 2006, respectively.  We expect the
      amounts of non-accrual mortgage loans to change over time depending on a number
      of factors, such as the growth or decline in the size of our mortgage loans
      held
      for investment portfolio, the maturity of the loan portfolio, the number and
      dollar value of problem loans that are recognized and resolved through
      collection efforts made by our third-party servicer, and the amount of
      charge-offs.  Additionally, the performance of our mortgage loans can
      be affected by external factors, such as economic and employment conditions,
      or
      other factors related to the individual borrower.





**(7)  Excess
      Cashflow Certificates**





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





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




In accordance with Emerging Issues Task Force (“EITF”) 99-20, “Recognition of
      Interest and Impairment on Purchased and Retained Beneficial Interests in
      Securitized Financial Assets,” we regularly analyzed and reviewed our
      assumptions to determine that the actual rate of return (interest income) on
      our
      excess cashflow certificates was within our expected rate of
      return.  The expected rate of return was recorded as a component of
      interest income.  Any return that either was greater than or less than
      the expected rate of return was reflected as a fair value adjustment and was
      recorded as a component of “other income” in the consolidated statements of
      operations.  During the three months ended March 31, 2007, we sold all
      of our remaining excess cashflow certificates at fair value for $1.1
      million, and consequently, no longer record any interest income or other
      income related to changes in fair value of the excess cashflow
      certificates.  For the three months ended June 30, 2006, we recorded
      interest income related to our excess cashflow certificates of
      $138,000.  For the six months ended June 30, 2007 and 2006, we
      recorded interest income related to our excess cashflow certificates of $17,000
      and $380,000, respectively.  For the three months ended June 30, 2006,
      we recorded a fair value gain in other income related to our excess cashflow
      certificates of $4.2 million.  For the six months ended June 30, 2007
      and 2006, we recorded fair value gain in income related to our excess cashflow
      certificates of $1.6 million and $7.4 million, respectively.





**19**





**(8)  Warehouse
      Financing**





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





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




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




*(Dollars
                    in thousands)*
                
                
                
                
                
                **Balance
                    Outstanding****Warehouse
                    Credit Facility**
                
                **Facility
                    Amount**(1)
                
                **Interest
                    Rate**
                
                **At**
                  **June
                    30, 
                  2007**
                
                **At**
                  **December
                    31, 2006**
                
                **Expiration
                    Date**Bank
                    of America
                
                $        
                     500,000
                
                Margin
                    over LIBOR
                
                $        395,481
                
                $        76,717
                
                August
                    2007Deutsche
                    Bank
                
                500,000
                
                Margin
                    over LIBOR
                
                359,183
                
                --
                
                October
                    2007Citigroup
                
                500,000
                
                Margin
                    over LIBOR
                
                --
                
                234,578
                
                May
                    2008RBS
                      Greenwich Capital
                
                500,000
                
                Margin
                    over LIBOR
                
                --
                
                24,570
                
                November
                    2007JPMorgan
                      Chase
                
                500,000
                
                Margin
                    over LIBOR
                
                --
                
                --
                
                May
                    2008Total
                
                $    
                     2,500,000
                
                
                
                $        754,664
                
                $        335,865


*(1) The
      warehouse facility amount shown is as of June 30, 2007, and was $1.75 billion
      as
      of December 31, 2006.  The committed portion of the warehouse facility
      amount totaled approximately $1.5 billion and $1.0 billion at June 30, 2007
      and
      December 31, 2006, respectively.*




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 $754.7 million we had outstanding at
      June
      30, 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 23 basis points to an average of
      5.32% for the three months ended June 30, 2007, compared to an average of 5.09%
      for the three months ended June 30, 2006.  The benchmark index
      increased 47 basis points to an average of 5.32% for the six months ended June
      30, 2007, compared to an average of 4.85% for the six months ended June 30,
      2006. Partially offsetting the increase in the benchmark rate during the
      three and six month periods was a decrease in the average margin over the
      benchmark index charged by our warehouse creditors during the same
      periods.  For the three months ended June 30, 2007 and 2006, we
      recorded interest expense related to our warehouse financing of $13.7 million
      and $7.5 million, respectively. For the six months ended June 30, 2007 and
      2006, we recorded interest expense related to our warehouse financing of $25.7
      million and $15.3 million, respectively.





**20**





The
      terms
      of our warehouse agreements require us to comply with various operating and
      financial covenants, which are customary for agreements of this
      type.  The continued availability of funds provided to us under these
      agreements is subject to, among other conditions, our continued compliance
      with
      these covenants.  If we fail to comply with any of these covenants or
      otherwise default under a warehouse credit facility, the lender has the right
      to
      terminate the warehouse credit facility and require immediate payment which
      may
      require sale of the collateral at less than optimal terms.  In
      addition, if we default under one warehouse credit facility, it would generally
      trigger a default under the other warehouse credit facilities.  We
      believe that we are in compliance with these covenants as of June 30,
      2007.





During
      the three months ended June 30, 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 December
      31,
      2006.





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





For
      the 14 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.  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 issuance of 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
      June 30, 2007 and December 31, 2006,
      the outstanding financing on mortgage loans held for investment, net consisted
      of $6.9 billion and $6.0 billion, respectively.  The weighted-average
      interest rate of our financing on mortgage loans held for investment, net
      increased 10 basis points to 5.70% at June 30, 2007 from 5.60% at December
      31,
      2006.





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





*(Dollars
                in thousands)*
            
            **Total**
            
            
            **Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Three
                Years**
            
            
            **Three
                to**
              **Five
                Years**
            
            
            **More
                than**
              **Five
                Years**Financing
                on mortgage loans held for investment, net (1)
            
            $
            6,903,729
            
            
            $
            2,117,495
            
            
            $
            2,605,034
            
            
            $
            1,121,663
            
            
            $
            1,059,537





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




**21**





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 June 30, 2007 and 2006, we recorded interest expense related
      to our securitization debt of $95.8 million and $68.6 million,
      respectively.  For the six months ended June 30, 2007 and 2006, we
      recorded interest expense related to our securitization debt of $184.2 million
      and $127.7 million, respectively. Included in financing on mortgage loans
      held for investment, net at June 30, 2007 and December 31, 2006, are $13.4
      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 June 30,
      2007 and December 31, 2006, the fair value of our corridors totaled $948,000
      and
      $2.5 million, respectively, and the fair value of our interest rate swaps
      (including amortizing notional balance interest rate swaps) totaled gains of
      $2.9 million and gains of $942,000, respectively.  The fair value of
      our corridors and interest rate swaps are recorded as a component of prepaid
      and
      other assets or accounts payable and other liabilities.





As
      of
      June 30, 2007, the effective portion of the changes in fair value of the
      corridors, interest rate swaps and any losses on terminated swaps are recorded
      as components of accumulated OCI and totaled, net of tax, losses of $446,000,
      gains of $1.8 million and losses of $2.6 million, respectively.  As of
      December 31, 2006, the effective portion of the changes in fair value of the
      corridors and interest rate swaps and any losses on terminated swaps are
      recorded as components of accumulated OCI, and totaled, net of tax, losses
      of
      $155,000, gains of $575,000 and losses of $1.9 million,
      respectively.  Accumulated OCI or loss relating to cash flow hedging
      is reclassified to earnings as a yield adjustment to interest expense as the
      interest payments affect earnings.  Hedge ineffectiveness associated
      with hedges resulted in a loss of $17,000 and a gain of $79,000 for the three
      months ended June 30, 2007 and 2006, respectively.  Hedge
      ineffectiveness associated with hedges resulted in a loss of $97,000 and a
      gain
      of $139,000 for the six months ended June 30, 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 June 30, 2007 and December 31, 2006, we classified
      $266,000 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 June 30, 2007 and 2006, a gain of $100,000 and a gain of
      $69,000, respectively, was recorded to earnings on the changes in fair value
      of
      the hedges (specifically corridors) held as trading
      securities.  During the six months ended June 30, 2007 and 2006, a
      gain of $84,000 and a gain of $284,000, respectively, was recorded to earnings
      on the changes in fair value of the hedges (specifically corridors) held as
      trading securities.





**22**





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 June 30, 2007:





*(Dollars
                in thousands)*
            
            **Total**
            
            
            **One****Year**
            
            
            **Two
                Years**
            
            
            **Three
                Years**
            
            
            **Four
                Years**
            
            
            **Five
                Years & Thereafter**Caps
                bought - notional
            
            $
            590,069
            
            
            $
            418,577
            
            
            $
            42,720
            
            
            $
            32,195
            
            
            $
            24,921
            
            
            $
            71,656Weighted-averagestrike
                rate
            
            
            7.27%
            
            
            
            7.08%
            
            
            
            7.43%
            
            
            
            7.46%
            
            
            
            7.43%
            
            
            
            7.40%Caps
                sold - notional
            
            $
            590,069
            
            
            $
            418,577
            
            
            $
            42,720
            
            
            $
            32,195
            
            
            $
            24,921
            
            
            $
            71,656Weighted-averagestrike
                rate
            
            
            9.28%
            
            
            
            9.28%
            
            
            
            9.27%
            
            
            
            9.27%
            
            
            
            9.28%
            
            
            
            9.32%Amortizing
                notional balance interest rate swaps:Notional
            
            $
            315,463
            
            
            $
            151,736
            
            
            $
            113,710
            
            
            $
            50,017
            
            
            $
            --
            
            
            $
            --Weighted-average
                rate
            
            
            5.10%
            
            
            
            5.12%
            
            
            
            5.09%
            
            
            
            5.00%
            
            
            
            --
            
            
            
            --





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





The
      original stated maturities of our corridors on the date of purchase ranged
      from
      a low of 1.3 years to a maximum of 8.3 years.  The original stated
      maturities of our amortizing interest rate swaps on the date of purchase ranged
      from a low of 3.0 years to a maximum of 3.1 years.  The maturities of
      our corridors as of June 30, 2007 ranged from July 2007 to July 2012 and had
      weighted average strike prices of 6.33% to 8.20% for the caps bought and 9.15%
      to 9.47% for caps sold.  The maturities of our notional balance
      interest rate swaps as of June 30, 2007 ranged from July 2007 to June 2010
      and
      had a weighted average rate of 4.96% to 5.12%.





**(11)
      Accumulated Other Comprehensive Loss**





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





*(Dollars
                in thousands)*
            
            **Before
                Tax Amount**
            
            
            **Tax
                Benefit (Expense)**
            
            
            **After
                Tax**
              **Amount**For
                the three months ended June 30, 2007:Net
                unrealized holding gains on derivatives arising during the
                period
            
            $
            4,031
            
            
            $
            (1,577
            )
            
            $
            2,454Reclassification
                adjustment for gains on derivatives included in net income
            
            
            278
            
            
            
            (109
            )
            
            
            169Other
                comprehensive income
            
            $
            4,309
            
            
            $
            (1,686
            )
            
            $
            2,623For
                the three months ended June 30, 2006:Net
                unrealized holding gains on derivatives arising during the
                period
            
            $
            5,999
            
            
            $
            (2,340
            )
            
            $
            3,659Reclassification
                adjustment for loss on derivatives included in net income
            
            
            (4,345
            )
            
            
            1,695
            
            
            
            (2,650
            )Other
                comprehensive income
            
            $
            1,654
            
            
            $
            (645
            )
            
            $
            1,009





**23**








*(Dollars
                in thousands)*
            
            **Before
                Tax Amount**
            
            
            **Tax
                Benefit (Expense)**
            
            
            **After
                Tax**
              **Amount**For
                the six months ended June 30, 2007:Net
                unrealized holding gains on derivatives arising during the
                period
            
            $
            534
            
            
            $
            (215
            )
            
            $
            319Reclassification
                adjustment for losses on derivatives included in net
                income
            
            
            (130
            )
            
            
            52
            
            
            
            (78
            )Other
                comprehensive income
            
            $
            404
            
            
            $
            (163
            )
            
            $
            241For
                the six months ended June 30, 2006:Net
                unrealized holding gains on derivatives arising during the
                period
            
            $
            12,671
            
            
            $
            (4,941
            )
            
            $
            7,730Reclassification
                adjustment for loss on derivatives included in net income
            
            
            (4,345
            )
            
            
            1,694
            
            
            
            (2,651
            )Other
                comprehensive income
            
            $
            8,326
            
            
            $
            (3,247
            )
            
            $
            5,079





**(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.








**Three
                Months Ended****June
                30,**
            
            
            **Six
                Months Ended****June
                30,***(Dollars
                in thousands, except share and**per
                share data)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                income, as reported
            
            $
            777
            
            
            $
            7,241
            
            
            $
            5,664
            
            
            $
            13,827Less
                preferred stock dividends
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Net
                income available to commonstockholders
            
            $
            777
            
            
            $
            7,241
            
            
            $
            5,664
            
            
            $
            13,827Basic
                - weighted-average shares
            
            
            23,335,936
            
            
            
            22,903,098
            
            
            
            23,313,648
            
            
            
            21,706,899Basic
                EPS
            
            $
            0.03
            
            
            $
            0.32
            
            
            $
            0.24
            
            
            $
            0.64Basic
                - weighted-average shares
            
            
            23,335,936
            
            
            
            22,903,098
            
            
            
            23,313,648
            
            
            
            21,706,899Incremental
                shares-options (1)
                (2)
            
            
            842,823
            
            
            
            793,260
            
            
            
            813,729
            
            
            
            828,310Diluted
                - weighted-average shares
            
            
            24,178,759
            
            
            
            23,696,358
            
            
            
            24,127,377
            
            
            
            22,535,209Diluted
                EPS (1)
                (2)
            
            $
            0.03
            
            
            $
            0.31
            
            
            $
            0.23
            
            
            $
            0.61





*(1) For
      the three and six months ended June 30, 2007, the weighted average of
      approximately 1.7 million and 1.7 million, respectively, in-the-money employee
      stock options and approximately 257,000 and 230,000, respectively, restricted
      stock awards are included in the calculation of diluted EPS.  We had
      no out-of-the-money employee stock options, which would have been excluded
      since
      their effect is anti-dilutive, for the three and six months ended June 30,
      2007.*





(2)For
      each of the three and six months ended June 30, 2006, approximately 1.8
          million in-the-money employee stock options and approximately 156,000
          restricted stock awards are included in the calculation of diluted
          EPS, while approximately 25,000 of out-of-the-money employee stock
          options have been excluded since their
      effect is anti-dilutive.


**24**





**(13) Subsequent
      Events**





We
      paid a cash dividend of $0.05 per
      share of common stock on July 3, 2007 to stockholders of record as of the
        close of business on June 25, 2007.


We
            have
            received substantial margin calls from our warehouse providers subsequent
            to
            June 30, 2007, including margin calls received during the days immediately
            preceding the filing date of this Report.  To date, we
            have been able  to satisfy these margin calls from our existing liquidity.  There
            can be no assurance, however, that we will not be subject to increased
            margin calls
            after the date of this Report and, if so, whether we will be able
            to satisfy our
            obligations thereunder. On
            August 13, 2007, we closed a repo financing facility with AG Delta
              Holdings, LLC, an affiliate of Angelo,
            Gordon & Co., in the principal mount of $60.0 million and bearing
            interest  at a fixed margin over one-month LIBOR.  The
            facility is  collateralized by our securitization residual, BIO and
            owner trust certificates (the “securitization related certificates”) – which
            entitle the holder to  receive the difference between the interest
            payments received from the loans
            held in the related securitization trust and the payments to the
            related asset-backed investors (less the contractual servicing fee
            and other fees, costs
            and expenses of administering the securitization trust).  The
            cash  flows from these securitization related certificates will be
            utilized to pay the
            principal under the facility.  We will make
            monthly interest payments on the then-existing principal balance
            of the facility.  The facility matures in 12
          months, if not repaid earlier.
  In
                  connection
                  with this transaction, we have agreed to issue to AG Delta
              Holdings, LLC warrants to purchase 10.0 million shares of our common
              stock.  The
                    initial exercise  price of the warrants is $5.00 per share,
                    and they expire in February 2009, subject to extension if
              we do not obtain stockholder approval for the warrant issuance
              within 90 days of the closing date.  We also have agreed
              to issue $10.0 million of convertible notes to several funds controlled
              by one of our existing equity investors.  The
                  notes are convertible into an aggregate of 2.0 million shares
                    of our common stock,
                  at a conversion price of $5.00 per
                  share.  The convertible notes mature in 12 months,
                  if not converted or redeemed earlier, and bear interest at
                  a rate of 6% per annum for the first 90 days and therafter
          at a rate of 12% per annum, until converted or redeemed. The
    issuance of most of the shares issuable upon exercise of the warrants
                  and all of the shares issuable upon exercise of the convertible
                  notes, are each subject to the approval of our stockholders.  The
                  holders of the convertible notes have the right to require
                  us to redeem the notes if we fail to distribute a definitive
                  proxy statement to obtain stockholder approval within 90 days
                  after the issuance date, or obtain the stockholder approval
                  within 120 days after the issuance date.  Additionally,
                  the value assigned to the warrants issued would create a discount
                  that would be amortized to interest expense as a yield adjustment
                  over the life of the associated financing facility.  The
                  value of the warrants has not yet been determined and could
                  have a significant impact on our earnings during the amortization
          period.
   **25**
  **Item
      2.  Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.**
 
 *This
      Quarterly Report on Form 10-Q (“Quarterly Report”) should be read in conjunction
      with the more detailed and comprehensive disclosures included in our Annual
      Report on Form 10-K for the year ended December 31, 2006.  In
      addition, please read this section in conjunction with our Consolidated
      Financial Statements and Notes to Consolidated Financial Statements herein,
      and
      please see “Part II – Item 1A. - Risk Factors,” including the information with
      respect to forward-looking statements that appear in this Report. As
      discussed in Part II-Item 1A of this Quarterly Report, there have been
      substantial operating difficulties for us and for companies in our sector during
      the months and weeks preceding the filing of this Quarterly
      Report.  Accordingly, our past performance described in this section
      should not be construed to be indicative of our future
      performance.*
  **General**
 
 We
      are a
      national specialty consumer finance company that originates, securitizes and
      sells non-conforming mortgage loans.  Our loans are primarily fixed
      rate and secured by first mortgages on one- to four-family residential
      properties.  Throughout our 25-year operating history, we have focused
      on lending to individuals who generally do not satisfy the credit, documentation
      or other underwriting standards set by more traditional sources of mortgage
      credit, including those entities that make loans in compliance with the
      conforming lending guidelines of Fannie Mae and Freddie Mac.  We make
      mortgage loans to these borrowers for purposes such as debt consolidation,
      refinancing, education and home improvements. We provide our customers with
      a variety of loan products designed to meet their needs, using a risk-based
      pricing strategy to develop products for different risk
      categories.  Historically, the majority of our loan production has
      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”).
 
 
 **26**
  **Origination
      of Mortgage Loans**
 
 All
      of the
      mortgage loans we originate are originated using our underwriting guidelines
      with the intent to hold the mortgage loans to maturity in our securitizations
      trusts, notwithstanding the fact that we sell a small percentage of the mortgage
      loans we originate on a whole loan basis each quarter.  The sale of these
      mortgage loans does not reflect on our intention when the mortgage loans are
      originated, but rather the fact we regularly review (generally on a monthly
      basis) our mortgage loans held for investment – pre-securitization portfolio to
      determine which mortgage loans we prefer to sell on a whole loan basis, rather
      than securitize.
 
 We
      originate
      mortgage loans through two distribution channels, wholesale and
      retail.  The majority of the mortgage loans we originate are made to
      borrowers 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.
 
 For
      the three
      and six months ended June 30, 2007 and 2006, we originated the following loans
      by origination channel and by loan type:
 
 **For
                the Three Months****Ended
                June 30,**
            
            
            **For
                the Six Months****Ended
                June 30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Originations
                by channel:Wholesale
            
            $
            728,234
            
            
            $
            515,353
            
            
            $
            1,390,005
            
            
            $
            1,033,385Retail
            
            
            624,601
            
            
            
            455,259
            
            
            
            1,203,604
            
            
            
            881,951Total
                originations
            
            $
            1,352,835
            
            
            $
            970,612
            
            
            $
            2,593,609
            
            
            $
            1,915,336Loan
                type:Fixed
                rate
            
            
            95.8%
            
            
            
            85.6%
            
            
            
            95.0%
            
            
            
            84.6%Adjustable-rate
            
            
            4.2
            
            
            
            14.4
            
            
            
            5.0
            
            
            
            15.4Total
            
            
            100.0%
            
            
            
            100.0%
            
            
            
            100.0%
            
            
            
            100.0%
 
 For
      the
      three months ended June 30, 2007, we originated $1.4 billion of loans, an
      increase of 39.4% over the $970.6 million of loans originated during the three
      months ended June 30, 2006.  Loan originations for the three months
      ended June 30, 2007 were comprised of approximately $728.2 million of wholesale
      loans, representing 53.8% of total loan production, and $624.6 million of retail
      loans, representing 46.2% of total loan production.  This compares to
      originations for the three months ended June 30, 2006 of $515.4 million of
      wholesale loans, representing 53.1% of total loan production, and $455.3 million
      of retail loans, representing 46.9% of total loan production.
 
 **27**


For
      the
      six months ended June 30, 2007, we originated $2.6 billion of loans, an increase
      of 35.4% over the $1.9 billion of loans originated during the six months ended
      June 30, 2006.  Loan originations for the six months ended June 30,
      2007 were comprised of approximately $1.4 billion of wholesale loans,
      representing 53.6% of total loan production, and $1.2 billion of retail loans,
      representing 46.4% of total loan production.  This compares to
      originations for the six months ended June 30, 2006 of $1.0 billion of wholesale
      loans, representing 54.0% of total loan production, and $882.0 million of retail
      loans, representing 46.0% of total loan production.





During
      the three months ended June 30, 2007 we continued to refine our underwriting
      criteria - we raised the minimum credit scores required on some loans and
        lowered the maximum loan-to-value (“LTV”) ratios on others
        and eliminated certain product offerings, among other things.  During
        the three months ended June 30, 2007, we ceased originating “2/28” loans
        (loans that have a fixed rate of interest for the first two years, and
        then adjusts thereafter for the remaining 28 years of the term) as one
        of our product offerings.  The primary reason for discontinuing
         this product relates to the fact that it did not offer a financial benefit
      to
      our prospective borrowers, especially when compared to our “3/27”
product.  Based upon changes in the market that are occurring
      subsequent to June 30, 2007, we recently ceased originating “3/27” loans
      (loans  that have a fixed rate of interest for the first three years, and
      then adjusts thereafter for the remaining 27 years of the term) based upon
      the lack of a financial benefit to our prospective borrowers, especially
      when compared to our
      fixed rate products.  Collectively, the “2/28” and “3/27” loans
       represented only 4.2% and 5.0% of our total originations for the three
      and six
      months ended June 30, 2007, respectively.





**Securitizations
      and Whole-Loan Sales.** As a fundamental part of our present
       business and financing strategy, we securitize the majority of the mortgage
      loans we originate.  We 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.  For example, if all of the mortgage loans we originated
      in a  quarter were placed in the pool being securitized at the end of that
      quarter, the pool would not have the optimal average loan life, mix of
      interest rate terms, mix of and overall LTV ratio, mix of credit quality,
      or geographic mix to
      maximize profitability and cash flow for the securitization.  Mortgage
       loans that are determined to be left out of the pool of mortgage loans
      collateralizing a securitization are typically sold shortly thereafter.





During
      the three months ended June 30, 2007 and 2006, whole-loan sales comprised
      approximately 19.5% and 15.7%, respectively, of the total amount of our combined
      securitizations and whole-loan sale transactions.  During the six
      months ended June 30, 2007 and 2006, whole-loan sales comprised approximately
      17.5% 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 and six months ended
      June 30, 2007 and 2006:





**Three
                Months Ended****June
                30,**
            
            
            **Six
                Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Loan
                securitizations – portfolio based
            
            $
            849,998
            
            
            $
            824,978
            
            
            $
            1,799,998
            
            
            $
            1,699,978Whole-loan
                sales
            
            
            205,379
            
            
            
            154,008
            
            
            
            382,461
            
            
            
            318,718Total
                securitizations and whole-loan sales
            
            $
            1,055,377
            
            
            $
            978,986
            
            
            $
            2,182,459
            
            
            $
            2,018,696





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





**28**





**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 and holding our mortgage loans
      and issuing asset-backed securities, and are bankruptcy remote – meaning that
      purchasers of asset-backed securities may rely only on the cash flows generated
      from the assets held by the securitization trust for payment and may not rely
      upon us for payment; likewise, the assets held by the securitization trust
      are
      not available to our general creditors, although 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.





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 required by the rating
        agencies and/or the bond insurer insuring the securitization.





The
        securitizations we completed during the six months ended June 30, 2007 required
        an O/C of 3.6% and 3.7% of the initial mortgage loans sold to the securitization
        trust.  During the year ended December 31, 2006, our securitizations
        required a range of O/C from 2.7% to 3.1% of the initial mortgage loans sold
        to
        the securitization trust.  The level of O/C required for our
        securitizations is driven by the ratings placed on our asset-backed securities
        by the rating agencies, which are Standard & Poor's Ratings Services
        (“S&P”), Moody's Investors Service, Inc (“Moody’s”), Fitch Ratings, Inc.
        (“Fitch”) and/or Dominion Bond Rating Service, Inc.
        (“DBRS”).  Subsequent to June 30, 2007, several of the rating agencies
        have announced changes to their ratings criterion and methodologies which,
        among
        other things, will raise the level of O/C required on our securitization
        transactions in the near term above the levels we have experienced during
        the
        first six months of 2007.





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





The
      NIM
      note(s) or Class N Notes entitle the holder to be paid a specified interest
      rate, and further provides for, (1) in the case of the Class N Notes, all
      remaining cash flows generated by the trust after payment of senior payment
      priorities and expenses, or (2) in the case of the NIM notes, the cash flows
      generated by the excess cashflow certificates, to be used to pay all principal
      and interest on the NIM note(s) or the Class N Notes until paid in full, which
      typically occurs approximately 15 to 24 months from the date the NIM note(s)
      or
      the Class N Notes are issued.  We ultimately will hold the excess
      cashflow or owner trust certificates after the holder(s) 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 portion of our
      cost to originate the loans included in the transaction, to the extent there
      are
      any excess proceeds.  We intend to continue to issue NIM notes or
      Class N Notes in 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.





**29**





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 applicable trust
      or
purchase
      up to
      1% of the mortgage loans contained in the securitization mortgage
      pool.  We refer to the recording 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.





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
      June
      30, 2007:





*(Dollars
                 in thousands*)**Asset-backed
                Security Series:**
            
            **Issue
                Date**
            
            **Current
                Loan 
              Principal Balance(1)**
            
            
            **Total
                Securitization Debt Balance(2)**2004-1
            
            March
                30, 2004
            
            $
            168,654
            
            
            $
            163,9322004-2
            
            June
                29, 2004
            
            
            202,418
            
            
            
            186,2412004-3
            
            September
                29, 2004
            
            
            242,485
            
            
            
            225,1082004-4
            
            December
                29, 2004
            
            
            268,633
            
            
            
            251,6732005-1
            
            March
                31, 2005
            
            
            369,821
            
            
            
            347,4942005-2
            
            June
                29, 2005
            
            
            425,923
            
            
            
            403,9162005-3
            
            September
                29, 2005
            
            
            510,441
            
            
            
            484,7162005-4
            
            December
                30, 2005
            
            
            572,075
            
            
            
            548,0782006-1
            
            March
                30, 2006
            
            
            611,906
            
            
            
            593,7172006-2
            
            June
                29, 2006
            
            
            657,043
            
            
            
            645,0342006-3
            
            September
                29, 2006
            
            
            722,802
            
            
            
            716,2662006-4
            
            December
                29, 2006
            
            
            586,540
            
            
            
            585,2062007-1
            
            March
                29, 2007
            
            
            929,887
            
            
            
            920,6472007-2
            
            June
                18, 2007
            
            
            849,998
            
            
            
            845,150Total
            
            
            
            $
            7,118,626
            
            
            $
            6,917,178





*(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 $13.4 million at June 30,
      2007.*


**30**


**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 sold 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 June 30, 2007.  The
      fair value of the excess cashflow certificates held at December 31, 2006 totaled
      $1.2 million.





**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.





**Whole-Loan
      Sales**.  Whole-loan sales are the sales of pools of mortgage
      loans to banks, consumer finance-related companies and institutional investors
      on a servicing-released basis.  As discussed above, we sell a portion
      of our mortgage loans on a whole-loan basis, without retaining servicing rights,
      generally in private transactions to financial institutions or consumer finance
      companies.  We recognize a gain or loss when we sell loans on a
      whole-loan basis equal to the difference between the cash proceeds received
      for
      the mortgage loans and our investment in the mortgage loans, including any
      unamortized loan origination fees and costs.  We generally sell these
      mortgage loans without recourse, except that we provide standard representations
      and warranties to the purchasers of such loans.  During the three
      months ended June 30, 2007 and 2006, we sold whole-loans without recourse to
      third-party purchasers (with the exception of a premium recapture and secondary
      marketing (indemnification) reserves described below) and on a
      servicing-released basis of $205.4 million and $154.0 million,
      respectively.  During the six months ended June 30, 2007 and 2006, we
      sold whole-loans without recourse to third-party purchasers (with the exception
      of a premium recapture and secondary marketing (indemnification) reserves
      described below) and on a servicing-released basis of $382.5 million and $318.7
      million, respectively.  The average gross premium we received for the
      whole loans sold during the three months ended June 30, 2007 was 3.22%, compared
      to 3.52% for the three months ended June 30, 2006.  The average gross
      premium we received for the whole loans sold during the six months ended June
      30, 2007 was 3.29%, compared to 3.48% for the six months ended June 30,
      2006.  The gross premium paid to us by third-party purchasers in
      whole-loan sale transactions does not take into account premiums we pay to
      originate the mortgage loans, the origination fees we collect, premium recapture
      reserves or secondary marketing (indemnification) reserves – each of which are
      components of the net gain on sale calculation.





We
      maintain a premium recapture reserve related to our contractual obligation
      to
      rebate a portion of any premium paid by a purchaser when a borrower prepays
      a
      sold loan within an agreed period of time.  The premium recapture
      reserve is established at the time of the whole-loan sale through a provision,
      which is reflected as a reduction of the gain on sale of mortgage
      loans.  During the three months ended June 30, 2007 and 2006, we
      recorded a premium recapture reserve provision of $209,000 and $248,000,
      respectively, for the refunding of premiums to whole-loan sale
      investors.  During the six months ended June 30, 2007 and 2006, we
      recorded a premium recapture reserve provision of $296,000 and $483,000,
      respectively, for the refunding of premiums to whole-loan sale
      investors. The premium recapture reserve is recorded as a liability on our
      consolidated balance sheets.  We estimate recapture losses primarily
      based upon historical premium recaptures and by reviewing the types of loan
      products, interest rates, borrower prepayment fees, if any, and an estimate
      of
      the impact of future interest rate changes may have on early
      repayments.  The premium recapture reserve totaled $699,000 and
      $958,000 at June 30, 2007 and December 31, 2006, respectively.





**31**





We
      also
      maintain a secondary market (indemnification) 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 June 30, 2007 and 2006 we
      recorded a secondary market (indemnification) reserve provision of $485,000
      and
      $54,000, respectively, for losses that arise in connection with loans that
      we
      may be required to repurchase from whole-loan sale investors.  During
      the six months ended June 30, 2007 and 2006 we recorded a secondary market
      (indemnification) reserve provision of $662,000 and $229,000, 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 (indemnification) reserve totaled $712,000 and $512,000 at June 30,
      2007,
      and December 31, 2006, respectively.





**Summary
      of Critical Accounting Policies**





An
      appreciation of our critical accounting policies is necessary to understand
      our
      financial results.  These policies may require management to make
      difficult and subjective judgments regarding uncertainties, and as a result,
      these estimates may significantly impact our financial results.  The
      accuracy of these estimates and the likelihood of future changes depend on
      a
      range of possible outcomes and a number of underlying variables, many of which
      are beyond our control, and there can be no assurance that our estimates are
      accurate.





**Accounting
      for Hedging
      Activities****.**  Our hedging strategy revolves
      around two principal activities; (a) the issuance of our prospective
      securitization financing which is collateralized by the origination of mortgage
      loans, and (b) the issuance of variable-rate securitization debt
      (financing).  As a result of these activities, we are exposed to
      interest rate risk beginning when our mortgage loans close and are recorded
      as
      assets until permanent financing is arranged, such as when the asset-backed
      securities are issued.  We utilize hedges to mitigate our interest
      rate exposure.  After we originate mortgage loans, our strategy is to
      generally use a series of duration matched interest rate swap contracts (i.e.,
      two, three and five-year tenor contracts) in an effort to lock in a
      pre-determined base interest rate on designated portions of our prospective
      future securitization financing (i.e., the asset-backed securities that we
      expect to issue).  We also use corridors (corresponding purchases and
      sales of interest rate caps with similar notional balances at different strike
      prices) and/or amortizing notional balance interest rate swaps that are designed
      to limit our financing costs on the variable portion of the debt issued in
      the
      securitization.  The purpose of the hedge within the securitization is
      to maintain minimum margins over specific periods of time, with the possibility
      of allowing us to increase margins during periods in which prevailing interest
      rates are lower than anticipated.  Both the interest rate swaps (which
      generally have an expected life of 36 months) and corridors (which have a range
      of expected lives) are derivative instruments that trade in liquid markets,
      and
      we do not use either of them for speculative purposes.





In
      accordance
      with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” we record all of our derivatives on our consolidated balance 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.


**32**







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





The
“new
      hedge relationship” is determined by re-aligning the hedge with the projected
      remaining 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 June 30, 2007 and December 31,
      2006, we did not maintain a valuation allowance against our deferred tax
      assets.  Additionally, on January 1, 2007, we adopted FIN No. 48,
      which clarified the accounting for uncertainty in income taxes recognized
      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
      confirmed over the 18 to 24 month period following the analysis date of June
      30,
      2007.  Provisions for loan losses are made for loans to the extent
      that we bear probable losses on these loans.  Provision amounts are
      charged as a current period expense to operations.  We charge-off
      uncollectible loans at the time we deem they are not probable of being
      collected.





**33**





In
      order to estimate an appropriate
      allowance for losses on mortgage loans held for investment (both securitized
      and
      pre-securitized), we estimate losses using a detailed analysis of historical
      mortgage loan performance data, which is updated each quarter.  This
      data is analyzed for loss performance and prepayment performance by product
      type, origination year and securitization issuance.  The results of
      that analysis are then applied to the current long-term mortgage portfolio
      held
      for investment, excluding those loans which meet the criteria for specific
      review under SFAS No. 114, and an estimate is created.  In accordance
      with SFAS No. 5, “Accounting for Contingencies,” we believe that pooling of
      mortgages with similar characteristics is an appropriate methodology by which
      to
      calculate or estimate the allowance for loan losses.  The results of
      that analysis are then applied to the current long-term mortgage portfolio,
      and
      an allowance for loan losses estimate is created to take into account both
      known
      and inherent losses in the loan portfolio.  Losses incurred will be
      written-off against the allowance for loan losses.





While
      we will
      continually evaluate the adequacy of the allowance for loan losses, we
        recognize that there are qualitative factors that must be taken into
        consideration when evaluating and measuring potential expected losses
        on mortgage  loans.  These items include, but are not limited
        to, current  performance of the loans, economic indicators that may affect
        the borrowers’
ability to pay, changes in the market value of the collateral, political factors
      and the general economic environment.  As these factors and estimates
       are influenced by factors outside of our control and there is inherently
       uncertainty in our estimates, it is reasonably possible that they could
       change.  In particular, if conditions were such that we were
       required  to increase the provision for loan losses, our income for that
       period would decrease.





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. **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.  During the three months ended June 30, 2007, we revised the
      prepayment assumptions utilized to accrete the deferred origination income
      related to our fixed rate mortgage loans.  In general, prepayment
      speeds are lowest in the first month after origination, and generally increase
      until a peak speed is reached.  Generally, loans will continue to
      prepay at the peak speed for some period of time, and then prepayment speeds
      typically begin to decline.  We use prepayment assumptions that
      reflect these tendencies.  The prepayment curve established during the
      second quarter of 2007 lowered the prepayment speeds we expect over the next
      12
      months.  As of June 30, 2007, the revised prepayment curve for fixed
      rate loans seasoned less than 15 months ranged from 4.0% to 35.0% over the
      next
      12 months as compared to 4.0% to 43.0% on the previous prepayment
      curve.  As of June 30, 2007, the revised prepayment curve for fixed
      rate loans seasoned 15 months or more is 24.0% over the next 12 months as
      compared a range of 34.0% to 43.0% on the previous prepayment
      curve.  As of June 30, 2007, the prepayment curves for adjustable-rate
      loans seasoned less than 15 months and 15 months or more ranged from 4.0%
      to 75.0% and 35.0% to 75.0%, respectively, over the next 12 months, which
      is unchanged from the previous prepayment curves.





**34**





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





**General**





Our
      net
      income for the three months ended June 30, 2007 was $777,000, or $0.03
        per share
      basic and $0.03 per share diluted, compared to net income of $7.2 million,
      or
      $0.32 per share basic and $0.31 per share diluted, for the three months
        ended June 30, 2006.  As described in more detail below, the
        primary drivers  of the decrease in net income were a $6.3 million increase
        in the provision for
      loan losses primarily related to the size (38.9% increase from June 30,
        2006) and seasoning of the mortgage loans held for investment, net, coupled
        with a
      $3.9 million decrease in net interest income due to a change in the prepayment
      assumptions used to accrete/amortize deferred income and expenses, a $3.9
         million increase in non-interest expense primarily related to general
        and  administrative expenses associated with a period-over-period increase
        of 39.4% in loan originations and a 14.0% increase in personnel, and
        an increase in REO
      related expenses.  Additionally contributing to the decrease
      was (a) a  $3.0 million decrease in non-interest income for the three
      months ended  June 30, 2007 compared to the three months ended June 30,
      2006, primarily  relating to the $4.2 million decrease in the amount of
      fair value change  recorded on our excess cashflow certificates due to
      the sale of all remaining excess cashflow certificates in the first quarter
      of 2007, and (b) a $455,000 decrease in prepayment penalty income (despite
      a 38.9% increase in the size of our mortgage loans held for investment,
      net at June 30, 2007), compared to June 30, 2006, due to the slower-than-expected
      prepayments experienced during the three months ended June 30, 2007 compared
      to the same period in 2006.  These
       decreases were partially offset by:





(1)
            An
                increase in net interest income before the provision for loan
                  losses of
                $2.6 million, or 7.1%, during the three months ended June 30,
                  2007 from
                $36.4 million recorded during the three months ended June 30,
                   2006.  The increase in net interest income before
                   the provision  for loan losses reflects the net effect of
                   recognizing interest income on
                a 38.9% larger amount of mortgage loans held for investment,
                   net and
                recognizing interest expense on a 38.8% larger amount of mortgage
                loan
                related financing (including warehouse credit financing) from
                   June 30,
                2006.  Additionally impacting both interest income
                and interest  expense during the three months ended June 30,
                2007 was a change in the
                prepayment assumptions used to accrete/amortize deferred income
                and expenses, which lowered net interest income by approximately
                $3.9 million
                during the quarter.  The increase in net interest income
                was  mitigated by the 89.7% increase in the provision for loan
                 losses and a $455,000 decrease in prepayment penalty income
                at June 30, 2007, compared to June 30, 2006, due to the slower-than-expected
                prepayments experienced during the three months ended June 30,
                2007 compared to the same period in 2006.  Our
                 net interest income after provision for loan losses represented
                 75.6% of our net revenue for the three months ended June 30,
                 2007, compared to 72.3% for the three months ended June 30,
                  2006; and





**35**





(2)
            An
                increase in net gain on sale of mortgage loans of $989,000, or 14.1%,
                to
                $8.0 million on the sale of $205.4 million of mortgage loans on a
                whole-loan basis during the three months ended June 30, 2007, from
                a $7.0
                million gain during the three months ended June 30, 2006 on sales
                on a
                whole-loan basis of $154.0 million of mortgage loans.  Whole
                loan sales represented 15.2% and 15.9% of total loans originated
                for the
                three months ended June 30, 2007 and 2006, respectively.  While
                the percentage of whole loan sales to loans originated within the
                quarter
                declined period-over-period, the 39.4% increase in loan originations
                for
                the three months ended June 30, 2007 as compared to the three months
                ended
                June 30, 2006, resulted in a 33.4% increase in the amount of whole
                loans
                sold and the increase in the gains recorded from our whole-loan sales
                during the three months ended June 30, 2007 compared to the three
                months
                ended June 30, 2006.





We
      originated $1.4 billion of mortgage loans during the three months ended June
      30,
      2007, representing a $382.2 million, or 39.4%, increase from $970.6 million
      of
      mortgage loans originated during the three months ended June 30,
      2006.  We securitized and/or sold $1.1 billion of loans during the
      three months ended June 30, 2007, an increase of 7.8% compared to the $979.0
      million of loans securitized and/or sold during the three months ended June
      30,
      2006.





**Net
      Interest Income**





We
      recorded
      net interest income of $39.0 million during the three months ended June 30,
      2007, an increase of $2.6 million, or 7.1%, from the $36.4 million recorded
      during the three months ended June 30, 2006.  The increase in net
      interest income primarily reflects the net effect of the higher average balance
      of mortgage loans held for investment and the related financing, coupled with
      the net changes in the interest rates earned or incurred on those balances
      and
      the impact of the change in prepayment speeds on the accretion/amortization
      of
      deferred income and expenses during the three months ended June 30, 2007
      compared to the three months ended June 30, 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 $36.0 million, or
      31.9%, to  $148.7 million for the three months ended June 30, 2007, from
      $112.7 million for
      the three months ended June 30, 2006.  The increase is primarily
      due  to (1) a $25.5 million increase in interest income earned on our loans
      held for
      investment - securitized, which totaled $7.0 billion at June 30, 2007,
      compared to $5.5 billion at June 30, 2006; coupled with a 31 basis point
      increase in the
      average interest rate over the same period, and (2) a $11.4 million increase
      in
      interest income on mortgage loans held for investment – pre-securitized
      due to  an increase in the average amount of mortgage loans we originated
      and held prior
      to securitization or sale during the three months ended June 30, 2007 compared
      to the three months ended June 30, 2006.  These increases were partially
       offset by (1) a $5.5 million decrease in deferred loan origination income
       (recorded as a component of interest income on mortgage loans held for
       investment) recognized due to a change in the prepayment speed assumptions
      utilized to accrete deferred income related to our mortgage loans held
      for investment (as further discussed below), (2) a $958,000 decrease in
       securitization pass-through interest received from securitization trusts
      on fixed-rate asset-backed securities due to the timing of the closing
      of the  relevant securitization during three months ended June 30,
      2007  (18th of the month), compared to the three months ended
      June 30, 2006 (29th of the month), (3) a $455,000 decrease in
      prepayment penalty  income (despite a 38.9% increase in the size of our
      mortgage loans held for investment, net at June 30, 2007, compared to
      June 30, 2006) due to the slower-than-expected prepayments experienced
      during the three months ended June 30, 2007 as compared to the same period
      in 2006, and (4) a $138,000 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.  Interest
      income for the three months ended June 30, 2007 was affected by the slowing
      of the prepayment speeds, specifically during the second quarter of 2007,
      on the fixed rate mortgage loans held for investment portfolio to reflect
      the increase in the estimated life of the mortgage loans.  The
      slowing of the estimated prepayments caused changes to the prepayment curves
      we use to accrete our deferred loan origination income (i.e., SFAS No.
      91 related deferred income and MSR related discounts).  The slowing
      of the prepayment speeds, and its effect on our accretion of deferred loan
      origination income, resulted in lowering our interest income by $5.5 million
      during the three months ended June 30, 2007 as
      compared to the amount of deferred fee income we would have generated if
      the prepayment curves remained the same as the prepayment curves used during
      2006 and through the first quarter of 2007.





**36**





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





**For
                the Three Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Interest
                income on mortgage loans held for investment - securitized, net (1)
            
            $
            126,559
            
            
            $
            101,072Interest
                income on mortgage loans held for investment - pre-securitization,
                net
            
            
            19,822
            
            
            
            8,396Securitization
                pass-through interest
            
            
            2,172
            
            
            
            3,130Interest
                income on excess cashflow certificates
            
            
            --
            
            
            
            138Miscellaneous
                interest income
            
            
            102
            
            
            
            --Total
                interest income
            
            $
            148,655
            
            
            $
            112,736





*(1)
      The amounts for the three months ended June 30, 2007 and 2006 include $4.6
      million and $5.0 million, respectively, of income from prepayment penalty
      fees.*





***Interest
      Expense.***  Interest expense increased by $33.3 million,
      or 43.7%, to $109.6 million for the three months ended June 30, 2007, from
      $76.3
      million for the three months ended June 30, 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 June 30, 2007 on our warehouse facilities,
      compared to the three months ended June 30, 2006.  The weighted
      average cost of our financing on mortgage loans held for investment increased
      by
      26 basis points from 5.44% at June 30, 2006 to 5.70% at June 30,
      2007.  Additionally contributing to the increase in interest expense
      was the higher warehouse financing costs due to a higher average one-month
      LIBOR
      rate, which is the benchmark index used to determine the cost of our borrowed
      funds.  The index rate increased 23 basis points to an average of
      5.32% for the three months ended June 30, 2007, compared to an average of 5.09%
      for the three months ended June 30, 2006.  Additionally,
      the slowing of prepayments on the mortgage loans described above has the
      effect of extending (slowing the repayments) the life of the financing on
      mortgage loan held for investment, slowing the amortization of the deferred
      debt
      issuance costs, trustee expenses and hedging.  As a result, interest
      expense was reduced by $1.6 million during the three months ended June 30,
      2007
      as compared to the amortization we would have experienced before we changed
      the
      prepayment curves.





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





**For
                the Three Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Interest
                expense on mortgage loans held for investment financing (1)
            
            $
            95,804
            
            
            $
            68,568Interest
                expense on warehouse financing
            
            
            13,702
            
            
            
            7,451Interest
                expense on other borrowings
            
            
            122
            
            
            
            105Other
                interest expense
            
            
            10
            
            
            
            170Total
                interest expense
            
            $
            109,638
            
            
            $
            76,294





*(1) The
      amounts for the three months ended June 30, 2007 and 2006 include $2.1 million
      and $72,000, respectively, of deferred securitization debt issuance cost
      amortization and trustee expenses recognized during the period, net of hedge
      amortization.*


**37**





**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 $13.3 million (including a net recovery of $93,000 of a specific
      provision related to impaired loans) and $7.0 million (including a
      $11,000 net specific provision related to impaired loans) for the three
      months ended June 30, 2007 and 2006, respectively, related to mortgage loans
      held for investment.  The increase in the amount of the provision for
      loan losses, excluding the specific provision related to impaired loans,
      corresponds to the performance and seasoning of our mortgage loans held for
      investment during the respective period.





**Non-Interest
      Income**





Total
      non-interest income decreased by $3.0 million, or 26.6%, to $8.3 million for
      the
      three months ended June 30, 2007, from $11.3 million for the three months ended
      June 30, 2006.  The decrease in non-interest income resulted from a
      decrease of $4.2 million in the amount of fair value gains recorded on our
      excess cashflow certificates, offset partially by a $989,000 increase in the
      net
      gain on sale of mortgage loans during the three months ended June 30, 2007
      as
      compared to the three months ended June 30, 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 (indemnification) reserves.  During the three months ended
      June 30, 2007, the net gain on the sale of mortgage loans increased $989,000,
      or
      14.1%, to $8.0 million on the sale of $205.4 million of mortgage loans on a
      whole-loan basis, from the $7.0 million gain recorded during the three months
      ended June 30, 2006 on the sale of $154.0 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 June 30, 2007 and 2006:





**For
                the Three Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Net
                Gain on Sale of Mortgage Loans:Loans
                sold
            
            $
            205,379
            
            
            $
            154,008Gain
                on whole-loan sales
            
            $
            6,616
            
            
            $
            5,422Premium
                recapture reserve
            
            
            (209
            )
            
            
            (248
            )Secondary
                marketing (indemnification) reserve (1)
            
            
            (485
            )
            
            
            (54
            )Net
                loan origination fees
            
            
            2,105
            
            
            
            1,918Net
                gain on sale recorded
            
            $
            8,027
            
            
            $
            7,038Average
                whole-loan sales premium
            
            
            3.22
            %
            
            
            3.52
            %Average
                whole-loan sales premium, net of reserves
            
            
            2.88
            %
            
            
            3.32
            %Average
                net gain on sale ratio
            
            
            3.91
            %
            
            
            4.57
            %





*(1)* *The
      secondary marketing (indemnification) reserve amount shown for the three months
      ended June 30, 2007 was comprised of a provision of $205,000 related to the
      loans sold during the three months ended June 30, 2007 and an additional
      provision of $280,000 related to reserve adjustments for loan sales from prior
      periods.*





**38**





During
      the three months ended June 30, 2007 and 2006, we recorded a secondary market
      (indemnification) reserve provision of $485,000 and $54,000, respectively,
      as a
      reduction of our gain on sale of mortgage loans.  The secondary market
      (indemnification) reserve covers our estimated exposure to losses arising from
      loan repurchases, or the net settlement, related to potential representation
      and
      warranty claims by investors.





The
      average whole-loan sales premium, net of reserves, for the three months ended
      June 30, 2007 and 2006 was 2.88% and 3.32%, respectively.  The average
      whole-loan sales premium, net of reserves, is calculated by dividing the gain
      on
      whole-loan sales, net of premium recapture and secondary marketing
      (indemnification) reserves, by the total amount of loans sold.  The
      average net gain on sale ratio for the three months ended June 30, 2007 and
      2006
      was 3.91% and 4.57%, respectively.  The average net gain on sale ratio
      is calculated by dividing the net gain on sale by the total amount of loans
      sold.





***Other
      Income.***  Other income decreased $4.0 million, or 93.9%,
      to $261,000 for the three months ended June 30, 2007, from $4.3 million for
      the
      three months ended June 30, 2006.  The decrease in other income period
      over period primarily relates to a $4.2 million decline in the amount of the
      fair value change recorded on our excess cashflow
      certificates.  During the three months ended March 31, 2007, we sold
      all of our remaining excess cashflow certificates.  Accordingly, we did not
      record any fair value adjustments during the three months ended June 30, 2007,
      compared to a $4.2 million fair value adjustment gain for the three months
      ended
      June 30, 2006.





Also
      included
      in other income are the gains recognized on the sale of MSRs.  During
      the three months ended June 30, 2007, we recorded a gain of $241,000 on the
      sale
      of our MSRs to a third-party, an increase of $194,000 over the amount recognized
      during the three months ended June 30, 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 June 30, 2007 as compared to the three months ended
      June
      30, 2006.





**Non-interest
      Expense**





Total
      non-interest expense increased by $3.9 million, or 13.5%, to $32.7 million
      for
      the three months ended June 30, 2007, from $28.8 million for the three months
      ended June 30, 2006.  The increase primarily is due to an increase in
      general and administrative expenses reflecting the impact of the 39.4% increase
      in our mortgage loan production and 14.0% increase in personnel and increased
      REO related expenses.  Additionally contributing to the increase in
      non-interest expense was a $1.0 million increase in payroll and related costs
      as
      a result of the increased staff levels.  Offsetting the increases was
      the $83,000 gain on derivative instruments relating to the ineffective portion
      of our derivatives recorded during the three months ended June 30, 2007, which
      was lower than the $148,000 gain recorded during the three months ended June
      30,
      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 $1.0 million, or
      6.1%, to $17.6 million for the three months ended June 30, 2007, from $16.6
      million for the three months ended June 30, 2006.  The increase was
      primarily the result of higher compensation and related payroll cost associated
      with an increase in our staff and increased loan production, offset partially
      by
      the increase in SFAS No. 91 related deferrals in the same period.  As
      of June 30, 2007, we employed 1,519 full- and part-time employees, an increase
      of 14.0% over our 1,333 full- and part-time employees as of June 30,
      2006.  Additionally, payroll and related costs, specifically for loan
      production related personnel, were higher due to the 39.4% increase in loan
      production during the three months ended June 30, 2007 compared to the three
      months ended June 30, 2006.  The amount of payroll and related costs
      deferred under SFAS No. 91 increased $4.7 million, or 37.7%, during the three
      months ended June 30, 2007, compared to the three months ended June 30, 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 June 30, 2007 was the $60,000 increase in stock-based compensation
      expense, primarily due to the impact of the expense related to the restricted
      stock awards that we have granted since June 30, 2006.





**39**





***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 $2.8 million, or 22.7%, to $15.2 million
      for
      the three months ended June 30, 2007, from $12.4 million for the three months
      ended June 30, 2006.  The increase primarily was due to an increase in
      expenses associated with our 39.4% increase in loan production during the three
      months ended June 30, 2007, compared to the three months ended June 30, 2006
      (which includes slightly higher fees and licenses, and loan servicing fees
      related to pre-securitization loans), the consequent 14.0% increase in personnel
      related to the ongoing expansion of our wholesale and retail divisions and
      the impact of a $2.6 million increase in REO-related expenses.





The
      increase in REO-related expenses in the three months ended June 30, 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 (i.e., payment of real estate taxes and
      insurance) and disposal of those properties will also generally
      increase.  The amount of REO properties held totaled $46.2 million and
      $11.0 million at June 30, 2007 and 2006, respectively.





***(Gain)
      Loss******on Derivative
      Instruments.***  The gain or loss on derivative instruments
      recorded during the three months ended June 30, 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) changes in the fair value of the derivative
      instruments classified as trading securities.





During
      the
      three months ended June 30, 2007, we recorded a gain on derivative instruments
      of $83,000, as compared to a net gain on derivatives instruments of $148,000
      during the three months ended June 30, 2006.  During the three months
      ended June 30, 2007, we recorded a loss of $17,000 on the ineffective portion
      of
      corridors and interest rate swaps, compared to a gain of $79,000 recorded on
      the
      ineffective portion of corridors and interest rate swaps during the three months
      ended June 30, 2006.  Additionally, at June 30, 2007 and 2006, we held
      $266,000 and $744,000, respectively, of corridors classified as trading
      securities in prepaid and other assets as these corridors were no longer deemed
      “highly effective.”  During the three months ended June 30, 2007 and
      2006, we recorded a gain of $100,000 and a gain of $69,000, 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 $526,000 on pre-tax income of $1.3 million for the
      three months ended June 30, 2007 (an effective tax rate of approximately
      40.4%).  The effective tax rate for the three months ended June 30,
      2007, reflects our estimate for a lower overall effective tax rate for 2007
      and
      subsequent years.  As a result of our net income before income tax
      expense decreasing quarter-over-quarter, the impact of the permanent differences
      (which were fairly consistent period-over-period) recorded during the three
      months ended June 30, 2007 had a more pronounced impact on increasing our
      effective tax rate.  We recorded an income tax expense of $4.7 million
      on pre-tax income of $11.9 million for the three months ended June 30, 2006
      (an
      effective tax rate of approximately 39.2%).





**Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006**





**General**





Our
      net
      income for the six months ended June 30, 2007 was $5.7 million, or $0.24 per
      share basic and $0.23 per share diluted, compared to net income of $13.8
      million, or $0.64 per share basic and $0.61 per share diluted, for the six
      months ended June 30, 2006.  As described in more detail below, the
      primary drivers of the decrease in net income were the $10.5 million increase
      in
      the provision for loan losses due to the increase in the size (38.9% increase
      from June 30, 2006) and seasoning of the mortgage loan held for investment
      portfolio.  The decrease was also driven by a $3.9 million decrease in
      net interest income due to a change in the prepayment assumptions used to
      accrete/amortize deferred income and expenses, a $6.9 million increase in
      non-interest expense primarily related to general and administrative expenses
      associated with a period-over-period increase of 35.4% in loan originations
      and
      a 14.0% increase in personnel, and an increase in REO related
      expenses.  Additionally contributing to the decrease was a $3.7
      million decrease in non-interest income for the six months ended June 30,
      2007 compared to the six months ended June 30, 2006, primarily relating to
      the
      $5.9 million decrease in the amount of fair value change recorded on our excess
      cashflow certificates due to the sale of all remaining excess cashflow
      certificates in the first quarter of 2007.  These decreases were
      partially offset by:





**40**





(1)
            An
                increase in net interest income before the provision for loan losses
                of
                $8.4 million, or 11.7%, to $79.5 million during the six months ended
                June
                30, 2007 from $71.1 million recorded during the six months ended
                June 30,
                2006.  The increase in net interest income before the provision
                for loan losses reflects the net effect of recognizing interest income
                on
                a 38.9% larger amount of mortgage loans held for investment, net
                and
                recognizing interest expense on a 38.8% larger amount of mortgage
                loan
                related financing (including warehouse credit financing) from June
                30,
                2006.  Additionally impacting both interest income and interest
                expense during the three months ended June 30, 2007 was a change
                in the
                prepayment assumptions used to accrete/amortize deferred income and
                expenses, which lowered net interest income by approximately $3.9
                million
                during the period.  The increase in net interest income was
                mitigated by the 78.5% increase in the provision for loan
                losses.  Our net interest income after provision for loan
                losses represented 75.6% of our net revenue for the six months ended
                June 30, 2007, compared to 72.7% for the six months ended June 30,
                2006;
                and





(2)
            An
                increase in net gain on sale of mortgage loans of $1.8 million, or
                12.5%,
                to $15.9 million on the sale of $382.5 million of mortgage loans
                on a
                whole-loan basis during the six months ended June 30, 2007, from
                a $14.1
                million gain during the six months ended June 30, 2006 on sales on
                a
                whole-loan basis of $318.7 million of mortgage loans.  Whole
                loan sales represented 14.7% and 16.6% of total loans originated
                for the
                six months ended June 30, 2007 and 2006, respectively.  While
                the percentage of whole loan sales to loans originated within the
                period
                declined period-over-period, the 35.4% increase in loan originations
                for
                the six months ended June 30, 2007 as compared to the six months
                ended
                June 30, 2006, resulted in a 20.0% increase in the amount of whole
                loans
                sold and the increase in the gains recorded from our whole-loan sales
                during the six months ended June 30, 2007 compared to the six months
                ended
                June 30, 2006.





We
      originated $2.6 billion of mortgage loans during the six months ended June
      30,
      2007, representing a $678.3 million, or 35.4%, increase from $1.9 billion of
      mortgage loans originated during the six months ended June 30,
      2006.  We securitized and/or sold $2.2 billion of loans during the six
      months ended June 30, 2007, an increase of 8.1% compared to the $2.0 billion
      of
      loans securitized and/or sold during the six months ended June 30,
      2006.





**Net
      Interest Income**





We
      recorded
      net interest income of $79.5 million during the six months ended June 30, 2007,
      an increase of $8.4 million, or 11.7%, from the $71.1 million recorded during
      the six months ended June 30, 2006.  The increase in net interest
      income primarily reflects the net effect of the higher average balance of
      mortgage loans held for investment and the related financing, coupled with
      the
      net changes in the interest rates earned or incurred on those balances and
      the
      impact of the change in prepayment speeds on the accretion/amortization of
      deferred income and expenses during the six months ended June 30, 2007 compared
      to the six months ended June 30, 2006.  Net interest income represents
      the difference between our interest income and our interest expense, each of
      which is described in the following paragraphs.





**41**





***Interest
      Income.*** Interest income increased $74.9 million, or 34.9%, to
      $289.6 million for the six months ended June 30, 2007, from $214.7 million
      for
      the six months ended June 30, 2006.  The increase is primarily due to
      (1) a $59.4 million increase in interest income earned on our loans held for
      investment - securitized, which totaled $7.0 billion at June 30, 2007, compared
      to $5.5 billion at June 30, 2006; coupled with a 31 basis point increase in
      the
      average interest rate over the same period, (2) a $16.3 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 six months ended June 30, 2007 compared
      to
      the six months ended June 30, 2006, and (3) a $835,000 increase in prepayment
      penalty income recognized during the six months ended June 30, 2007 compared
      to
      the six months ended June 30, 2006.  These increases were partly offset by
      (1) a $5.5 million decrease in deferred loan origination income (recorded as
      a
      component of interest income on mortgage loans held for investment) recognized
      due to a change in the prepayment speed assumptions utilized to accrete deferred
      income related to our mortgage loans held for investment (as further discussed
      below), (2) a $570,000 decrease in securitization pass-through interest received
      from securitization trusts on fixed-rate asset-backed securities was primarily
      due to the timing of the closing of the relevant securitization during
      six months ended June 30, 2007 (18th of the month), compared to the
      six months ended June 30, 2006 (29th of the month), and (3) a
      $363,000 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.  Interest income for the six months ended
      June 30, 2007 was affected by the slowing of the prepayment speeds, specifically
      during the second quarter of 2007, on the fixed rate mortgage loans held for
      investment portfolio to reflect the increase in the estimated life of the
      mortgage loans.  The slowing of the estimated prepayments caused
      changes to the prepayment curves we use to accrete our deferred loan origination
      income.  The slowing of the prepayment speeds, and its effect on our
      accretion of deferred loan origination income, resulted in lowering our interest
      income by $5.5 million during the six months ended June 30, 2007 as compared
      to
      the amount of deferred fee income we would have generated if the prepayment
      curves had remained the same as the prepayment curves used during 2006 and
      through the first quarter of 2007.




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





**For
                the Six Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Interest
                income on mortgage loans held for investment - securitized, net (1)
            
            $
            249,526
            
            
            $
            190,126Interest
                income on mortgage loans held for investment - pre-securitization,
                net
            
            
            33,952
            
            
            
            17,698Securitization
                pass-through interest
            
            
            5,934
            
            
            
            6,504Interest
                income on excess cashflow certificates
            
            
            17
            
            
            
            380Miscellaneous
                interest income
            
            
            186
            
            
            
            1Total
                interest income
            
            $
            289,615
            
            
            $
            214,709





*(1)
      The amounts for the six months ended June 30, 2007 and 2006 include $10.1
      million and $9.2 million, respectively, of income from prepayment penalty
      fees.*





***Interest
      Expense.***  Interest expense increased by $66.6 million,
      or 46.4%, to $210.2 million for the six months ended June 30, 2007, from $143.6
      million for the six months ended June 30, 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 six months ended June 30, 2007 on our warehouse facilities, compared
      to the six months ended June 30, 2006.  The weighted average cost of
      our financing on mortgage loans held for investment increased by 26 basis points
      from 5.44% at June 30, 2006 to 5.70% at June 30, 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 47 basis points to an average of 5.32% for the six months
      ended June 30, 2007, compared to an average of 4.85% for the six months ended
      June 30, 2006.  Additionally, the slowing of prepayments on the
      mortgage loans as described above has the effect of extending (slowing the
      repayments) the life of the financing on mortgage loans held for investment,
      slowing the amortization of the deferred debt issuance costs, trustee expenses
      and hedging.  As a result, interest expense was reduced by $1.6
      million during the six months ended June 30, 2007 as compared to the
      amortization we would have experienced before we changed the prepayment
      curves.


**42**





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





**For
                the Six Months Ended****June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Interest
                expense on mortgage loans held for investment financing (1)
            
            $
            184,191
            
            
            $
            127,681Interest
                expense on warehouse financing
            
            
            25,654
            
            
            
            15,334Interest
                expense on other borrowings
            
            
            240
            
            
            
            210Other
                interest expense
            
            
            75
            
            
            
            335Total
                interest expense
            
            $
            210,160
            
            
            $
            143,560





*(1)  The
      amounts for the six months ended June 30, 2007 and 2006 include $5.6 million
      and
      $815,000, 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 $23.9 million (including a recovery of $352,000 of a specific
      provision related to impaired loans) and $13.4 million (including a recovery
      of
      $22,000 of a specific provision related to impaired loans) for the six
      months ended June 30, 2007 and 2006, respectively, related to mortgage loans
      held for investment.  The increase in the amount of the provision for
      loan losses, excluding the specific provision related to impaired loans,
      corresponds to the performance and seasoning of our mortgage loans held for
      investment during the respective period.





**Non-Interest
      Income**





Total
      non-interest income decreased by $3.7 million, or 17.4%, to $18.0 million for
      the six months ended June 30, 2007, from $21.7 million for the six months ended
      June 30, 2006.  The decrease in non-interest income resulted from a
      decrease of $5.8 million in the amount of fair value gains recorded on our
      excess cashflow certificates, offset partially by a $1.8 million increase in
      the
      net gain on sale of mortgage loans during the six months ended June 30, 2007
      as
      compared to the six months ended June 30, 2006.





***Net
      Gain on
      Sale of Mortgage Loans.***  During the six months ended
      June 30, 2007, the net gain on the sale of mortgage loans increased $1.8
      million, or 12.5%, to $15.9 million on the sale of $382.5 million of mortgage
      loans on a whole-loan basis, from the $14.1 million gain recorded during the
      six
      months ended June 30, 2006 on the sale of $318.7 million of mortgage loans
      on a
      whole-loan basis.





**43**





The
      following table is a summary of our
      net gain on sale of mortgage loans for the six months ended June 30, 2007 and
      2006:





**For
                the Six Months Ended**
              **June
                30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Net
                Gain on Sale of Mortgage Loans:Loans
                sold
            
            $
            382,461
            
            
            $
            318,718Gain
                on whole-loan sales
            
            $
            12,587
            
            
            $
            11,094Premium
                recapture reserve (1)
            
            
            (296
            )
            
            
            (483
            )Secondary
                marketing (indemnification) reserve (2)
            
            
            (662
            )
            
            
            (229
            )Net
                loan origination fees
            
            
            4,238
            
            
            
            3,717Net
                gain on sale recorded
            
            $
            15,867
            
            
            $
            14,099Average
                whole-loan sales premium
            
            
            3.29
            %
            
            
            3.48
            %Average
                whole-loan sales premium, net of reserves
            
            
            3.04
            %
            
            
            3.26
            %Average
                net gain on sale ratio
            
            
            4.15
            %
            
            
            4.42
            %





*(1) The
      premium recapture reserve amount shown for the six months ended June 30, 2007
      was comprised of a provision of $525,000 related to the loans sold during the
      six months ended June 30, 2007 and a recovery of $229,000 related to reserve
      adjustments for loan sales from prior year periods.*





*(2) The
      secondary marketing (indemnification) reserve amount shown for the six months
      ended June 30, 2007 was comprised of a provision of $382,000 related to the
      loans sold during the six months ended June 30, 2007 and an additional provision
      of $280,000 related to reserve adjustments for loan sales from prior
      periods.*





During
      the six months ended June 30, 2007 and 2006, we recorded a secondary market
      (indemnification) reserve provision of $662,000 and $229,000, respectively,
      as a
      reduction of our gain on sale of mortgage loans.  The secondary market
      (indemnification) reserve covers our estimated exposure to losses arising from
      loan repurchases, or the net settlement, related to potential representation
      and
      warranty claims by investors.





The
      average whole-loan sales premium, net of reserves, for the six months ended
      June
      30, 2007 and 2006 was 3.04% and 3.26%, respectively.  The average
      whole-loan sales premium, net of reserves, is calculated by dividing the gain
      on
      whole-loan sales, net of premium recapture and secondary marketing
      (indemnification) reserves, by the total amount of loans sold.  The
      average net gain on sale ratio for the six months ended June 30, 2007 and 2006
      was 4.15% and 4.42%, respectively.  The average net gain on sale ratio
      is calculated by dividing the net gain on sale by the total amount of loans
      sold.





***Other
      Income.***  Other income decreased $5.5 million, or 72.7%,
      to $2.1 million for the six months ended June 30, 2007, from $7.6 million for
      the six months ended June 30, 2006.  The decrease in other income
      period over period primarily relates to a $5.8 million decline in the amount
      of
      the fair value change recorded on our excess cashflow
      certificates.  During the six months ended June 30, 2007, we recorded
      a $1.6 million fair value adjustment gain compared to a $7.4 million fair value
      adjustment gain for the six months ended June 30, 2006.  The decrease
      in the amount of fair value adjustment gains recorded during the six months
      ended June 30, 2007 was primarily driven by the amount of excess cashflow
      certificates that we held throughout the period, prior to our sale of the
      remaining excess cashflow certificates 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 six months ended June 30, 2007, we recorded a gain of $491,000 on the sale
      of our MSRs to a third-party, an increase of $397,000 over the amount recognized
      during the six months ended June 30, 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 six months ended June 30, 2007 as compared to the six months ended June
      30,
      2006.





**44**





**Non-interest
      Expense**





Total
      non-interest expense increased by $6.9 million, or 12.3%, to $63.7 million
      for
      the six months ended June 30, 2007, from $56.8 million for the six months ended
      June 30, 2006.  The increase primarily is due to an increase in
      general and administrative expenses reflecting the impact of the 35.4% increase
      in our mortgage loan production and 14.0% increase in personnel, and increased
      REO related expenses.  Additionally contributing to the increase in
      non-interest expense was a $1.2 million increase in payroll and related costs
      and a $436,000 increase in the loss on derivative instruments recorded period
      over period.





***Payroll
      and
      Related Costs.***  Payroll and related costs increased by
      $1.2 million, or 3.5%, to $34.8 million for the six months ended June 30, 2007,
      from $33.6 million for the six months ended June 30, 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 almost completely by the increase in SFAS No. 91 related deferrals in
      the
      same period.  As of June 30, 2007, we employed 1,519 full- and
      part-time employees, an increase of 14.0% over our 1,333 full- and part-time
      employees as of June 30, 2006.  Additionally, payroll and related
      costs, specifically for loan production related personnel, were higher due
      to
      the 35.4% increase in loan production during the six months ended June 30,
      2007
      compared to the six months ended June 30, 2006.  The amount of payroll
      and related costs deferred under SFAS No. 91 increased $8.4 million, or 33.5%,
      during the six months ended June 30, 2007, compared to the six months ended
      June
      30, 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 six months
      ended June 30, 2007 was the $268,000, or 64.5%, increase in stock-based
      compensation expense, primarily due to the impact of the expense related to
      the
      restricted stock awards that we have granted since June 30, 2006.





***General
      and
      Administrative Expenses.*** General and administrative expenses
      increased $5.3 million, or 22.6%, to $28.9 million for the six months ended
      June
      30, 2007, from $23.6 million for the six months ended June 30,
      2006.  The increase primarily was due to an increase in expenses
      associated with our 35.4% increase in loan production during the six months
      ended June 30, 2007, compared to the six months ended June 30, 2006 (which
      includes an increase of $570,000 in fees and licenses, and loan servicing fees
      related to pre-securitization loans), the consequent 14.0% increase in personnel
      related to our ongoing expansion of our wholesale and retail divisions (which
      resulted in a $252,000 increase in depreciation expense) and the impact of
      a
      $5.3 million increase in REO-related expenses.  These increases were
      partially offset by an $821,000 decrease in professional fees (legal, accounting
      and consulting).





The
      increase in REO-related expenses in the six months ended June 30, 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 (i.e., payment of real estate taxes and
      insurance) and disposal of those properties will also generally
      increase.  The amount of REO properties held totaled $46.2 million and
      $11.0 million at June 30, 2007 and 2006, respectively.





***(Gain)******Loss******on Derivative
      Instruments.***  The gain or loss on derivative instruments
      recorded during the six months ended June 30, 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) changes in the fair value of the derivative instruments
      classified as trading securities.





During
      the
      six months ended June 30, 2007, we recorded a loss on derivative instruments
      of
      $13,000, as compared to a net gain on derivatives instruments of $423,000 during
      the six months ended June 30, 2006.  During the six months ended June
      30, 2007, we recorded a loss of $97,000 on the ineffective portion of corridors
      and interest rate swaps, compared to a gain of $139,000 recorded on the
      ineffective portion of corridors and interest rate swaps during the six months
      ended June 30, 2006.  Additionally, at June 30, 2007 and 2006, we held
      $266,000 and $744,000, respectively, of corridors classified as trading
      securities in prepaid and other assets as these corridors were no longer deemed
      “highly effective.”  During the six months ended June 30, 2007 and
      2006, we recorded a gain of $84,000 and a gain of $284,000, respectively, to
      earnings for the changes in the fair value of the hedges (specifically
      corridors) held as trading securities.





**45**





**Provision
      for Income Tax Expense**





We
      recorded an income tax expense of $4.1 million on pre-tax income of $9.8 million
      for the six months ended June 30, 2007 (an effective tax rate of approximately
      42.1%).  The effective tax rate for the six months ended June 30,
      2007, reflects 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 during
      the
      first quarter of 2007, which resulted in an increase of $287,000 in our tax
      provision during the first quarter of 2007 and which offset the slight benefit
      recognized to our tax provision in the second quarter of 2007.  The
      effective tax rate, excluding the first quarter of 2007 effect of the rate
      reduction in the deferred tax asset, would have been 39.1% for the six months
      ended June 30, 2007.  As a result of our net income before income tax
      expense decreasing period-over-period, the impact of the permanent differences
      (which were fairly consistent period-over-period) recorded during the six months
      ended June 30, 2007 had a more pronounced impact on increasing our effective
      tax
      rate.  We recorded an income tax expense of $8.9 million on pre-tax
      income of $22.7 million for the six months ended June 30, 2006 (an effective
      tax
      rate of approximately 39.2%).





**Financial
      Condition**





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





***Cash
        and Cash
        Equivalents.***  Cash and cash equivalents increased
        $736,000, or 12.8%, to $6.5 million at June 30, 2007, from $5.7 million at
        December 31, 2006.  This increase was primarily related to the timing
        of cash received and disbursed from normal operations.





***Mortgage
      Loans Held for Investment,******Net*****.**  Mortgage
      loans held for investment, net increased $1.3 billion, or 20.7%, to $7.7 billion
      at June 30, 2007, from $6.4 billion at December 31, 2006.  This
      account represents our basis in the mortgage loans that were either delivered
      to
      the securitization trusts (recorded as mortgage loans held for investment –
securitized) 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.





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





*(Dollars
                in thousands)*
            
            **At
                June 30,****2007**
            
            
            **At
                December 31, 
              2006**Mortgage
                loans held for investment - securitized
            
            $
            6,992,217
            
            
            $
            6,051,996Mortgage
                loans held for investment - pre-securitization (1)
            
            
            821,858
            
            
            
            417,818Discounts
                (MSR related)
            
            
            (47,482
            )
            
            
            (36,933
            )Net
                deferred origination fees
            
            
            (24,831
            )
            
            
            (19,194
            )Allowance
                for loan losses
            
            
            (66,864
            )
            
            
            (55,310
            )Mortgage
                loans held for investment, net
            
            $
            7,674,898
            
            
            $
            6,358,377





*(1) Included
      in
      our mortgage loans held for investment – pre-securitization at June 30, 2007 and
      December 31, 2006 was approximately $754.7 million and $335.9 million,
      respectively, of mortgage loans that were pledged as collateral for our
      warehouse financings at June 30, 2007 and December 31, 2006,
      respectively.*





During
      the
      six months ended June 30, 2007, we originated $2.6 billion of mortgage loans
      and
      sold $382.5 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 six months ended June
      30, 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 six months of 2007, coupled with the increased
      level of originations and the timing of our securitizations during the six
      months ended June 30, 2007.  These pre-securitization loans were
      primarily financed through our warehouse credit facilities.





**46**





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 June 30, 2007 and December 31, 2006, we
      established an allowance for loan losses totaling $66.9 million and $55.3
      million, respectively, based upon our analysis of the mortgage loans held for
      investment portfolio, including a $606,000 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
      June 30, 2007.





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





*(Dollars
                in thousands)*
            
            **For
                the Six Months Ended June 30, 2007**
            
            
            **For
                the****Year
                Ended**
              **December
                31, 2006**Allowance
                for loan losses – beginning of year
            
            $
            55,310
            
            
            $
            36,832Provision
                for loan losses (1)
            
            
            23,921
            
            
            
            29,085Charge-offs
                (2)
            
            
            (12,367
            )
            
            
            (10,607
            )Allowance
                for loan losses – end of period/year (3)
            
            $
            66,864
            
            
            $
            55,310





*(1)
      T* *he
      provision for loan losses for the six months ended June 30, 2007 and year ended
      December 31, 2006 includes a specific provision which consisted of a
      $352,000 recovery and a $377,000 recovery, respectively.  The
      specific provisions relates to probable losses attributable to impaired
      loans.*





*(2)* *The
      charge-offs for the six months ended June 30, 2007 includes $55,000 of
      charge-offs related to impaired loans.  The charge-offs for the year
      ended December 31, 2006 includes $342,000 (net of $10,000 of recoveries) in
      charge-offs against the specific allowance for loan losses attributable to
      impaired loans primarily related to loans located in Hurricanes Katrina and
      Rita
      disaster areas.*





*(3)* *The
      allowance for loan losses at June 30, 2007 and December 31, 2006 includes a
      specific allowance for impaired loans of $606,000 and $1.0 million,
      respectively.  A portion of the specific allowance, or $212,000 and
      $675,000, relates to impaired loans located in Hurricanes Katrina and Rita
      disaster areas at June 30, 2007 and December 31, 2006,
      respectively.*





Our
      specific allowance for loan losses at June 30, 2007 and December 31, 2006 is
      based upon our probable loss exposure attributable to 14 and 17 properties,
      respectively, securing a total unpaid principal balance (impaired loans) of
      $2.3
      million and $2.5 million, respectively.  The impaired loan totals at
      June 30, 2007 and December 31, 2006 include approximately $462,000 (none of
      which are pre-securitization loans) and $1.3 million (of which $226,000 are
      pre-securitization loans), respectively, of mortgage loans held for investment
      located in the Hurricanes Katrina and Rita disaster areas designated by the
      Federal Emergency Management Agency (“FEMA”).  As additional
      information is obtained, we will continue to assess the need for any adjustments
      to our specific reserves related to our impaired loans.





***Trustee
      Receivable.***  Trustee receivable decreased $9.9 million,
      or 13.4%, to $63.5 million at June 30, 2007 from $73.4 million at December
      31,
      2006.  Trustee receivable principally represents any un-remitted
      principal and interest payments collected by the securitization trust’s
      third-party loan servicer subsequent to the monthly remittance cut-off date
      on
      our mortgage loans held for investment – securitized portfolio.  The
      unscheduled principal payments and prepaid loan payments received after the
      remittance cut-off date as of June 30, 2007 and December 31, 2006 totaled $57.9
      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 June 2007 remittance cut-off date will be
      remitted to us in July 2007).





**47**





***Accrued
      Interest Receivable.***  Accrued interest receivable
      increased $10.1 million, or 24.4%, to $51.8 million at June 30, 2007, from
      $41.7
      million at December 31, 2006.  The increase is due to (1) the 15.5%
      increase in mortgage loans held for investment – securitized from December 31,
      2006, (2) the 96.7% 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 12 basis points from December 31,
      2006 to June 30, 2007.  Additionally contributing to the increase in
      the accrued interest receivable balance is the increase in the amount of accrued
      interest owed relating to loans that are 30 to 89 days past due in accordance
      with contractual terms of the mortgage at June 30, 2007 compared to December
      31,
      2006.





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





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





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





***Equipment,
      Net*****.**  Equipment, net, decreased
      $968,000, or 11.7%, to $7.3 million at June 30, 2007, from $8.3 million at
      December 31, 2006.  The decrease is primarily due to the depreciation
      recognized during the six months ended June 30, 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.





***Accounts
      Receivable.*** Accounts receivable increased $11.8 million to
      $16.7 million at June 30, 2007, from $4.9 million at December 31,
      2006.  The increase primarily is due to an $8.1 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 first quarter of 2007.  The
      increase in servicer receivables relates to a $3.8 million increase in loan
      payments received by our third-party loan servicer during June 2007, which
      was
      remitted to us in July 2007.





***Prepaid
      and
      Other Assets.***  Prepaid and other assets increased $18.7
      million, or 37.5%, to $68.5 million at June 30, 2007, from $49.8 million at
      December 31, 2006.  The increase primarily is due to the $16.6
      million, or 56.2%, increase in REO properties due to the expected seasoning
      of
      the loan portfolio, coupled with a $1.5 million increase in prepaid
      securitization fees and a $418,000 net increase in the fair value of our
      derivative instruments used to hedge our securitization debt during the six
      months ended June 30, 2007.  The increase in prepaid securitization
      fees resulted from the fees paid related to our securitizations during the
      six
      months ended June 30, 2007 exceeding the amortization of those fees from all
      of
      our outstanding securitizations during the same period.





**48**





At
      June 30,
      2007 and December 31, 2006, we held $46.2 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 $4.6 million and $546,000
      was made during the six months ended June 30, 2007 and 2006, respectively,
      for
      decreases in the fair value of the REO properties.





***Deferred
      Tax Asset.*** The deferred tax asset decreased by $9.7 million,
      or 21.1%, to $36.1 million at June 30, 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, (3) realized
      gains and losses on derivatives (interest rate swaps) associated with hedging
      the securitization debt issuance (financing costs); and (4) a $163,000 decrease
      in deferred taxes related to the fair value of the hedge instruments within
      accumulated OCI.  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.





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 decreased $36,000, or 2.3%, to
      $1.5 million at June 30, 2007, from $1.6 million at December 31,
      2006.  Bank payable represents the amount of checks written against
      our operating account which are subsequently covered as they are presented
      to
      the bank for payment by either drawing down our lines of credit or from
      subsequent deposits of operating cash.





***Warehouse
      Financing.***  Our warehouse financing increased $418.8
      million, or 124.7%, to $754.7 million at June 30, 2007, from $335.9 million
      at
      December 31, 2006.  The increase was primarily due to a $404.0
      million, or 96.7%, increase in the amount of mortgage loans held for investment
      - pre-securitization from December 31, 2006 to June 30, 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 and timing of securitizations during the six
      months ended June 30, 2007.  We have continued to carry additional
      loans financed through our warehouse credit facilities rather than through
      securitization debt in part to take advantage of the favorable interest rate
      spreads that exist on our warehouse credit facilities at June 30, 2007 and
      in
      part due to the challenging securitization market that existed during the six
      months ended June 30, 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 June 30,
      2007.  At June 30, 2007, we self-funded $67.2 million (none of which
      are pledged as collateral on our warehouse credit facilities) of these mortgage
      loans, compared to $82.0 million (none of which are pledged as collateral on
      our
      warehouse credit facilities) at December 31, 2006.





***Financing
      on
      Mortgage Loans Held for Investment, Net.***  Our financing
      on mortgage loans held for investment, net increased $885.8 million, or 14.7%,
      to $6.9 billion at June 30, 2007, from $6.0 billion at December 31,
      2006.  This increase in the issuance of asset-backed securities
      corresponds to the 15.5% increase in loans held for investment - securitized
      during the six months ended June 30, 2007.  The balance of this
      account will generally increase or decrease in proportion to the change in
      the
      balance of our mortgage loans held for investment - securitized.





***Other
      Borrowings.***Other borrowings decreased $441,000, or 7.4%, to
      $5.5 million at June 30, 2007 from $6.0 million at December 31,
      2006.  The decrease in other borrowings was due to a decrease in the
      amount of financed equipment during the six months ended June 30,
      2007.





**49**





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




*(Dollars
                  in
                  thousands*)**Equipment
                  Financing**
              
              **Range
                  of Interest Rates******
              
              
              **Balance**
              
              **Range
                  of Expiration
                  Dates**At
                  June 30,
                  2007
              
              6.69%
                  to 8.95%
              
              $
              5,529
              
              September
                  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
      $6.2 million, or 24.9%, to $31.3 million at June 30, 2007, from $25.1 million
      at
      December 31, 2006.  The increase was primarily related to (1) the
      14.7% increase in financing on mortgage loans held for investment, net, (2)
      the
      124.7% increase in warehouse financing, and (3) the impact of the 10 basis
      point
      (5.70% at June 30, 2007 from 5.60% at December 31, 2006) increase in the
      weighted-average cost on mortgage loans held for investment
      financing.  We did not experience a change in the index that is
      utilized to calculate the interest expense on our warehouse financing over
      the
      same time period, which has remained at 5.32% from December 31, 2006 to June
      30,
      2007.





***Accounts
      Payable and Other Liabilities.***  Accounts payable and
      other liabilities increased $21.4 million, or 40.4%, to $74.6 million at June
      30, 2007, from $53.2 million at December 31, 2006.  The increase was
      primarily due to (1) a $17.9 million increase in accrued servicer payables
      related primarily to our growth in our mortgage loans held for investment
      portfolio and REO properties held, and (2) a $4.3 million increase in payroll
      accruals for payroll related items (*i.e.*, salary and commissions) due
      primarily to the increase in origination volume during the six months ended
      June
      30, 2007, coupled with a 8.9% increase in personnel since December 31,
      2006.  These increases were partially offset by a $221,000 decrease in
      accrued professional fees, primarily related to the timing of payments from
      December 31, 2006 to June 30, 2007.





***Stockholders’
      Equity.***  Stockholders’ equity increased $4.4 million, or
      3.0%, to $154.0 million at June 30, 2007 from $149.6 million at December
      31, 2006.  This increase is primarily due to (1) the recording of $5.7
      million in net income for the six months ended June 30, 2007, (2) the $116,000
      of proceeds and $102,000 of excess tax benefits we received from the exercise
      of
      37,300 stock options from authorized but unissued shares during the six months
      ended June 30, 2007, (3) the $683,000 impact of stock-based compensation
      recorded during the six months ended June 30, 2007, and (4) a $241,000 decrease
      in the net unrealized losses from derivatives.  These increases were
      offset by payment of $1.2 million of common stock dividends coupled with the
      accrual of $1.2 million in common stock dividends that were declared on June
      25,
      2007 and paid on July 3, 2007.





**Contractual
      Obligations**





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





*(Dollars
                in thousands)*
            
            **Total**
            
            
            **Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Three
                Years**
            
            
            **Three
                to**
              **Five
                Years**
            
            
            **More
                than**
              **Five
                Years**Financing
                on mortgage loans held for investment, net (1)
            
            $
            6,903,729
            
            
            $
            2,117,495
            
            
            $
            2,605,034
            
            
            $
            1,121,663
            
            
            $
            1,059,537Operating
                leases
            
            $
            24,746
            
            
            $
            7,282
            
            
            $
            10,437
            
            
            $
            6,717
            
            
            $
            310Equipment
                financing
            
            $
            5,529
            
            
            $
            183
            
            
            $
            5,346
            
            
            $
            --
            
            
            $
            --





*(1)
      A* *mounts
      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.*


**50**





**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 June 30, 2007 and December 31, 2006, we had
      outstanding origination commitments to fund approximately $183.1 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 six months ended June 30, 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 to us and do not have the ability to require us to
      repurchase their loans other than for non-credit-related recourse that can
      arise
      under standard representations and warranties.  See “- Origination of
      Mortgage Loans – Securitizations” and “- Securitizations Structured as a Sale”
for additional information regarding these transactions.





**Cash
      Flows**





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





**For
                the Six Months
Ended June 30,***(Dollars
                in thousands)*
            
            **2007**
            
            
            **2006**Net
                cash provided by (used in):Operating
                activities
            
            $
            33,507
            
            
            $
            17,553Investing
                activities
            
            $
            (1,332,121
            )
            
            $
            (902,304
            )Financing
                activities
            
            $
            1,299,350
            
            
            $
            884,727





*Operating
      Activities*– The net**cash provided by operating activities
      was $33.5 million for the six months ended June 30, 2007, compared to $17.6
      million for the six months ended June 30, 2006.  The increase for the
      six months ended June 30, 2007 primarily reflects the net impact of the $26.7
      million increase in accrued interest payable, accounts payable and other
      liabilities, the $5.7 million of net income recorded, the $23.9 million
      provision for loan losses, the $16.3 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), the $9.8 million decrease in
      trustee receivable and the $9.5 million of deferred tax expense
      accrued.  Partially offsetting these increases was the impact of the
      $42.4 million increase in accrued interest receivable, accounts receivable
      and
      prepaid and other assets, the $12.6 million of gains recorded on mortgage loan
      sales, the $7.2 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 $1.3 billion for
      the six months ended June 30, 2007, compared to $902.3 million for the six
      months ended June 30, 2006.  The increase in net cash used in
      investing activities during the six months ended June 30, 2007 primarily related
      to the $2.6 billion of mortgage loans held for investment originated, offset
      by
      $867.3 million in principal repayments received on mortgage loans held for
      investment and by $395.0 million in proceeds received from the sale of mortgage
      loans.





**51**





*Financing
      Activities*– The net
      cash provided by financing activities was $1.3 billion for the six months ended
      June 30, 2007, compared to $884.7 million for the six months ended June 30,
      2006.  The increase in net cash provided during the six months ended
      June 30, 2007 primarily related to the $2.6 billion in proceeds received from
      warehouse financing, and by $1.8 billion in the proceeds received from the
      financing on mortgage loans held for investment.  Partially offsetting
      the increases was a $2.2 billion decrease from the repayment of warehouse
      financing and a $899.0 million decrease from the repayment of financing on
      mortgage loans held for investment.





**Liquidity
      and Capital Resources**





The
      term
“liquidity” refers to our ability to generate adequate amounts of cash to fund
      our operations, including our loan originations, loan purchases, operating
      expenses, securitization activities, tax payments and planned dividend
      payments.  Historically, we have generated working capital primarily
      from the cash proceeds we receive from our securitizations, including the NIM
      transactions and the sale of MSRs.  Our current cost structure has
      many embedded fixed costs, which can be significantly affected by a relatively
      substantial decrease in our loan origination volume.  There can be no
      assurance, however, that we will continue to originate a sufficient amount
      of
      mortgage loans or be able to securitize our loans at favorable terms or at
      all.  We may choose to not sell MSRs or may reduce the amount of
      securitization debt we issue, or incur higher funding costs, or may incur higher
      reserve requirements on our securitization transactions as driven by the
      agencies rating our securitizations, 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, changes in prevailing interest rates could adversely impact
      our cash flow in future periods.




The
          subprime
          mortgage industry has experienced a period of turmoil during the first
          six
          months of 2007, which has worsened during the several weeks preceding the
          filing
          of this Report.  Our liquidity has been adversely impacted by these
          market conditions and the resultant margin calls we have received from
          our
          warehouse line providers (described below).  (See "-Part II - Item 1A
          - Risk Factors").  In the days prior to the filing date of this
          Report, we received additional margin calls which, when we evaluated our
          business and prevailing market conditions, caused us to seek additional
          sources
          of capital and to alter our operations to address the volatility of the
          current
          operating environment.  We entered into financing transactions
          described below in an effort to address our liquidity needs.  After
          giving effect to the recent financing transactions described below, and
          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.




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





·
            the
                proceeds we receive from selling or financing asset-backed securities
                (including NIM notes or Class N Notes) in connection with our
                securitizations;





·
            the
                proceeds from the sale of MSRs to a third-party mortgage
                servicer;





·
            the
                premiums we receive from selling whole loans on a servicing-released
                basis;





·
            origination
                fees collected on newly closed
                loans;





**52**





·
            the
                cash flow from corridors and interest rate swaps;
                and





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




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 (including any related margin
                calls), 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 related margin requirements 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 $343,000 and $387,000 at June 30,
      2007 and December 31, 2006, respectively.  Included in “accounts
      payable and other liabilities” is an allowance for recourse loans related to
      those loans sold with recourse of $115,000 and $81,000 at June 30, 2007 and
      December 31, 2006, respectively.  During the six months ended June 30,
      2007, we reimbursed investors $66,000, through the recourse reserve, to net
      settle several loans.  We did not repurchase any loans that were sold
      with recourse under our existing repurchase agreements during the six months
      ended June 30, 2007 or during the year ended December 31, 2006.





**53**


**Financing
      Facilities**





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





To
      originate and accumulate loans for securitization, we borrow money on a
      short-term basis primarily through secured warehouse credit
      facilities.  Throughout each quarter, as we amass loans for inclusion
      in the next securitization, a significant portion of our total warehouse
      financing lines may be utilized to fund these loans.  The amounts we
      are able to borrow under our warehouse credit facilities is dependent upon
      the
      valuations placed on the collateral by the warehouse providers.  The
      collateral is subject to re-valuation at any time.  Any downward
      re-valuations of the collateral may result in a margin call, which will subject
      us to either making a cash payment or delivering additional collateral to the
      warehouse provider and result in the reduction in our available liquidity and
      substantially harm our results of operation and financial
      condition.  There can be no assurance that we will be able to satisfy
      margin calls.  We have received substantial margin calls from our
      warehouse providers since June 30, 2007, including margin calls
      received during the days immediately proceeding the filing of this
      Report.  To date, we have been able to satisfy these margin calls from
      our existing liquidity.  There can be no assurance, however, that we
      will not be subject to increased margin calls after the date of this Report
      and,
      if so, whether we will be able to satisfy our obligations
      thereunder.




The
      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 June 30, 2007 (including any subsequent changes thereto)
      are as follows:





**Bank
      of
      America Warehouse Credit****Facility****.**  We have a $500.0 million
      facility  ($250.0 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.  There
      can be no assurance that we will be able to renew or replace this credit
      facility at terms satisfactory to us or at all. As of June 30, 2007, the
      outstanding balance under the facility was $395.5 million.





**Deutsche
      Bank
      Warehouse Credit****Facility****.** We
      have a $500.0 million facility ($250.0 million of which is committed) with
      Deutsche Bank which bears interest based upon a fixed margin over one-month
      LIBOR.  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 June 30, 2007, the outstanding balance under the facility
      was $359.2 million.





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





**RBS
      Greenwich
      Capital Warehouse Credit Facility****.**  We have
      a $500.0 million facility ($250.0 million of which is committed) with RBS
      Greenwich Capital Financial Products, Inc., which bears interest based upon
      a
      fixed margin over one-month LIBOR.  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
      June 30, 2007, we had no outstanding balance under the facility.





**54**





**JPMorgan
      Chase Warehouse Credit Facility.**  We have a $500.0 million
      facility ($250.0 million of which is committed) with JPMorgan Chase which bears
      interest based upon a fixed margin over one-month LIBOR.  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 2008.  As of June
      30, 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.  If we fail to comply with any of these
      covenants or otherwise default under a warehouse credit facility, the lender
      has
      the right to terminate the warehouse credit facility and require immediate
      payment, which may require sale of the collateral at less than optimal
      terms.  In addition, if we default under one warehouse credit
      facility, it would generally trigger a default under the other warehouse credit
      facilities.  We believe we were in compliance with these covenants as
      of June 30, 2007.




**August
        2007 Financing**
  On
          August
          13, 2007, we closed a repo financing facility with AG Delta Holdings,
            LLC, an affiliate of Angelo, Gordon & Co., in the principal
            mount of $60.0 million and bearing interest at a fixed margin over
            one-month LIBOR.  The
            facility is  collateralized by our securitization residual, BIO and
            owner trust certificates (the “securitization related certificates”) – which
            entitle the holder to  receive the difference between the interest
            payments received from the loans
          held in the related securitization trust and the payments to the related
          asset-backed investors (less the contractual servicing fee and other
            fees, costs
          and expenses of administering the securitization trust).  The
          cash  flows from these securitization related certificates will be
          utilized to pay the
          principal under the facility.  We will make
          monthly interest payments on the then-existing principal balance of
          the facility.  The facility matures in 12 months, if not
          repaid earlier.
 
 In
            connection with this transaction, we have agreed to issue to AG Delta
            Holdings, LLC warrants to purchase 10.0 million shares of our common
            stock.  The
            initial exercise price of the warrants is $5.00 per share, and they
            expire in February 2009, subject to extension if we do not obtain
            stockholder approval for the warrant issuance within 90 days of the
            closing date.  We
            also have agreed to issue $10.0 million of convertible notes to several
            funds controlled by one of our existing equity investors.  The
            notes are convertible into an aggregate of 2.0 million shares of
            our common stock, at a conversion price of $5.00 per share.  The
            convertible notes mature in 12 months, if not converted or redeemed
            earlier, and bear interest at a rate of 6% per annum for the first
            90 days and thereafter at a rate of 12% per annum, until converted
            or redeemed.


**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 75.6% and 72.3% of our net revenues (net interest
      income and non-interest income, less provision for loan loss) during the three
      months ended June 30, 2007 and 2006, respectively.  Net interest
      income after provision for loan loss represented 75.6% and 72.7% of our net
      revenues (net interest income and non-interest income, less provision for loan
      loss) during the six months ended June 30, 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.

**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 six months ended June 30, 2007 and the
      year ended December 31, 2006, we repurchased or net settled $3.3
      million ($1.2 million related to the three months ended June 30, 2007) and
      $2.3 million, respectively, of loans under certain re-purchase provisions
      related to whole-loan sales.


**55**





**Geographical
      Concentration**





Properties
      securing our mortgage loans held for investment are geographically dispersed
      throughout the United States.  For the three months ended June 30,
      2007, approximately 19.6%, 11.7%, 7.5%, 7.3%, 5.9% and 5.9%, based upon
      principal balance, of the mortgage loans we originated were on properties
      located in New York, Florida, Illinois, New Jersey, Maryland and Pennsylvania,
      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.





**Environmental
      Matters**





To
      date,
      we have not been required to perform any environmental investigation or clean-up
      activities, nor have we been subject to any environmental
      claims.  There can be no assurance, however, that this will remain the
      case in the future.  Although we primarily lend to owners of
      residential properties, in the course of our business, we may acquire properties
      securing loans that are in default.  There is a risk that we could be
      required to investigate and clean-up hazardous or toxic substances or chemical
      releases at these properties, and may be held liable to a governmental entity
      or
      to third parties for property damage, personal injury and investigation and
      clean-up costs incurred in connection with the contamination.  In
      addition, the owner or former owners of a contaminated site may be subject
      to
      common law claims by third parties based on damages and costs resulting from
      environmental contamination emanating from the property.





**Inflation**





Inflation
      affects us most significantly in the areas of mortgage loan originations and
      profit margins.  Interest rates normally increase during periods of
      rising inflation (or in periods when the Federal Reserve Bank attempts to
      prevent inflation).  Historically, as interest rates increase,
      mortgage loan production decreases, particularly from loan
      refinancing.  Generally, in 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**





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





**56**





*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.







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.





**57**





We
      regularly
      issue securitization asset-backed securities collateralized by fixed- and
      variable-rate mortgage loans.  As a result of this activity, we are
      exposed to interest rate risk beginning when our mortgage loans close and are
      recorded as assets until permanent financing is arranged, such as when
      asset-backed securities are issued.  To reduce our financial exposure
      to changes in interest rates, our strategy is to use derivative instruments,
      in
      the form of interest rate swap contracts, in an effort to effectively lock
      in a
      pre-determined interest rate on designated portions of our prospective future
      securitization financings.  We also use corridors (corresponding
      purchases and sales of interest rate caps with similar notional balances at
      different strike prices) and/or amortizing notional balance interest rate swaps
      that are designed to mitigate our basis risk within the
      securitization.  (See “- Item 2. - Management’s Discussion and
      Analysis of Financial Condition and Results of Operations - Summary of Critical
      Accounting Policies - Accounting for Hedging Activities”).  Changes in
      interest rates also could adversely affect our ability to originate loans and/or
      could affect the level of loan prepayments, impacting the amount of mortgage
      loans held for investment.  (See “- Interest Rate Risk/Market Risk”
and “Part II. – Item 1A. – Risk Factors”).





**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.





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.”





**58**





When
      interest
      rates on our assets do not adjust at the same rates as our liabilities or when
      the assets have fixed rates and the liabilities are adjusting, our future
      earnings potential is affected.  We express this interest rate risk as
      the risk that the market value of assets will increase or decrease at different
      rates than that of the liabilities.  Expressed another way, this is
      the risk that net asset value will experience an adverse change when interest
      rates change.  We assess the risk based on the change in market values
      given increases and decreases in interest rates.  We also assess the
      risk based on the impact to net income in changing interest rate
      environments.





Management
      primarily uses financing sources where the interest rate resets
      frequently.  As of June 30, 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 contain 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 rate of interest 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 the current end-of-period data, in conjunction with
      a
      forward LIBOR curve and estimated repayment data based on anticipated receipt
      of
      principal and interest on the underlying mortgage loan collateral.





We
      refer to
      the one-year and the three-year projections of net interest income as the “base
      case.”  Once the base case has been established, we “shock” the base
      case with instantaneous and parallel shifts in interest rates in 100 basis
      point
      increments upward and downward.  Calculations are made for each of the
      defined instantaneous and parallel shifts in interest rates over or under the
      forward LIBOR curve used to determine the base case and includes any associated
      changes in projected mortgage prepayment speeds.  The following
      sensitivity 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 June 30,
      2007:





*(Dollars
                in thousands)*
            
            **Base
                Case**
            
            
            **Up
                100 Basis Points**
            
            
            **Up
                200 Basis Points**
            
            
            **Down
                100 Basis Points**
            
            
            **Down
                200 Basis Points*****One-Year
                Projection:***Net
                interest income (1)(2)
            
            $
            185,630
            
            
            $
            180,291
            
            
            $
            175,677
            
            
            $
            191,024
            
            
            $
            196,636Percentage
                change from base
            
            
            
            
            
            
            (2.88)%
            
            
            
            (5.36)%
            
            
            
            2.91%
            
            
            
            5.93%***Three-Year
                Projection:***Net
                interest income (1)(2)
            
            $
            391,857
            
            
            $
            384,555
            
            
            $
            378,096
            
            
            $
            399,023
            
            
            $
            407,063Percentage
                change from base
            
            
            
            
            
            
            (1.86)%
            
            
            
            (3.51)%
            
            
            
            1.83%
            
            
            
            3.88%





*(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 September 30, 2007.*





**59**





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





**Hedging**.  From
      an interest rate risk management perspective, we use derivative instruments
      (interest rate swaps and corridors) in an effort to offset the potential adverse
      effects of our exposure during a period of rising rates, 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 purchase option contract.  Each contract has both
      a fixed or amortizing notional face amount on which the interest is computed,
      and a set term to maturity.  When the referenced LIBOR interest rate
      rises above the contractual strike rate, we earn corridor income (net of the
      in-the-money interest rate cap sold as part of the
      corridor).  Payments on an annualized basis are equal to the
      difference between actual LIBOR and the strike rate.  Interest rate
      swaps have similar characteristics.  An interest rate swap is a
      transaction between two parties in which each agrees to exchange payments tied
      to different interest rates or indices for a specified period of time, generally
      based on a notional amount of principal.  The interest rate swap
      agreements we utilize allow us to pay a fixed rate of interest while receiving
      a
      rate that adjusts with one-month LIBOR.





**Maturity
      and Repricing Information**





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





*(Dollars
                in thousands)*
            
            **Total**
            
            
            **One**
              **Year**
            
            
            **Two
                Years**
            
            
            **Three
                Years**
            
            
            **Four
                Years**
            
            
            **Five
                Years & Thereafter**Caps
                bought - notional
            
            $
            590,069
            
            
            $
            418,577
            
            
            $
            42,720
            
            
            $
            32,195
            
            
            $
            24,921
            
            
            $
            71,656Weighted-average
                strikerate
            
            
            7.27%
            
            
            
            7.08%
            
            
            
            7.43%
            
            
            
            7.46%
            
            
            
            7.43%
            
            
            
            7.40%Caps
                sold - notional
            
            $
            590,069
            
            
            $
            418,577
            
            
            $
            42,720
            
            
            $
            32,195
            
            
            $
            24,921
            
            
            $
            71,656Weighted-average
                strikerate
            
            
            9.28%
            
            
            
            9.28%
            
            
            
            9.27%
            
            
            
            9.27%
            
            
            
            9.28%
            
            
            
            9.32%Amortizing
                notional balance interest rate swaps:Notional
            
            $
            315,463
            
            
            $
            151,736
            
            
            $
            113,710
            
            
            $
            50,017
            
            
            $
            --
            
            
            $
            --Weighted-average
                rate
            
            
            5.10%
            
            
            
            5.12%
            
            
            
            5.09%
            
            
            
            5.00%
            
            
            
            --
            
            
            
            --





**60**





**Item
      4.  Controls and
      Procedures.**





Prior
      to the
      filing of this report, management, including the Chief Executive Officer and
      Chief Financial Officer, evaluated the effectiveness and operation of our
      disclosure controls and procedures.  Our Chief Executive Officer and
      Chief Financial Officer concluded that, as of June 30, 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 June 30, 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:





·
            In
                or about November 1998, we received notice that we had been named
                in a
                lawsuit filed in the United States District Court for the Eastern
                District
                of New York.  In December 1998, the plaintiffs filed an amended
                complaint alleging that we had violated the Home Ownership and Equity
                Protection Act of 1994, the federal Truth-in-Lending Act, and Section
                349
                of the New York State General Business Law, which relates to consumer
                protection for deceptive practices.  The complaint sought: (a)
                certification of a class of plaintiffs, (b) declaratory judgment
                permitting rescission, (c) unspecified actual, statutory, treble
                and
                punitive damages, including attorneys’ fees, (d) injunctive relief and (e)
                declaratory judgment declaring the loan transactions as void and
                unconscionable.  On December 7, 1998, the plaintiffs filed a
                motion seeking a temporary restraining order and preliminary injunction,
                enjoining us from conducting foreclosure sales on 11
                properties.  The District Court Judge ruled that in order to
                consider the motion, plaintiff must move to intervene on behalf of
                these
                11 borrowers.  Thereafter, plaintiff moved to intervene on
                behalf of three of these 11 borrowers and sought injunctive relief
                on
                their behalf.  We opposed the motions.  On December
                14, 1998, the District Court Judge granted the motion to intervene
                and on
                December 23, 1998, the District Court Judge issued a preliminary
                injunction that enjoined us from proceeding with the foreclosure
                sales of
                the three interveners’ properties.  We filed a motion for
                reconsideration of the December 23, 1998 order.  In January
                1999, we filed an answer to plaintiffs’ first amended
                complaint.  In July 1999, the plaintiffs were granted leave, on
                consent, to file a second amended complaint.  In August 1999,
                the plaintiffs filed a second amended complaint that, among other
                things,
                added additional parties but contained the same causes of action
                alleged
                in the first amended complaint.  In September 1999, we filed a
                motion to dismiss the complaint, which was opposed by plaintiffs
                and, in
                June 2000, was denied in part and granted in part by the District
                Court.  In or about October 1999, plaintiffs filed a motion
                seeking an order preventing us, our attorneys and/or the New York
                State
                Banking Department (“NYSBD”) from issuing notices to a number of our
                borrowers, in accordance with the settlement agreement entered into
                by and
                between the NYSBD and us.  In the fourth quarter of 1999, we and
                the NYSBD submitted opposition to the plaintiffs’ motion.  In
                March 2000, the District Court issued an order that permitted us
                to issue
                an approved form of the notice.  In September 1999, the
                plaintiffs filed a motion for class certification, which we opposed
                in
                February 2000, and which was ultimately withdrawn without prejudice
                by the
                plaintiffs in January 2001.  In February 2002, we executed a
                settlement agreement with the plaintiffs, under which we denied all
                wrongdoing, but agreed to resolve the litigation on a class-wide
                basis.  The District Court preliminarily approved the settlement
                and a fairness hearing was held in May 2002.  We submitted
                supplemental briefing at the District Court’s request in or about April
                2004.  In August 2004, the District Court conditionally approved
                the settlement, subject to our submitting supplemental documentation
                regarding a change in the settlement agreement and proposed supplemental
                notices to be sent to those borrowers who either opted out or
                objected.  We, plaintiffs and certain objectors submitted our
                respective supplemental submissions in August 2004 and the District
                Court
                granted its final approval to the settlement in January
                2005.  In February 2005, certain objectors filed a notice of
                appeal.  The objectors filed their appellate brief in July
                2005.  We filed our appellate papers in opposition in September
                2005, and the objectors filed their reply papers in September
                2005.  In February 2006, the Appellate Court vacated the
                District Court’s decision to approve the settlement, not based on the
                merits of the settlement, but because a motion to intervene was decided
                by
                the District Court Magistrate Judge and not the District Court
                Judge.  The Appellate Court instructed the District Court Judge
                to rule on the motion to intervene and, until then, it cannot be
                determined if the District Court Judge will also have to rule on
                the
                fairness of the settlement, or if that issue will have to return
                to the
                Appellate Court.  Briefing on the intervention motion was
                re-submitted to the District Court Judge in July 2006, and the motion
                was
                denied in November 2006.  In January 2007, we executed a
                proposed amendment to the settlement with the plaintiffs which did
                not
                increase the settlement amount.  In March 2007, the plaintiffs
                filed a motion for preliminary approval of the amended settlement
                and the
                proposed notice to the class.  In April 2007, certain objectors
                filed an opposition to the motion for preliminary approval.  We
                filed our reply to the objectors' opposition in May 2007.  The
                plaintiffs also filed their reply to the objectors' opposition in
                May
                2007.  If the District Court preliminarily approves the
                settlement, as amended, a new fairness hearing date will be
                scheduled.  If the settlement is not approved, we believe we
                have meritorious defenses and intend to vigorously defend this suit,
                but
                cannot estimate with any certainty our ultimate legal or financial
                liability, if any, with respect to the alleged
                claims.





**61**





·
            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.  In July 2007, we filed a motion for
                certification of an interlocutory appeal from the District Court’s May
                2007 order and the plaintiffs filed their opposition papers in
                July 2007.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.





**62**





·
            In
                or about February 2007, we received notice that we had been named
                in a
                lawsuit filed in the United States District Court for the Northern
                District of Illinois, Eastern Division, alleging that we had accessed
                certain consumers' credit reports without a permissible purpose under
                the
                Fair Credit Reporting Act of 1970, as amended (“FCRA”), and sent improper
                prescreening offers in Illinois.  The complaint seeks: (a)
                certification of a class of plaintiffs, (b) injunctive relief against
                further violations, (c) statutory damages and general and other damages,
                and (d) attorneys’ fees, costs and litigation expenses, based upon alleged
                (i) violations of the FCRA, (ii) common law invasion of privacy and
                (iii)
                consumer fraud/unfair acts and practices.  In March 2007, we
                filed a motion for a stay of the action pending certain decisions
                expected
                to be rendered by other courts in actions pending against other companies,
                which decisions we expect may impact the legal issues involved in
                our
                case.  In March 2007, the Court stayed the action until June
                2007.  In June 2007, the plaintiff stipulated, without
                prejudice, to dismissing the common law invasion of privacy claim
                and the
                consumer fraud/unfair acts and practices claim, and dismissed only
                that
                part of the relief seeking injunctive relief on the FCRA
                claim.  In June 2007, we filed an answer to complaint and
                discovery is proceeding.   In July 2007, plaintiff filed a
                motion for class certification and our opposition papers were scheduled
                to
                be filed in August 2007.In August 2007, the class action briefing schedule was put on hold
                while
                the parties try to work out an individual settlement of the action.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 statements contained
      in this Quarterly Report constitute forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934, which involve risks and uncertainties that
      exist in our operations and business environment, and are subject to change
      based on a variety of important factors.  Generally, forward-looking
      statements can be identified by the use of forward-looking terminology
      including, but not limited to, “anticipate that,” “believes,” “continue to,”
“estimates,” “expects 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,
      financing activities and liquidity requirements, the future performance of
      our
      loan portfolios, the impact of changes in interest rates, our future hedging
      strategy, the availability of warehouse, residual and other credit facilities;
	  our ability or inability to continue to access the securitization and whole-loan
	  markets on favorable terms and conditions or at all; our ability to obtain stockholder
	  approval of the equity issuances described in Liquidity and Capital resources  August
	  2007 Financing above and the consequences to us if we do not receive stockholder approval;
	  the potential impact that amortizing the discount related to the warrants may have to our
	  financial statements; rating agencies changes impacting reserve levels; loan prepayment
	  rates, delinquency and default rates;
	  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:


·
              Our
                  ability or inability to continue our practice of securitizing mortgage
                  loans, as well as our ability to utilize optimal securitization
                  structures
                  (including the execution of NIM transactions and the sale of MSRs
                  at the
                  time of securitization) at terms favorable to us to generate sufficient
                  cash proceeds to offset our current cost structure. We rely heavily
                  upon
                  the asset-backed securities market for our long term
                  financing.  During the period immediately prior to the date of
                  this Report, this market has been severely constrained, with only
                  a small
                  number of transactions coming to market.  We cannot assure you
                  that we will continue to be successful in securitizing mortgage
                  loans.  Our ability to complete securitizations of our mortgage
                  loans will depend upon a number of factors, many of which are beyond
                  our
                  control, including conditions in the credit and securities markets
                  generally, conditions in the asset-backed securities market specifically
                  and the performance of our mortgage loans previously
                  securitized;
 
 ·
              Our
                  ability to realize proceeds that are approximately equal to or
                  greater
                  than the full economic value of the mortgage loans we
                  securitize.  We cannot assure you that we will continue to be
                  successful in doing so in the future.  As a result of conditions
                  within the subprime mortgage industry, rating agencies, financial
                  guarantee insurers and investors have recently begun to, and may
                  continue
                  to in the future, require additional credit enhancement to support
                  the
                  securities sold in securitizations of subprime mortgage
                  loans.  This requirement generally has the effect of reducing
                  the proceeds we may receive from, and increasing the overall expense
                  of
                  executing securitizations.  The ratings agencies that rate
                  subprime securitizations have recently increased reserve requirements,
                  the
                  magnitude of which was unanticipated, which may affect the amount
                  of
                  proceeds we can expect to receive in future securitizations.  We
                  have recently raised our mortgage rates and modified our product
                  offerings
                  and underwriting guidelines in an effort to mitigate the effects
                  of these
                  changes.  There can be no assurance, however, that we will be
                  successful in doing so.  In addition, we expect to receive lower
                  proceeds from any future securitization that contains collateral
                  that was
                  originated based upon our previous guidelines and
                  rates;
 
 **63**


·
              Each
                  of the securitizations includes a series of asset-backed securities
                  with
                  various credit ratings. Unexpected changes
                  in ratings or
                  rating methodology by the rating agencies (S&P, Moody's, Fitch
                  and/or DBRS), including without limitation, the required levels of
                  O/C on our newly
                  issued or existing securitization transactions may have an adverse
                  impact
                  on our cash position and may affect the prices we receive on all
                  or
                  certain portions of the asset-backed securities we issue.  The required O/C
                  and sizing of
                  each rated class of asset-backed securitiesbeing offered
                  are generally
                  determined solely by the rating
                  agencies;





·
              Our
                  ability or inability to continue to access, renew or replace
                    credit facilities at favorable
                  terms and conditions, including without limitation, warehouse
                    and other
                  credit facilities used to finance newly originated mortgage
                    loans held for
                  investment – pre-securitization 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 would result
                  in the  reduction in our available liquidity and harm our results
                  of operation and
                  financial condition.   We have received substantial
                  margin  calls from our warehouse providers since June 30, 2007,
                  including margin
                  calls received during the days immediately proceeding
                  the filing of  this Report.  To date, we have been
                  able to satisfy all
                  such margin calls from our existing liquidity.  There
                  can  be no assurance, however, that we will not be subject
                  to increased margin  calls after the filing this Report
                  and, if so, whether we will be  able to satisfy our obligations
                  thereunder.  In the event we are not able to
                  satisfy a margin call, we could lose the related
                  line of
                  credit and trigger defaults under our other credit
                  facilities;





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





·
              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;





**64**





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





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





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





·
              The
                  risk that any material decline in real estate values would weaken
                  our
                  collateral and LTV ratios and increase the possibility of loss
                  if a
                  borrower defaults.  In such an event, we would be subject to the
                  risk of loss on such mortgage asset arising from borrower defaults
                  to the
                  extent not covered by a third-party credit enhancement.  Our
                  ability or inability to earn a sufficient spread between our cost
                  of funds
                  and our average mortgage rates to generate sufficient revenues
                  and cash
                  flows to offset our current cost structure and cash
                  uses;





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





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





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





·
              The
                  effects of interest rate fluctuations and our ability or inability
                  to
                  hedge effectively against these fluctuations in interest rates,
                  the effect
                  of changes in monetary and fiscal policies, social and economic
                  conditions, unforeseen inflationary pressures and monetary
                  fluctuation;





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





**65**





·
              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 39.6% and 41.5% of our
                  loans
                  were originated during the three and six months ended June 30,
                  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.  In the event that we are not successful in
                  maintaining or expanding our broker relationships, our wholesale
                  loan
                  origination volume may decrease which could significantly harm
                  our
                  business, financial condition, liquidity and results of
                  operations;





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





·
              Our
                  loan products may require payment adjustments during the term of
                  the
                  mortgage loan that may result in increased payment defaults by
                  borrowers
                  and higher losses to us.  This can result in payment defaults by
                  borrowers who are unprepared or unable to meet higher payment
                  requirements.  In addition, some of our loan products do not
                  amortize evenly and generally enable the borrower to either pay
                  only
                  interest for several years before the loan begins amortizing, or
                  to pay a
                  reduced principal and interest payment for the first 10
                  years.  These loan products, in addition to possibly having
                  increased payment defaults, also may result in higher losses to
                  us due to
                  higher principal balances outstanding at the time of a borrower
                  default
                  than would be the case for a loan that amortizes evenly throughout
                  its
                  term;





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





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





**66**





·
              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.  We
                  anticipate that the level of regulatory activity at the federal
                  and state
                  level is likely to increase in the short term, in light of higher
                  defaults
                  and reports of unprecedented numbers of consumers at risk to lose
                  their
                  homes.Many of these laws and regulations seek to impose
                  broad restrictions on certain commonly accepted lending practices,
                  including some of our practices.  In addition, federal, state
                  and local laws could impact O/C requirements set by the rating
                  agencies,
                  which could decrease the cash proceeds we may receive from our
                  securitizations;




·
              The
                  increasing number of federal, state and local “anti-predatory” lending and
                  consumer protection laws may restrict our ability to originate,
                  or
                  increase our risk of liability with respect to, some types of mortgage
                  loans and could increase our cost of doing business.  In recent
                  years, several federal, state and local laws, rules and regulations
                  have
                  been adopted, or are under consideration for adoption, that are
                  intended
                  to eliminate so-called “predatory” lending practices and provide consumers
                  with additional protections.  These laws, rules and regulations
                  impose restrictions on mortgage loans on which certain points and
                  fees,
                  interest rate, or the annual percentage rate (“APR”) exceed specified
                  amounts.  Some of these restrictions expose lenders to 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.  The U.S.
                  Federal Reserve Board announced that it would hold hearings to
                  consider
                  new regulations in the subprime mortgage sector, and U.S. Congress
                  has
                  also announced that it is conducting hearings to consider new legislation
                  as well.  Further, other Federal Regulatory agencies have
                  introduced guidance restricting certain products offered by depository
                  institutions that state banking regulators may adopt and require
                  non-depository mortgage lenders to follow as well.  As the
                  result of such laws, rules, regulation, and guidance, 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;





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





·
              The
                  effect that poor servicing or collections by third-party servicers
                  that
                  service the loans we originate, and/or regulatory actions and class
                  action
                  lawsuits against these servicers, could have on the net interest
                  spread we
                  earn, and/or our ability to sell or securitize loans in the
                  future;





**67**





·
              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 it has appealed the decision and intends to continue
                  to
                  vigorously defend this matter.  Further, according to its public
                  filings, Ocwen maintains high levels of indebtedness.  Ocwen is
                  a non-investment grade company and in 2004 terminated its banking
                  subsidiary's status as a federal savings bank under supervision
                  of the
                  Office of Thrift Supervision (“OTS”) and Federal Deposit Insurance
                  Corporation (“FDIC”).  Ocwen is now licensed and regulated
                  primarily at the state and local level.  On September 13, 2006,
                  a complaint was filed in the United States Bankruptcy Court in
                  Delaware
                  against Ocwen and other parties by the Chapter 7 Trustee of American
                  Business Financial Services, Inc. and its subsidiaries (collectively,
                  “ABFS”) alleging various improper activities and conduct that have harmed
                  ABFS.  Claims against Ocwen include damages resulting from
                  improperly servicing mortgage loans included in ABFS-sponsored
                  securitizations and from actions relating to the acquisition of
                  servicing
                  rights from ABFS on those securitizations.  Ocwen believes the
                  claims made by ABFS are without merit and intends to vigorously
                  defend the
                  matter.  If Ocwen’s operations are impaired as a result of
                  litigation, judgments, governmental investigations, its inability
                  to repay
                  its indebtedness when due, or further degradation of its capitalization
                  or
                  credit rating, our profitability and operations may be
                  harmed;


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


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





·
              Our
                  ability or inability to detect misrepresentations, fraudulent information
                  or negligent acts on the part of loan applicants, mortgage brokers,
                  other
                  vendors or our employees in our loan originations prior to funding
                  and the
                  effect it may have on our business, including potentially harming
                  our
                  reputation or resulting in poorer performing loans.  A loan
                  obtained as a result of a material misrepresentation is typically
                  unsaleable or subject to repurchase if it is sold prior to detection
                  of
                  the misrepresentation;





·
              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 (1) retain such loans in our portfolio,
                  which may
                  have an adverse impact on our cash position or generate losses,
                  or (2)
                  sell them at a significant discount, which may generate losses
                  and
                  adversely effect cash flows.  Recent bankruptcies, and
                  regulatory and legal actions affecting the subprime sector may
                  cause our
                  loans to be viewed as less desirable for securitization.  In the
                  recent past, other subprime mortgage lenders have encountered substantial
                  difficulties in completing securitizations of these mortgage loans,
                  and we
                  cannot assure you that we will be able to continue our practice
                  of doing
                  so;





**68**





·
              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;





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





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





·
              The
                  risk that using Insured Automated Valuation Models (“Insured AVMs”) in
                  lieu of appraisals could increase our losses.  An AVM may be
                  considered a less accurate measure to value a property than a full
                  appraisal with an interior inspection performed by a licensed
                  appraiser.  We utilized an Insured AVM on approximately 13.9%
                  and 14.1% of the loans we originated during the three and six months
                  ended
                  June 30, 2007, respectively.  If the values received from the
                  AVM are higher than the actual property values, we may incur higher
                  losses.  While we obtain an insurance policy on the AVM value at
                  the time of origination, there can be no assurance that we will
                  recover
                  claims from this policy in the event of a
                  loss;





**69**





·
              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;





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





·
              Our
                  inability to comply with REIT qualification tests for our REIT
                  subsidiary
                  on a continuous basis would subject our securitization trusts owned
                  by our
                  REIT subsidiary to federal income tax as a corporation (as a taxable
                  mortgage pool) and not allow it to be filed as part of consolidated
                  income
                  tax return with any other corporation.  The REIT rules require
                  compliance with asset, income, distribution and ownership
                  tests.  The ownership test prohibits five or fewer stockholders
                  from owning more than 50% of our common stock.  As of June 30,
                  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 Executive Vice President (General
                  Counsel);




·
              The
                    investors in our August 2007 financings, an affiliate of
                      Angelo, Gordon & Co. and funds managed by Mohnish Pabrai,
                      beneficially own a significant portion of our outstanding
                      shares (or warrants, which if exercised, would constitute
                      a significant portion of our then-outstanding common stock),
                      and therefore, they could also exercise significant influence
                      as to the matters described above;




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





·
              Future
                  sales of shares of our common stock, including shares of common
                  stock held
                  by our insiders, may negatively impact the price of our common
                  stock.  In
                  addition, in our August 2007 financing, we will issue convertible
                  notes which are convertible into an additional 2.0 million
                  shares of common stock, and warrants
                  to issue an additional 10 million shares of common
                  stock.  We are obligated to register these shares
                  for  resale.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.


**70**







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





Our
      annual
      meeting of stockholders was held on May 17, 2007.  At the meeting,
      Sidney A. Miller, Martin D. Payson and John Adamovich were re-elected as Class
      II Directors for a term of three years.  Arnold B. Pollard and Richard
      Blass continue to serve as Class I Directors and Hugh Miller, William Addas
      and
      Margaret A. Williams continue to serve as Class III Directors.


·
            Votes
                cast in favor of Mr.Sidney A. Miller’sselection totaled 22,651,259,
                while 55,627 votes were
                withheld.





·
            Votes
                cast in favor of Mr. Martin
                D. Payson’s selection totaled 22,652,300; while 54,586 votes were
                withheld.





·
            Votes
                cast in favor of Mr. John
                Adamovich’s selection totaled 22,667,585; while 39,301 votes were
                withheld.





The
      stockholders also voted to ratify the appointment of BDO Seidman, LLP as our
      independent registered public accounting firm for the fiscal year ending
      December 31, 2007.  Votes cast in favor of this ratification were
      22,664,252; while votes cast against were 41,465 and abstentions totaled
      1,169.





**Item
      6.  Exhibits.**


**Exhibit
                  No.**
              
              **Filed**
              
              **Description**31.1
              
              (a)
              
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Executive
                  Officer31.2
              
              (a)
              
              Rule
                  13a-14(a)/15d-14(a) Certification of the Chief Financial
                  Officer32.1
              
              (a)
              
              Section
                  1350 Certification of the Chief Executive Officer32.2
              
              (a)
              
              Section
                  1350 Certification of the Chief Financial
                  Officer






(a)
            Filed
                herewith.


**71**








**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: August 13, 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

**72**


---