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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
  þ
    
    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
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from           to
 Commission File Number: 000-31828
 
 LUMINENT MORTGAGE CAPITAL, INC.
  Maryland
(State or other jurisdiction of incorporation or
organization)
    
    06-1694835
(I.R.S. Employer
Identification No.)101 California Street, Suite 1350, San Francisco, California
(Address of principal executive offices)
    
    94111
(Zip Code)
 (415) 217-4500
  
 þ o
  o þ o
 o þ




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##### 



INDEX
 PAGEINTRODUCTORY NOTE
    
    iiCAUTIONARY NOTE
    
    iiiPART I
    
    FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS
    
    
    1ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    25ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    46ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    50PART II
    
    OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    51ITEM 1A.
    
    RISK FACTORS
    
    
    51ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    54ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    54ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    54ITEM 5.
    
    OTHER INFORMATION
    
    
    55ITEM 6.
    
    EXHIBITS
    
    
    54SIGNATURES
    
    
    55EXHIBIT INDEX
    
    
    56EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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ii




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
    
    our ability to purchase sufficient mortgages for our securitization business;
    
    the effect of the flattening of, or other changes in, the yield curve on our investment strategies;
    
    changes in interest rates and mortgage prepayment rates;
    
    our ability to obtain or renew sufficient funding to maintain our leverage strategies
and support our liquidity position;
    
    the possible effect of negative amortization of mortgages on our financial condition
and REIT qualification;
    
    the possible impact of our failure to maintain exemptions under the 1940 Act;
    
    potential impacts of our leveraging policies on our net income and cash available for distribution;
    
    the power of our board of directors to change our operating policies and strategies
without stockholder approval;
    
    effects of interest rate caps on our adjustable-rate and hybrid adjustable-rate loans
and mortgage-backed securities;
    
    the degree to which our hedging strategies may or may not protect us from interest rate
volatility;
    
    our ability to invest up to 10% of our investment portfolio in residuals, leveraged
mortgage derivative securities and shares of other REITs as well as other investments;
    
    volatility in the timing and amount of our cash distributions; and
    
    the other factors described in this Form 10-Q, including those under the captions
Managements Discussion and Analysis of Financial Condition and Results of Operations,
Risk Factors and Quantitative and Qualitative Disclosures about Market Risk.
  iii




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INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:Condensed Consolidated Balance Sheets (unaudited) at June 30, 2007 and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended
June 30, 2007 and June 30, 2006
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the six months ended
June 30, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2007 and June 30, 2006
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    7
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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2007
    
    
    2006Assets:Cash and cash equivalents
    
    $
    13,254
    
    
    $
    5,902Restricted cash
    
    
    14,559
    
    
    
    7,498Loans held-for-investment, net of allowance for loan losses of $12,297 at
June 30, 2007 and
$5,020 at December 31, 2006
    
    
    5,934,480
    
    
    
    5,591,717Mortgage-backed securities, at fair value
    
    
    84,602
    
    
    
    141,556Mortgage-backed securities pledged as collateral, at fair value
    
    
    3,309,437
    
    
    
    2,789,382Debt securities, at fair value
    
    
    1,157
    
    
    
    Equity securities, at fair value
    
    
    831
    
    
    
    1,098Interest receivable
    
    
    38,347
    
    
    
    36,736Principal receivable
    
    
    2,515
    
    
    
    1,029Derivatives, at fair value
    
    
    59,766
    
    
    
    13,021Other assets
    
    
    40,798
    
    
    
    25,856Total assets
    
    $
    9,499,746
    
    
    $
    8,613,795Liabilities:Mortgage-backed notes
    
    $
    4,515,197
    
    
    $
    3,917,677Repurchase agreements
    
    
    2,868,572
    
    
    
    2,707,915Warehouse lending facilities
    
    
    573,658
    
    
    
    752,777Commercial paper
    
    
    573,385
    
    
    
    637,677Collateralized debt obligations
    
    
    295,013
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Convertible senior notes
    
    
    90,000
    
    
    
    Unsettled security purchases
    
    
    4,572
    
    
    
    Cash distributions payable
    
    
    13,857
    
    
    
    14,343Accrued interest expense
    
    
    15,436
    
    
    
    12,094Accounts payable and accrued expenses
    
    
    22,156
    
    
    
    6,969Total liabilities
    
    
    9,064,634
    
    
    
    8,142,240Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at June 30,
2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 43,303,004 and 47,808,510 shares issued and
outstanding at June 30, 2007 and December 31, 2006, respectively
    
    
    43
    
    
    
    48Additional paid-in capital
    
    
    543,859
    
    
    
    583,492Accumulated other comprehensive income
    
    
    12,122
    
    
    
    3,842Accumulated distributions in excess of accumulated earnings
    
    
    (120,912
    )
    
    
    (115,827
    )Total stockholders equity
    
    
    435,112
    
    
    
    471,555Total liabilities and stockholders equity
    
    $
    9,499,746
    
    
    $
    8,613,795
  2




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,(in thousands, except share and per share amounts)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net interest income:Interest income:Mortgage loan and securitization portfolio
    
    $
    95,967
    
    
    $
    45,398
    
    
    $
    194,658
    
    
    $
    68,009Spread portfolio
    
    
    31,775
    
    
    
    19,845
    
    
    
    62,151
    
    
    
    50,810Credit sensitive bond portfolio
    
    
    18,727
    
    
    
    9,667
    
    
    
    35,226
    
    
    
    17,683Total interest income
    
    
    146,469
    
    
    
    74,910
    
    
    
    292,035
    
    
    
    136,502Interest expense
    
    
    122,222
    
    
    
    53,513
    
    
    
    237,426
    
    
    
    99,484Net interest income
    
    
    24,247
    
    
    
    21,397
    
    
    
    54,609
    
    
    
    37,018Other income:Gains on derivatives, net
    
    
    20,617
    
    
    
    7,183
    
    
    
    35,882
    
    
    
    15,776Impairment losses on securities
    
    
    (18,740
    )
    
    
    (462
    )
    
    
    (18,745
    )
    
    
    (2,179
    )Gains (losses) on sales of mortgage-backed securities
    
    
    4
    
    
    
    (1,240
    )
    
    
    (15,449
    )
    
    
    823Other expense
    
    
    (19
    )
    
    
    (131
    )
    
    
    (99
    )
    
    
    (608
    )Total other income
    
    
    1,862
    
    
    
    5,350
    
    
    
    1,589
    
    
    
    13,812Expenses:Servicing expense
    
    
    6,730
    
    
    
    2,538
    
    
    
    12,716
    
    
    
    4,020Provision for loan losses
    
    
    4,645
    
    
    
    1,525
    
    
    
    8,188
    
    
    
    1,525Salaries and benefits
    
    
    3,551
    
    
    
    2,018
    
    
    
    6,635
    
    
    
    4,441Professional services
    
    
    997
    
    
    
    471
    
    
    
    1,841
    
    
    
    1,093Management compensation expense to related party
    
    
    
    
    
    
    854
    
    
    
    
    
    
    
    1,665Other general and administrative expenses
    
    
    1,889
    
    
    
    1,136
    
    
    
    3,674
    
    
    
    2,091Total expenses
    
    
    17,812
    
    
    
    8,542
    
    
    
    33,054
    
    
    
    14,835Income before income taxes
    
    
    8,297
    
    
    
    18,205
    
    
    
    23,144
    
    
    
    35,995Income taxes (benefit)
    
    
    (506
    )
    
    
    641
    
    
    
    (45
    )
    
    
    652Net income
    
    $
    8,803
    
    
    $
    17,564
    
    
    $
    23,189
    
    
    $
    35,343Net income per share  basic
    
    $
    0.20
    
    
    $
    0.45
    
    
    $
    0.50
    
    
    $
    0.90Net income per share  diluted
    
    $
    0.20
    
    
    $
    0.45
    
    
    $
    0.50
    
    
    $
    0.90Weighted-average number of shares outstanding  basic
    
    
    44,774,340
    
    
    
    38,609,963
    
    
    
    46,038,178
    
    
    
    39,060,284Weighted-average number of shares outstanding  diluted
    
    
    44,898,778
    
    
    
    38,834,435
    
    
    
    46,220,019
    
    
    
    39,337,203Dividend per share
    
    $
    0.32
    
    
    $
    0.20
    
    
    $
    0.62
    
    
    $
    0.25
  3




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (Unaudited)
 AccumulatedAccumulated
    
    
    DistributionsCommon Stock
    
    
    Additional
    
    
    Other
    
    
    in Excess ofPar
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    TotalBalance, January 1, 2007
    
    
    47,809
    
    
    $
    48
    
    
    $
    583,492
    
    
    $
    3,842
    
    
    $
    (115,827
    )
    
    
    
    
    
    $
    471,555Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,189
    
    
    $
    23,189
    
    
    
    23,189Securities available-for-sale,
fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,116
    
    
    
    
    
    
    
    9,116
    
    
    
    9,116Amortization of derivative
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (836
    )
    
    
    
    
    
    
    (836
    )
    
    
    (836
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    31,469Repurchases of common stock
    
    
    (4,775
    )
    
    
    (5
    )
    
    
    (41,118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,123
    )Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,274
    )
    
    
    
    
    
    
    (28,274
    )Issuance and amortization of
restricted common stock
    
    
    269
    
    
    
    
    
    
    
    1,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,485Balance, June 30, 2007
    
    
    43,303
    
    
    $
    43
    
    
    $
    543,859
    
    
    $
    12,122
    
    
    $
    (120,912
    )
    
    
    
    
    
    $
    435,112
  4




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the Six Months Ended June 30,(in thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    23,189
    
    
    $
    35,343Adjustments to reconcile net income to net cash provided by (used in) operating activities:Amortization of premium/(discount) on loans held-for-investment and mortgage-backed
securities and depreciation
    
    
    11,800
    
    
    
    (1,416
    )Impairment losses on securities
    
    
    18,745
    
    
    
    2,179Provision for loan losses
    
    
    8,188
    
    
    
    1,525Negative amortization of loans held-for-investment
    
    
    (52,196
    )
    
    
    (16,969
    )Share-based compensation
    
    
    1,485
    
    
    
    1,676Net realized and unrealized gains on derivative instruments
    
    
    (20,906
    )
    
    
    (14,759
    )Net (losses) on mortgage backed securities held as trading
    
    
    (9
    )
    
    
    Net gain (losses) on sales of mortgage-backed-securities available-for-sale
    
    
    15,449
    
    
    
    (823
    )Changes in operating assets and liabilities:(Increase) decrease in interest receivable, net of purchased interest
    
    
    (1,320
    )
    
    
    1,130(Increase) decrease in other assets
    
    
    1,171
    
    
    
    (15,305
    )Increase in accounts payable and other liabilities
    
    
    14,798
    
    
    
    310Increase (decrease) in accrued interest expense
    
    
    3,342
    
    
    
    (11,527
    )Increase in management compensation payable, incentive compensation payable and
other related-party payable
    
    
    
    
    
    
    588Net cash provided by (used in) operating activities
    
    
    23,736
    
    
    
    (18,048
    )Cash flows from investing activities:Purchases of mortgage-backed securities
    
    
    (790,866
    )
    
    
    (1,449,385
    )Proceeds from sales of mortgage-backed securities
    
    
    31,348
    
    
    
    3,619,558Principal payments of mortgage-backed securities
    
    
    280,454
    
    
    
    289,359Purchases of loans held-for-investment, net
    
    
    (1,262,734
    )
    
    
    (3,143,481
    )Principal payments of loans held-for-investment
    
    
    940,605
    
    
    
    106,707Purchases of derivative instruments
    
    
    (32,979
    )
    
    
    (1,555
    )Proceeds from derivative instruments
    
    
    7,331
    
    
    
    2,326Purchase of debt securities
    
    
    (1,271
    )
    
    
    Net change in restricted cash
    
    
    (7,061
    )
    
    
    747Other
    
    
    (176
    )
    
    
    Net cash used in investing activities
    
    
    (835,349
    )
    
    
    (575,724
    )Cash flows from financing activities:Repurchases of common stock
    
    
    (41,123
    )
    
    
    (15,534
    )Capitalized financing costs
    
    
    (7,122
    )
    
    
    Borrowings under repurchase agreements
    
    
    21,901,406
    
    
    
    19,794,029Principal payments on repurchase agreements
    
    
    (21,740,749
    )
    
    
    (21,414,302
    )Borrowings under warehouse lending facilities
    
    
    1,651,917
    
    
    
    2,468,843Paydown of warehouse lending facilities
    
    
    (1,830,852
    )
    
    
    (2,467,969
    )Borrowings under commercial paper facility
    
    
    2,838,460
    
    
    
    Paydown of commercial paper facility
    
    
    (2,902,752
    )
    
    
    Distributions to stockholders
    
    
    (28,760
    )
    
    
    (3,202
    )Proceeds from issuance of mortgage-backed notes
    
    
    1,359,447
    
    
    
    2,324,948Principal payments on mortgage-backed notes
    
    
    (761,934
    )
    
    
    (94,196
    )Proceeds from issuance of collateralized debt obligations
    
    
    291,027
    
    
    
    Principal payments on margin debt
    
    
    
    
    
    
    (3,548
    )Proceeds from issuance of convertible senior notes
    
    
    90,000
    
    
    
    Net cash provided by financing activities
    
    
    818,965
    
    
    
    589,069Net increase (decrease) in cash and cash equivalents
    
    
    7,352
    
    
    
    (4,703
    )Cash and cash equivalents, beginning of the period
    
    
    5,902
    
    
    
    11,466Cash and cash equivalents, end of the period
    
    $
    13,254
    
    
    $
    6,763
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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
 For the Six Months Ended June 30,(in thousands)
    
    2007
    
    
    2006Supplemental disclosure of cash flow information:Interest paid
    
    $
    245,393
    
    
    $
    113,741Taxes paid
    
    
    1,179
    
    
    
    486Non-cash investing and financing activities:Increase in unsettled security purchases
    
    $
    4,572
    
    
    $
    53,181(Increase) decrease in principal receivable
    
    
    (1,488
    )
    
    
    11,948Transfer of loans held-for-investment to real estate owned
    
    
    8,681
    
    
    
    Acquisition of mortgage-backed securities available-for-sale through collateralized debt obligations
    
    
    (3,986
    )
    
    
    Principal payments of mortgage-backed securities available-for-sale
    
    
    183
    
    
    
    Paydown of warehouse lending facilities
    
    
    (183
    )
    
    
    Increase (decrease) in cash distributions payable to stockholders
    
    
    (486
    )
    
    
    6,605
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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1OVERVIEW
    Business Conditions and Going Concern
    
 7




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
 
 
 
 
 
 
   NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Accounting for Certain
Hybrid Financial Instruments  an Amendment of FASB Statement No. 133 and 140
 Recent Accounting Pronouncements
  8




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Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions
 Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
  Accounting for Investments in Certain Debt and Equity Securities
 Clarification of the Scope of the Audit and Accounting Guide and Accounting for Parent Companies and Equity Method Investors for
Investments in Investment Companies. Investment Companies
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 . Accounting for
Derivative Instruments and Hedging Activities , Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable
Financial Assets (B40).
 9




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Accounting for Uncertainty in
Income Taxes. Accounting for Income Taxes.
 NOTE 3SECURITIES
   Unrealized Gains and Losses on Available-for-Sale Securities
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueJune 30, 2007Mortgage-backed securities,
available-for-sale
    
    $
    3,253,506
    
    
    $
    9,581
    
    
    $
    
    
    
    $
    3,263,087Debt securities, available-for-sale
    
    
    1,157
    
    
    
    
    
    
    
    
    
    
    
    1,157Total
    
    $
    3,254,663
    
    
    $
    9,581
    
    
    $
    
    
    
    $
    3,264,244December 31, 2006Mortgage-backed securities,
availablefor-sale
    
    $
    2,930,878
    
    
    $
    7,549
    
    
    $
    (7,489
    )
    
    $
    2,930,938
  10




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Holding Period of Gross Unrealized Losses on Available-for-Sale Securities
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2006Agency-backed
mortgage-backed securities
    
    $
    8,850
    
    
    $
    (66
    )
    
    $
    
    
    
    $
    
    
    
    $
    8,850
    
    
    $
    (66
    )Non-agency-backed
mortgage-backed securities
    
    
    971,034
    
    
    
    (3,058
    )
    
    
    138,210
    
    
    
    (4,365
    )
    
    
    1,109,244
    
    
    
    (7,423
    )Total temporarily impaired
mortgage-backed securities
    
    $
    979,884
    
    
    $
    (3,124
    )
    
    $
    138,210
    
    
    $
    (4,365
    )
    
    $
    1,118,094
    
    
    $
    (7,489
    )
     Recognition of
interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets
 11




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Weighted-Average Life of Mortgage-Backed Securities


Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    CouponLess than one year
    
    $
    803,817
    
    
    $
    803,474
    
    
    
    5.66
    %Greater than one year and less than five years
    
    
    2,534,595
    
    
    
    2,525,412
    
    
    
    5.96Greater than five years
    
    
    55,627
    
    
    
    55,700
    
    
    
    7.11Total
    
    $
    3,394,039
    
    
    $
    3,384,586
    
    
    
    5.91
    %


12



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##### Table of Contents



NOTE 4LOANS HELD-FOR-INVESTMENT
  Components of Residential Mortgage Loans Held-for-Investment
 June 30,
    
    
    December 31,2007
    
    
    2006Principal
    
    $
    5,821,630
    
    
    $
    5,472,325Unamortized premium
    
    
    125,147
    
    
    
    124,412Amortized cost
    
    
    5,946,777
    
    
    
    5,596,737Allowance for loan losses
    
    
    (12,297
    )
    
    
    (5,020
    )Total residential
mortgage loans, net of
allowance for loan
losses
    
    $
    5,934,480
    
    
    $
    5,591,717
  Allowance for Loan Losses
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2007
    
    
    June 30, 2006
    
    
    June 30, 2007
    
    
    June 30, 2006Balance, beginning of period
    
    $
    8,262
    
    
    $
    
    
    
    $
    5,020
    
    
    $
    Provision for loan losses
    
    
    4,645
    
    
    
    1,525
    
    
    
    8,188
    
    
    
    1,525Usage of allowance
    
    
    (610
    )
    
    
    
    
    
    
    (911
    )
    
    
    Balance, end of period
    
    $
    12,297
    
    
    $
    1,525
    
    
    $
    12,297
    
    
    $
    1,525
   13




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##### Table of Contents



NOTE 5BORROWINGS
  Borrowings
 Weighted-Borrowings
    
    
    Average
    
    
    Fair Value of
    
    
    Final StatedOutstanding
    
    
    Interest Rate
    
    
    Collateral(3)
    
    
    Maturities (5)June 30, 2007Mortgage-backed notes (1) (2)
    
    $
    4,512,495
    
    
    
    5.56
    %
    
    $
    4,509,333
    
    
    
    2046Repurchase agreements
    
    
    2,868,572
    
    
    
    5.43
    
    
    
    3,304,153
    
    
    
    2010Warehouse lending facilities
    
    
    573,658
    
    
    
    6.32
    
    
    
    595,583
    
    
    
    (4
    )Commercial paper facility
    
    
    574,873
    
    
    
    5.37
    
    
    
    575,978
    
    
    
    2007Collateralized debt obligations (1)
    
    
    296,000
    
    
    
    6.35
    
    
    
    300,330
    
    
    
    2047Junior subordinated notes
    
    
    92,788
    
    
    
    8.58
    
    
    none
    
    

    
    2035Convertible senior notes
    
    
    90,000
    
    
    
    8.13
    
    
    none
    

    
    
    2027Total
    
    $
    9,008,386
    
    
    
    5.64
    %
    
    $
    9,285,377December 31, 2006Mortgage-backed notes (1) (2)
    
    $
    3,914,932
    
    
    
    5.60
    %
    
    $
    3,919,354
    
    
    
    2046Repurchase agreements
    
    
    2,707,915
    
    
    
    5.45
    
    
    
    2,909,895
    
    
    
    2008Commercial paper facility
    
    
    639,871
    
    
    
    5.36
    
    
    
    643,823
    
    
    
    2007Warehouse lending facilities
    
    
    752,777
    
    
    
    5.80
    
    
    
    794,420
    
    
    
    (4
    )Junior subordinated notes
    
    
    92,788
    
    
    
    8.58
    
    
    none
    

    
    
    2035Total
    
    $
    8,108,283
    
    
    
    5.58
    %
    
    $
    8,267,492
 
 (1)
    
    Outstanding balances for mortgage-backed notes exclude $2.7 million in unamortized premium at June 30, 2007 and December
31, 2006 $1.0 million for collateralized debt obligations at June 30, 2007 and $1.5 million and $2.2 million at June 30,
2007 and December 31, 2006, respectively, for commercial paper. The maturity of each class of securities is directly
affected by the rate of principal repayments on the associated residential mortgage loan collateral. As a result, the
actual maturity of each series of mortgage-backed notes may be shorter than the stated maturity.(2)
    
    The carrying amount of loans pledged as collateral is $4.5 billion and $3.9 billion at June 30, 2007 and December 31, 2006.(3)
    
    Collateral for borrowings consists of mortgage-backed securities available-for-sale and loans held-for-investment.(4)
    
    Borrowing has no stated maturity.(5)
    
    Mortgage-backed notes, repurchase agreements and collateralized debt obligations mature at various dates. The date above
is the last maturity date for each type of borrowing.  Mortgage-backed notes
  14




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##### Table of Contents



Repurchase Agreements
  Repurchase Agreement Maturities
 June 30, 2007
    
    
    December 31, 2006Overnight 1 day or less
    
    $
    
    
    
    $
    Between 2 and 30 days
    
    
    2,425,817
    
    
    
    2,070,939Between 31 and 90 days
    
    
    
    
    
    
    201,976Between 91 and 1,094 days
    
    
    442,775
    
    
    
    435,000Total
    
    $
    2,868,572
    
    
    $
    2,707,915
  Warehouse Lending Facilities
 Mortgage Loan Financing.
 Asset-backed Securities Financing.
 15




---



##### Table of Contents



Warehouse Lending Facilities
 At June 30, 2007
    
    
    At December 31, 2006Weighted-
    
    
    
    
    
    
    
    
    
    
    Weighted-Borrowing
    
    
    Borrowings
    
    
    Average
    
    
    Borrowing
    
    
    Borrowings
    
    
    AverageCounterparty
    
    Capacity
    
    
    Outstanding
    
    
    Interest Rate
    
    
    Capacity
    
    
    Outstanding
    
    
    Interest RateMortgage loan financing:Greenwich Capital Financial Products, Inc.
    
    $
    1,000.0
    
    
    $
    573.7
    
    
    
    6.32
    %
    
    $
    1,000.0
    
    
    $
    455.2
    
    
    
    5.80
    %Barclays Bank plc
    
    
    1,000.0
    
    
    
    
    
    
    
    
    
    
    
    1,000.0
    
    
    
    290.1
    
    
    
    5.78Bear Stearns Mortgage Capital Corp.
    
    
    500.0
    
    
    
    
    
    
    
    
    
    
    
    500.0
    
    
    
    7.5
    
    
    
    5.77Asset-backed securities financing:Greenwich Capital Financial Products, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500.0
    
    
    
    
    
    
    
    Total
    
    $
    2,500.0
    
    
    $
    573.7
    
    
    
    6.32
    %
    
    $
    3,000.0
    
    
    $
    752.8
    
    
    
    5.80
    %
   Commercial Paper Facility
   Collateralized Debt Obligations
  Junior Subordinated Notes
  16




---



##### Table of Contents



Convertible Senior Notes
      NOTE 6CAPITAL STOCK AND EARNINGS PER SHARE
   17




---



##### Table of Contents



Reconciliation of Basic and Diluted Earnings Per Share
 For the Three Months Ended
    
    
    For the Three Months EndedJune 30, 2007
    
    
    June 30, 2006Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    8,803
    
    
    $
    8,803
    
    
    $
    17,564
    
    
    $
    17,564Weighted-average number
of common shares
outstanding
    
    
    44,774,340
    
    
    
    44,774,340
    
    
    
    38,609,963
    
    
    
    38,609,963Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    124,438
    
    
    
    
    
    
    
    224,472Adjusted
weighted-average number
of common shares
outstanding
    
    
    44,774,340
    
    
    
    44,898,778
    
    
    
    38,609,963
    
    
    
    38,834,435Net income per share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.45
    
    
    $
    0.45
 For the Six Months
    
    
    For the Six MonthsEnded June 30, 2007
    
    
    Ended June 30, 2006Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    23,189
    
    
    $
    23,189
    
    
    $
    35,343
    
    
    $
    35,343Weighted-average number
of common shares
outstanding
    
    
    46,038,178
    
    
    
    46,038,178
    
    
    
    39,060,284
    
    
    
    39,060,284Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    181,841
    
    
    
    
    
    
    
    276,919Adjusted
weighted-average number
of common shares
outstanding
    
    
    46,038,178
    
    
    
    46,220,019
    
    
    
    39,060,284
    
    
    
    39,337,203Net income per share
    
    $
    0.50
    
    
    $
    0.50
    
    
    $
    0.90
    
    
    $
    0.90
 
 Options mainly related to the purchase option from the issuance of convertible debt in June
2007 in the amount 8.1 million shares for the three and six months ended June 30, 2007 and 55
thousand shares for the three and six months ended June 30, 2006 were outstanding but excluded from
the computation of earnings per share because they were antidilutive.  NOTE 72003 STOCK INCENTIVE PLANS
  18




---



##### Table of Contents



Common Stock Available for Grant
 2003 Outside2003 Stock
    
    
    Advisors StockIncentive Plan
    
    
    Incentive Plan
    
    
    TotalJune 30, 2007Shares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    (1,029,500
    )
    
    
    (20,760
    )
    
    
    (1,050,260
    )Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    820,500
    
    
    
    129,240
    
    
    
    949,740
 Outstanding Stock Options
 June 30, 2007Stock options outstanding (shares)
    
    
    55,000Weighted-average exercise price
    
    $
    14.82Weighted-average remaining life (years)
    
    
    6.1
  Common Stock Awards
 Number of
    
    
    Weighted-AverageCommon Shares
    
    
    Issue PriceOutstanding, January 1, 2007
    
    
    721,329
    
    
    $
    9.13Issued
    
    
    269,094
    
    
    
    9.32Forfeited
    
    
    
    
    
    
    Outstanding, June 30, 2007
    
    
    990,423
    
    
    $
    9.18
 Non-vested Common Stock Awards
 Number of Common
    
    
    Weighted-AverageShares
    
    
    Grant-Date Fair ValueNonvested, January 1, 2007
    
    
    555,923
    
    
    $
    9.20Granted
    
    
    269,094
    
    
    
    9.32Vested
    
    
    (153,217
    )
    
    
    8.74Forfeited
    
    
    
    
    
    
    Nonvested, June 30, 2007
    
    
    671,800
    
    
    $
    9.35
   19




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##### Table of Contents



NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures About Fair Value of Financial Instruments
  Fair Value of Financial Instruments
 June 30, 2007
    
    
    December 31, 2006Carrying
    
    
    
    
    
    
    CarryingValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair ValueLoans held-for-investment
    
    $
    5,934,480
    
    
    $
    5,854,416
    
    
    $
    5,591,717
    
    
    $
    5,586,872Mortgage-backed notes
    
    
    4,515,197
    
    
    
    4,509,332
    
    
    
    3,917,677
    
    
    
    3,919,353CDOs
    
    
    295,013
    
    
    
    295,013
    
    
    
    
    
    
    
    Convertible senior notes
    
    
    90,000
    
    
    
    95,491
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    90,516
    
    
    
    92,788
    
    
    
    91,325
 NOTE 9ACCUMULATED OTHER COMPREHENSIVE INCOME
 Components of Accumulated Other Comprehensive Income
 June 30,
    
    
    December 31,2007
    
    
    2006Unrealized holding losses on securities available-for-sale
    
    $
    (24,746
    )
    
    $
    (5,957
    )Reclassification adjustment for net losses (gains) on
securities available-for-sale included in net income
    
    
    15,449
    
    
    
    (993
    )Impairment losses on  securities
    
    
    18,740
    
    
    
    7,010Net unrealized gain on  securities available-for-sale
    
    
    9,443
    
    
    
    60Net deferred realized and unrealized gains on cash flow hedges
    
    
    2,898
    
    
    
    3,734Net unrealized losses (gains) on equity securities available-for-sale
    
    
    (219
    )
    
    
    48Accumulated other comprehensive income
    
    $
    12,122
    
    
    $
    3,842
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  20




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##### Table of Contents



Derivative Contracts
 Estimated Fair ValueJune 30,
    
    
    December 31,2007
    
    
    2006Eurodollar futures contracts sold short
    
    $
    5,983
    
    
    $
    149Interest rate swap contracts
    
    
    10,054
    
    
    
    4,383Interest rate cap contracts
    
    
    5,764
    
    
    
    1,531Credit default swaps
    
    
    38,732
    
    
    
    6,958Other  underwriter option
    
    
    (349
    )
    
    
    Loan purchase commitments
    
    
    (418
    )
    
    
    
 Realized and Unrealized Gains and Losses on Derivative Contracts
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Free standing derivatives:Realized gains
    
    $
    4,516
    
    
    $
    1,599
    
    
    $
    15,460
    
    
    $
    1,599Unrealized gains
    
    
    16,904
    
    
    
    5,077
    
    
    
    21,868
    
    
    
    14,641Purchase commitment derivatives:Realized losses
    
    
    (932
    )
    
    
    
    
    
    
    (1,028
    )
    
    
    Unrealized gains (losses)
    
    
    129
    
    
    
    507
    
    
    
    (418
    )
    
    
    (464
    )
 Cash Flow Hedging Strategies
  NOTE 11INCOME TAXES
   21




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##### Table of Contents



NOTE 12SUBSEQUENT EVENTS
  Arco Financing Agreement
 .
   Financing Agreements Recent Events
  22




---



##### Table of Contents





Sale of Securities and Status of Repurchase Agreement Arrangements




Sale of Residential Mortgage Loans and Retained Mortgage-backed Securities


.


Reclassification of Unrealized Losses on Securities Held as Available-For-Sale




Effect of Rating Agency Downgrades on our Mortgage-Backed Securities




Class Action Lawsuits


23




---



##### Table of Contents











Vesting of Common Stock Awards




Suspension of Dividend Payment




Corporate Tax Status


, Accounting for Uncertainty in Income Taxes 24




---



##### Table of Contents



The following discussion of our financial condition and results of operations should be
read in conjunction with the financial statements and notes to those statements included in Item 1
of this Form 10-Q . This discussion may contain certain forward-looking statements that involve
risks and uncertainties. Forward-looking statements are those that are not historical in nature.
See Cautionary Note Regarding Forward-looking Statements. As a result of many factors, such as
those set forth under Risk Factors in Item 1A of this Form 10-Q , Item 1A of our 2006 Form 10-K ,
elsewhere in this Quarterly Report or incorporated by reference herein, our actual results may
differ materially from those anticipated in such forward-looking statements.
 Overview
 Executive Summary
  Financial performance:Return on equity
    
    
    11.9
    %REIT taxable return on equity
    
    
    12.2
    %Book value per share
    
    $
    10.05Net interest spread
    
    
    1.22
    %REIT taxable net interest spread
    
    
    0.74
    %Quarterly dividend declared
    
    $0.32 Per shareYear-to-date dividend declared
    
    $0.62 Per shareMortgage-backed assets:Weighted-average credit rating of mortgage-backed
securities
    
    
    AAPercentage of securitized assets rated AAA
    
    
    82.6
    %Percentage of total assets that are non-investment grade
    
    
    2.7
    %Growth in total assets December, 31 2006 to June 30, 2007
    
    
    10.3
    %Asset/liability duration gap
    
    
    Negative 1
month
 Business Conditions and Going Concern
   25




---



##### Table of Contents




 
 
 
 
 
 
 
  Investment Activities
  26




---



##### Table of Contents













27



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##### Table of Contents



Critical Accounting Policies
  Interest Income Recognition
   Classifications of Investment Securities
  Accounting for
Certain Hybrid Financial Instruments  an Amendment of FASB Statements No. 133 and 140
 Valuations of Mortgage-backed Securities
  28
    Table of Contents     Allowance and Provision for Loan Losses
    29




---



##### Table of Contents



Accounting for Derivative Financial Instruments and Hedging Activities
  Results of Operations
  Components of Net Interest Spread
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    6.77
    %
    
    
    6.55
    %
    
    
    6.87
    %
    
    
    6.01
    %Weighted-average cost of financing liabilities
    
    
    5.65
    
    
    
    4.83
    
    
    
    5.65
    
    
    
    4.67Net interest spread
    
    
    1.12
    %
    
    
    1.72
    %
    
    
    1.22
    %
    
    
    1.34
    %Weighted-average earning assets
    
    $
    8.7
    
    
    $
    4.6
    
    
    $
    8.5
    
    
    $
    4.5Weighted-average financing liabilities
    
    $
    8.6
    
    
    $
    4.4
    
    
    $
    8.4
    
    
    $
    4.2
   30




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##### Table of Contents



Components of Interest Expense
 Percentage
    
    
    
    
    
    
    Percentageof Weighted
    
    
    
    
    
    
    of WeightedThree Months
    
    
    Average
    
    
    Three Months
    
    
    AverageEnded
    
    
    Cost of
    
    
    Ended
    
    
    Cost ofJune 30,
    
    
    Financing
    
    
    June 30,
    
    
    Financing2007
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    64,665
    
    
    
    2.99
    %
    
    $
    31,974
    
    
    
    2.90
    %Interest expense on repurchase agreement liabilities
    
    
    37,672
    
    
    
    1.74
    
    
    
    22,488
    
    
    
    2.03Interest expense on commercial paper facility
    
    
    8,674
    
    
    
    0.40
    
    
    
    
    
    
    
    Interest expense on warehouse lending facilities
    
    
    3,979
    
    
    
    0.18
    
    
    
    2.269
    
    
    
    0.20Interest expense on junior subordinated notes
    
    
    1,964
    
    
    
    0.09
    
    
    
    1,927
    
    
    
    0.17Interest expense on CDOs
    
    
    4,987
    
    
    
    0.23
    
    
    
    
    
    
    
    Interest expense on convertible senior notes
    
    
    539
    
    
    
    0.03
    
    
    
    
    
    
    
    Amortization of net realized gains on futures and interest
rate swap contracts
    
    
    (393
    )
    
    
    (0.02
    )
    
    
    (4,729
    )
    
    
    (0.43
    )Net interest income on interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    (416
    )
    
    
    (0.04
    )Other
    
    
    135
    
    
    
    0.01
    
    
    
    
    
    
    
    Total interest expense
    
    $
    122,222
    
    
    
    5.65
    %
    
    $
    53,513
    
    
    
    4.83
    %
 Percentage
    
    
    
    
    
    
    Percentageof Weighted
    
    
    
    
    
    
    of WeightedSix Months
    
    
    Average
    
    
    Six Months
    
    
    AverageEnded
    
    
    Cost of
    
    
    Ended
    
    
    Cost ofJune 30,
    
    
    Financing
    
    
    June 30,
    
    
    Financing2007
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    125,709
    
    
    
    2.99
    %
    
    $
    45,748
    
    
    
    2.15
    %Interest expense on repurchase agreement liabilities
    
    
    74,086
    
    
    
    1.76
    
    
    
    50,503
    
    
    
    2.37Interest expense on commercial paper facility
    
    
    17,824
    
    
    
    0.43
    
    
    
    
    
    
    
    Interest expense on warehouse lending facilities
    
    
    10,847
    
    
    
    0.26
    
    
    
    5,470
    
    
    
    0.26Interest expense on junior subordinated notes
    
    
    3,919
    
    
    
    0.09
    
    
    
    3,818
    
    
    
    0.18Interest expense on CDOs
    
    
    5,133
    
    
    
    0.12
    
    
    
    
    
    
    
    Interest expense on convertible senior notes
    
    
    539
    
    
    
    0.01
    
    
    
    
    
    
    
    Amortization of net realized gains on futures and interest
rate swap contracts
    
    
    (836
    )
    
    
    (0.02
    )
    
    
    (6,344
    )
    
    
    (0.30
    )Net interest expense on interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    0.01Other
    
    
    205
    
    
    
    0.01
    
    
    
    
    
    
    
    Total interest expense
    
    $
    237,426
    
    
    
    5.65
    %
    
    $
    99,484
    
    
    
    4.67
    %
  31




---



##### Table of Contents



Components of Other Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Realized gains on derivative instruments, net
    
    $
    2,498
    
    
    $
    3,488
    
    
    $
    12,985
    
    
    $
    3,477Unrealized gains on derivative instruments, net
    
    
    17,034
    
    
    
    3,695
    
    
    
    21,449
    
    
    
    12,299Net interest income on interest rate swaps
    
    
    1,385
    
    
    
    
    
    
    
    2,223
    
    
    
    Other derivative related expenses
    
    
    (300
    )
    
    
    
    
    
    
    (775
    )
    
    
    Gains on derivatives, net
    
    
    20,617
    
    
    
    7,183
    
    
    
    35,882
    
    
    
    15,776Impairment losses on mortgage-backed securities
    
    
    (18,740
    )
    
    
    (462
    )
    
    
    (18,745
    )
    
    
    (2,179
    )Sales of mortgage-backed securities:Gains
    
    
    4
    
    
    
    20
    
    
    
    4
    
    
    
    9,648Losses
    
    
    
    
    
    
    (1,260
    )
    
    
    (15,453
    )
    
    
    (8,825
    )Sub-total
    
    
    4
    
    
    
    (1,240
    )
    
    
    (15,449
    )
    
    
    823Other expense
    
    
    (19
    )
    
    
    (131
    )
    
    
    (99
    )
    
    
    (608
    )Total
    
    $
    1,862
    
    
    $
    5,350
    
    
    $
    1,589
    
    
    $
    13,812
   Components of Operating Expenses
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Servicing expense
    
    $
    6,730
    
    
    $
    2,538
    
    
    $
    12,716
    
    
    $
    4,020Provision for loan losses
    
    
    4,645
    
    
    
    1,525
    
    
    
    8,188
    
    
    
    1,525Salaries and benefits
    
    
    3,551
    
    
    
    2,018
    
    
    
    6,635
    
    
    
    4,441Professional services
    
    
    997
    
    
    
    471
    
    
    
    1,841
    
    
    
    1,093Management compensation expense to
related party
    
    
    
    
    
    
    854
    
    
    
    
    
    
    
    1,665Other general and administrative expenses
    
    
    1,889
    
    
    
    1,136
    
    
    
    3,674
    
    
    
    2,091Total expenses
    
    $
    17,812
    
    
    $
    8,542
    
    
    $
    33,054
    
    
    $
    14,835
  32




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##### Table of Contents



REIT taxable income
   33




---



##### Table of Contents



Reconciliation of GAAP Net Income to REIT Taxable Income
 Six Months EndedJune 30,2007
    
    
    2006GAAP net income
    
    $
    23,189
    
    
    $
    35,343Adjustments to GAAP net income:Interest income and interest expense, net
    
    
    (21,273
    )
    
    
    (7,635
    )Impairment losses on mortgage-backed securities
    
    
    18,745
    
    
    
    2,179Provision for loan losses
    
    
    8,086
    
    
    
    1,525Servicing expense
    
    
    12,044
    
    
    
    3,105Losses (gains) on mortgage-backed securities,
net
    
    
    15,440
    
    
    
    (823
    )Unrealized gains on derivative instruments, net
    
    
    (21,449
    )
    
    
    (12,299
    )Other, net
    
    
    (6,213
    )
    
    
    (1,820
    )Net adjustments to GAAP net income
    
    
    794
    
    
    
    (15,768
    )REIT taxable income
    
    
    28,569
    
    
    
    19,575REIT taxable income per share
    
    $
    0.63
    
    
    $
    0.50Average shares outstanding on dividend record
date during the quarter
    
    
    45,492,038
    
    
    
    39,065,245
 Estimated Undistributed REIT Taxable Income
 Six Months EndedJune 30,2007
    
    
    2006Undistributed REIT taxable income, beginning of period
    
    $
    4,429
    
    
    $
    3,154REIT taxable income earned during period
    
    
    28,569
    
    
    
    19,575Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    (27,858
    )
    
    
    (9,642
    )Other adjustments
    
    
    5,157
    
    
    
    724Undistributed REIT taxable income, end of period
    
    $
    10,297
    
    
    $
    13,811Cash distributions per share that were declared during period
    
    $
    0.62
    
    
    $
    0.25Percentage of current year REIT taxable income distributed
    
    
    97.5
    %
    
    
    49.3
    %
   34




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##### Table of Contents



Financial Condition
 Mortgage-backed securities
   Asset Quality
 June 30, 2007
    
    
    December 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalMortgage-
    
    
    
    
    
    
    Mortgage-backed
    
    
    
    
    
    
    backedFair Value
    
    
    Securities
    
    
    Fair Value
    
    
    SecuritiesResidential Mortgage Credit PortfolioInvestment-grade MBS:AAA rating
    
    $
    5,284
    
    
    
    0.2
    %
    
    $
    
    
    
    
    AA/Aa rating
    
    
    186,879
    
    
    
    5.5
    
    
    
    129,096
    
    
    
    4.4
    %A/A rating
    
    
    337,200
    
    
    
    10.0
    
    
    
    238,623
    
    
    
    8.1BBB/Baa rating
    
    
    307,111
    
    
    
    9.0
    
    
    
    273,359
    
    
    
    9.3Total Investment-grade MBS
    
    
    836,474
    
    
    
    24.7
    
    
    
    641,078
    
    
    
    21.8Weighted-average credit rating
    
    
    A-
    
    
    
    
    
    
    
    A-Non-investment-grade MBS:BB/Ba rating
    
    
    130,590
    
    
    
    3.8
    
    
    
    145,741
    
    
    
    5.0Not rated
    
    
    9,629
    
    
    
    0.3
    
    
    
    11,196
    
    
    
    0.4Total non-investment-grade MBS
    
    
    140,219
    
    
    
    4.1
    
    
    
    156,937
    
    
    
    5.4Weighted-average credit rating (1)
    
    BB
    
    
    
    
    
    
    BBTotal Residential Mortgage Credit portfolio
    
    
    976,693
    
    
    
    28.8
    
    
    
    798,015
    
    
    
    27.2Weighted-average credit rating (1)
    
    
    A-
    
    
    
    
    
    
    BBB+Spread PortfolioAgency MBS
    
    
    70,669
    
    
    
    2.1
    
    
    
    106,648
    
    
    
    3.7AAA/Aaa rating
    
    
    2,346,677
    
    
    
    69.1
    
    
    
    2,026,275
    
    
    
    69.1Total Spread portfolio
    
    
    2,417,346
    
    
    
    71.2
    
    
    
    2,132,923
    
    
    
    72.8Weighted-average credit rating
    
    AAA
    
    
    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    3,394,039
    
    
    
    100.0
    %
    
    $
    2,930,938
    
    
    
    100.0
    %Weighted-average credit rating
    
    AA
    
    
    
    
    
    
    AA
 
 (1)
    
    Weighted-average credit rating excludes non-rated mortgage-backed securities of $9.6 million and $11.2 million at June 30,
2007 and December 31, 2006, respectively and includes the effect of credit-related derivative instruments that are a direct
economic hedge of a specific security. 35




---



##### Table of Contents



Loans held-for-investment
 Residential Loans Held-For Investment Product Data
 Weighted-AverageMonths toReset of
    
    
    
    
    
    
    
    
    
    
    Seriously
    
    
    
    
    
    
    Number ofLoans After
    
    
    
    
    
    
    Principal
    
    
    Delinquent
    
    
    
    
    
    
    SeriouslyWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Loans as a
    
    
    Number of
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Seriously
    
    
    Percentage of
    
    
    Seriously
    
    
    Loans as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Total
    
    
    Delinquent
    
    
    Percentage ofRate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    Loans (2)
    
    
    Principal
    
    
    Loans (2)
    
    
    Total LoansJune 30, 2007Floating rate
mortgage
    
    
    8.27
    %
    
    
    2037
    
    
    
    1
    
    
    
    1
    
    
    $
    3,616,692
    
    
    $
    57,637
    
    
    
    0.99
    %
    
    
    123
    
    
    
    0.80
    %Hybrid mortgage
    
    
    6.63
    %
    
    
    2036
    
    
    
    55
    
    
    
    26
    
    
    
    2,204,938
    
    
    
    26,915
    
    
    
    0.46
    
    
    
    72
    
    
    
    0.47Total
    
    
    7.65
    %
    
    
    2037
    
    
    
    22
    
    
    
    9
    
    
    $
    5,821,630
    
    
    $
    84,552
    
    
    
    1.45
    %
    
    
    195
    
    
    
    1.27
    %December 31, 2006Floating rate
mortgage
    
    
    8.02
    %
    
    
    2037
    
    
    
    1
    
    
    
    1
    
    
    $
    4,089,015
    
    
    $
    20,830
    
    
    
    0.38
    %
    
    
    45
    
    
    
    0.33
    %Hybrid mortgage
    
    
    6.57
    %
    
    
    2036
    
    
    
    54
    
    
    
    33
    
    
    
    1,383,310
    
    
    
    13,053
    
    
    
    0.24
    
    
    
    30
    
    
    
    0.21Total
    
    
    7.65
    %
    
    
    2037
    
    
    
    14
    
    
    
    9
    
    
    $
    5,472,325
    
    
    $
    33,883
    
    
    
    0.62
    %
    
    
    75
    
    
    
    0.54
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities related to our hybrid residential mortgage loans. Amounts reflect the effect of these hedges on the months
to reset of our residential mortgage loans. In addition at June 30, 2007 and December 31, 2006, the financing for $0.2 billion and $0.3 billion of our hybrid residential mortgage loans,
respectively is, like the underlying collateral, fixed for a period of three to five years and then becomes variable based upon the average rates of the underlying loans which will adjust based on
LIBOR. The weighted-average period to reset of the debt we use to acquire residential mortgage loans was match funded approximately four months and six months at June 30, 2006 and December 31,
2006, respectively.(2)
    
    Seriously delinquent loans are loans 90 or more days past due and loans in foreclosure.  36




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##### Table of Contents



Residential Mortgage Loans Key Metrics
 June 30, 2007
    
    
    December 31, 2006Unpaid principal balance
    
    $
    5,821,620
    
    
    $
    5,472,325Number of loans
    
    
    15,327
    
    
    
    13,942Average loan balance
    
    $
    380
    
    
    $
    393Weighted-average coupon rate
    
    
    7.65
    %
    
    
    7.65
    %Weighted-average lifetime cap
    
    
    10.86
    %
    
    
    10.64
    %Weighted-average original term, in months
    
    
    374
    
    
    
    375Weighted-average remaining term, in months
    
    
    362
    
    
    
    366Weighted-average effective loan-to-value ratio (LTV)(1)
    
    
    71.0
    %
    
    
    72.6
    %Weighted-average FICO score
    
    
    715
    
    
    
    713Number of loans with FICO scores below 620
    
    
    10
    
    
    
    11Percentage of loans with FICO scores above 700
    
    
    58.6
    %
    
    
    58.5
    %Percentage of loans with LTV greater than 80%
    
    
    8.1
    %
    
    
    6.8
    %Percentage of loans with LTV greater than 90%
    
    
    2.6
    %
    
    
    1.3
    %Percentage of loans with effective LTV greater than 80% (1)
    
    
    0
    %
    
    
    0
    %Percentage of no documentation loans
    
    
    2.3
    %
    
    
    2.5
    %Percentage of loans originated for refinancing purposes
    
    
    59.6
    %
    
    
    58.0
    %Top five geographic concentrations (% exposure):California
    
    
    52.9
    %
    
    
    57.4
    %Florida
    
    
    11.3
    %
    
    
    8.6
    %Arizona
    
    
    4.2
    %
    
    
    4.1
    %Virginia
    
    
    3.6
    %
    
    
    3.7
    %Washington
    
    
    3.4
    %
    
    
    2.7
    %Occupancy status:Owner-occupied
    
    
    86.4
    %
    
    
    86.5
    %Investor
    
    
    13.6
    %
    
    
    13.5
    %Property type:Single-family
    
    
    83.6
    %
    
    
    83.6
    %Condominium
    
    
    10.5
    %
    
    
    9.7
    %Other residential
    
    
    5.9
    %
    
    
    6.7
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Including the effect of mortgage insurance purchased to cover an additional $1.2 billion of loan principal
at June 30, 2007. 37




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##### Table of Contents



Residential Mortgage Loan Quality
 FICO ScoresJune 30, 2007
    
    <620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:<60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    1.1
    %60.01  70%
    
    
    0.1
    
    
    
    1.0
    
    
    
    2.0
    
    
    
    2.2
    
    
    
    3.0
    
    
    
    8.370.01  80%
    
    
    0.0
    
    
    
    1.3
    
    
    
    2.4
    
    
    
    2.0
    
    
    
    2.6
    
    
    
    8.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.1
    %
    
    
    2.5
    %
    
    
    4.6
    %
    
    
    4.4
    %
    
    
    6.1
    %
    
    
    17.7
    %Reduced Documentation:(2)LTV:<60%
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    1.2
    %
    
    
    1.6
    %
    
    
    2.5
    %
    
    
    5.7
    %60.01  70%
    
    
    0.0
    
    
    
    1.9
    
    
    
    10.2
    
    
    
    9.4
    
    
    
    9.3
    
    
    
    30.870.01  80%
    
    
    0.0
    
    
    
    3.0
    
    
    
    14.9
    
    
    
    13.7
    
    
    
    11.9
    
    
    
    43.5> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.0
    %
    
    
    5.3
    %
    
    
    26.3
    %
    
    
    24.7
    %
    
    
    23.7
    %
    
    
    80.0
    %No Documentation:(3)LTV:<60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.3
    %
    
    
    0.7
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.6
    
    
    
    1.470.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.5
    %
    
    
    0.7
    %
    
    
    1.0
    %
    
    
    2.3
    %Total Portfolio:LTV:<60%
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    1.6
    %
    
    
    2.0
    %
    
    
    3.3
    %
    
    
    7.5
    %60.01  70%
    
    
    0.1
    
    
    
    3.0
    
    
    
    12.5
    
    
    
    12.0
    
    
    
    12.9
    
    
    
    40.570.01  80%
    
    
    0.0
    
    
    
    4.3
    
    
    
    17.3
    
    
    
    15.8
    
    
    
    14.6
    
    
    
    52.0> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    7.9
    %
    
    
    31.4
    %
    
    
    29.8
    %
    
    
    30.8
    %
    
    
    100.0
    %
 38




---



##### Table of Contents



FICO ScoresDecember 31, 2006
    
    <620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:<60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    1.1
    %60.01  70%
    
    
    0.0
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.5
    
    
    
    4.770.01  80%
    
    
    0.0
    
    
    
    1.6
    
    
    
    3.1
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    10.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.0
    %
    
    
    2.6
    %
    
    
    4.5
    %
    
    
    3.9
    %
    
    
    5.1
    %
    
    
    16.1
    %Reduced Documentation:(2)LTV:<60%
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    1.3
    %
    
    
    1.5
    %
    
    
    2.4
    %
    
    
    5.8
    %60.01  70%
    
    
    0.0
    
    
    
    2.0
    
    
    
    7.9
    
    
    
    7.3
    
    
    
    6.7
    
    
    
    23.970.01  80%
    
    
    0.1
    
    
    
    3.7
    
    
    
    18.1
    
    
    
    16.0
    
    
    
    13.8
    
    
    
    51.7> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.1
    %
    
    
    6.3
    %
    
    
    27.3
    %
    
    
    24.8
    %
    
    
    22.9
    %
    
    
    81.4
    %No Documentation:(3)LTV:<60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.4
    %
    
    
    0.8
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    1.170.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.8
    %
    
    
    1.0
    %
    
    
    2.5
    %Total Portfolio:LTV:<60%
    
    
    0.0
    %
    
    
    0.8
    %
    
    
    1.7
    %
    
    
    1.9
    %
    
    
    3.3
    %
    
    
    7.7
    %60.01  70%
    
    
    0.0
    
    
    
    2.9
    
    
    
    9.4
    
    
    
    8.8
    
    
    
    8.6
    
    
    
    29.770.01  80%
    
    
    0.1
    
    
    
    5.3
    
    
    
    21.3
    
    
    
    18.8
    
    
    
    17.1
    
    
    
    62.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    9.0
    %
    
    
    32.4
    %
    
    
    29.5
    %
    
    
    29.0
    %
    
    
    100.0
    %
 
 (1)
    
    Full documentation includes verification of the borrowers income, employment, assets and liabilities.(2)
    
    Reduced documentation, sometimes referred to as Alt-A, includes mortgages that comply with most, but
not all, of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
criteria for a conforming mortgage. Alt-A mortgages are generally high quality, with less than full
documentation verified.(3)
    
    No documentation excludes verification of borrowers income, employment or assets. Delinquencies and Allowance for loan losses
 Residential Mortgage Loan Delinquency Status
 June 30, 2007
    
    
    December 31, 2006Number of
    
    
    Principal
    
    
    Number of
    
    
    PrincipalLoans
    
    
    Amount
    
    
    Loans
    
    
    AmountDelinquency status:30 to 59 days
    
    
    394
    
    
    $
    156,479
    
    
    
    248
    
    
    $
    100,71060 to 90 days
    
    
    111
    
    
    
    44,084
    
    
    
    46
    
    
    
    17,38990 days or more
    
    
    91
    
    
    
    40,850
    
    
    
    42
    
    
    
    17,175Total
    
    
    596
    
    
    
    241,413
    
    
    
    336
    
    
    
    135,274Foreclosures
    
    
    104
    
    
    
    43,702
    
    
    
    28
    
    
    
    15,387Total Delinquencies
    
    
    700
    
    
    $
    285,115
    
    
    
    364
    
    
    $
    150,661
  39




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##### Table of Contents



Asset Repricing Characteristics
 Asset Repricing Characteristics
 June 30, 2007
    
    
    December 31, 2006Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    3,616,692
    
    
    
    38.7
    %
    
    $
    4,089,015
    
    
    
    48.0
    %Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    284
    
    
    nmReset >12 months but < 60 months
    
    
    1,825,810
    
    
    
    19.6
    
    
    
    1,180,727
    
    
    
    13.9Reset > 60 months
    
    
    379,128
    
    
    
    4.1
    
    
    
    202,299
    
    
    
    2.4Unamortized premium
    
    
    125,147
    
    
    
    1.3
    
    
    
    124,412
    
    
    
    1.5Allowance for loan losses
    
    
    (12,297
    )
    
    
    (0.1
    )
    
    
    (5,020
    )
    
    
    (0.1
    )Sub-total
    
    
    5,934,480
    
    
    
    63.6
    
    
    
    5,591,717
    
    
    
    65.7ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    819,234
    
    
    
    8.8
    
    
    
    796,539
    
    
    
    9.3Reset >1 month but < 12 months
    
    
    73,389
    
    
    
    0.8
    
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    16,941
    
    
    
    0.2
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    909,564
    
    
    
    9.8
    
    
    
    796,539
    
    
    
    9.3Fixed-rate residential mortgage-backed securities:
    
    
    67,128
    
    
    
    0.7
    
    
    
    1,476
    
    
    nmSpread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    2,341,700
    
    
    
    25.1
    
    
    
    2,024,275
    
    
    
    23.7Reset >1 month but < 12 months
    
    
    72,375
    
    
    
    0.8
    
    
    
    108,648
    
    
    
    1.3Reset >12 months but < 60 months
    
    
    3,272
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    2,471,347
    
    
    
    25.9
    
    
    
    2,132,923
    
    
    
    25.0Total mortgage assets
    
    $
    9,328,519
    
    
    
    100.0
    %
    
    $
    8,522,655
    
    
    
    100.0
    %
 nm = not meaningful
  40




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##### Table of Contents



Index rates
 LIBOR
    
    
    Treasury
    
    
    MTA
    
    
    COFIJune 30, 2007Mortgage-backed
securities
    
    
    98
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    34
    
    
    
    
    
    
    
    66
    
    
    nmDecember 31, 2006Mortgage-backed
securities
    
    
    98
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    26
    
    
    
    
    
    
    
    74
    
    
    nm
 
 nm = not meaningful
  Securitizations
  Mortgage-Backed Notes
  41




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##### Table of Contents



Loan Securitization Highlights
 Total2005
    
    
    2006
    
    
    2007
    
    
    PortfolioNumber of securitizations
    
    
    1
    
    
    
    7
    
    
    
    2
    
    
    
    10Loans, unpaid principal balance
    
    $
    520,568
    
    
    $
    4,638,527
    
    
    $
    1,369,009
    
    
    $
    6,528,104Mortgage-backed notes issued to
third parties
    
    
    500,267
    
    
    
    3,823,913
    
    
    
    1,332,474
    
    
    
    5,656,654Debt retained
    
    
    20,301
    
    
    
    814,614
    
    
    
    36,535
    
    
    
    871,450Retained investment grade %(1)
    
    
    3.1
    %
    
    
    15.4
    %
    
    
    2.0
    %
    
    
    11.3
    %Retained non-investment grade %(1)
    
    
    0.8
    %
    
    
    2.1
    %
    
    
    0.3
    %
    
    
    1.6
    %Cost of debt on AAA-rated
mortgage-backed notes  spread to
LIBOR(2)
    
    
    0.27
    %
    
    
    0.22
    %
    
    
    0.19
    %
    
    
    0.22
    %Loans, unpaid principal balance
at June 30, 2007
    
    $
    342,686
    
    
    $
    3,606,658
    
    
    $
    1,288,393
    
    
    $
    5,237,736
 (1)
    
    Retained tranches as a percentage of total mortgage-backed notes issued.(2)
    
    LUM 2006-3 cost of debt excludes $0.3 billion of AAA mortgage-backed
notes which, like the underlying loan collateral, are fixed for three
to five years and then become variable based upon the average rates of
the underlying loans which will adjust based on LIBOR.
 42




---



##### Table of Contents



Loan Securitizations Mortgage-Backed Notes Ratings
 Total2005
    
    
    2006
    
    
    2007
    
    
    PortfolioNumber of securitizations
    
    
    1
    
    
    
    7
    
    
    
    2
    
    
    
    10Mortgage-backed notes issued
to third-party investorsAAA/Aaa rating
    
    $
    482,307
    
    
    $
    3,646,372
    
    
    $
    1,294,726
    
    
    $
    5,423,405AA/Aa rating
    
    
    17,960
    
    
    
    155,772
    
    
    
    35,135
    
    
    
    208,867A/A rating
    
    
    
    
    
    
    19,128
    
    
    
    2,613
    
    
    
    21,741BBB/Baa rating
    
    
    
    
    
    
    2,641
    
    
    
    
    
    
    
    2,641Total mortgage-backed notes
issued to third-party
investors
    
    $
    500,267
    
    
    $
    3,823,913
    
    
    $
    1,332,474
    
    
    $
    5,656,654Percentage of total collateral
    
    
    96.1
    %
    
    
    82.4
    %
    
    
    97.3
    %
    
    
    86.7
    %Debt retainedAAA/Aaa rating
    
    $
    
    
    
    $
    551,441
    
    
    $
    
    
    
    $
    551,441AA/Aa rating
    
    
    6,767
    
    
    
    42,346
    
    
    
    8,518
    
    
    
    57,631A/A rating
    
    
    4,165
    
    
    
    68,856
    
    
    
    7,375
    
    
    
    80,396BBB/Bbb rating
    
    
    5,206
    
    
    
    52,579
    
    
    
    10,885
    
    
    
    68,670BB/Ba rating
    
    
    1,301
    
    
    
    39,283
    
    
    
    
    
    
    
    40,584B/B rating
    
    
    
    
    
    
    24,630
    
    
    
    
    
    
    
    24,630Not rated
    
    
    
    
    
    
    31,420
    
    
    
    4,635
    
    
    
    36,055Total mortgage- backed notes
retained
    
    
    17,439
    
    
    
    810,555
    
    
    
    31,413
    
    
    
    859,407Overcollateralization
    
    
    2,862
    
    
    
    4,059
    
    
    
    5,122
    
    
    
    12,043Total debt retained
    
    $
    20,301
    
    
    $
    814,614
    
    
    $
    36,535
    
    
    $
    871,450Percentage of total collateral
    
    
    3.9
    %
    
    
    17.6
    %
    
    
    2.7
    %
    
    
    13.3
    %
 Collateralized Debt Obligations
  Exemption from the Investment Company Act of 1940
  
 
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Liquidity and Capital Resources
    .
  44




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Contractual Obligations and Commitments
  Contractual Obligations
 Payments Due by PeriodTotal
    
    
    Less than 1 
year
    
    
    1  3 years
    
    
    3  5 
years
    
    
    More than 
5 yearsJune 30, 2007Mortgage-backed notes (1)
    
    $
    4,512.5
    
    
    $
    1,145.0
    
    
    $
    1,984.2
    
    
    $
    1,154.6
    
    
    $
    228.7Repurchase agreements
    
    
    2,868.6
    
    
    
    2,560.8
    
    
    
    307.8
    
    
    
    
    
    
    
    Warehouse lending
facilities
    
    
    573.7
    
    
    
    573.7
    
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    573.4
    
    
    
    573.4
    
    
    
    
    
    
    
    
    
    
    
    CDOs (1)
    
    
    296.0
    
    
    
    6.7
    
    
    
    21.1
    
    
    
    138.2
    
    
    
    130.0Junior subordinated notes
    
    
    92.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92.8Convertible senior notes
    
    
    90.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90.0Facilities leases
    
    
    1.0
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.1Total
    
    $
    9,008.0
    
    
    $
    4,859.9
    
    
    $
    2,313.4
    
    
    $
    1,293.1
    
    
    $
    541.6
 (1)
    
    The mortgage-backed notes and CDOs have stated maturities through 2047;
however, the expected maturity is subject to change based on the prepayments
and loan losses of the underlying mortgage loans or mortgage-backed securities.
In addition, we may exercise a redemption option and thereby effect
termination and early retirement of the debt. The payments represented reflect
our assumptions for prepayment and credit losses at June 30, 2007 and assume we
will exercise our redemption option.
  Off-Balance Sheet Arrangements
  45




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Recent Accounting and Reporting Developments
  
   Short-Term Financing Risks
  Credit Risk
     46




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Concentration Risk
  Interest Rate Risk
  Effect on Net Interest Income
   47




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Interest Rate Sensitivity
(dollars in millions)
 Interest Rates
    
    
    
    
    
    
    Interest Rates
    
    
    Interest RatesFall 100
    
    
    
    
    
    
    Rise 100
    
    
    Rise 200Basis Points
    
    
    Unchanged
    
    
    Basis Points
    
    
    Basis PointsJune 30, 2007:Mortgage-Backed SecuritiesFair value
    
    $
    3,397.0
    
    
    $
    3,394.0
    
    
    $
    3,391.1
    
    
    $
    3,388.1Change in fair value
    
    
    3.0
    
    
    
    
    
    
    
    (2.9
    )
    
    
    (5.9
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Hedge Instruments(1)Fair value
    
    $
    26.0
    
    
    $
    59.8
    
    
    $
    92.5
    
    
    $
    136.5Change in fair value
    
    
    (33.8
    )
    
    
    
    
    
    
    32.7
    
    
    
    76.7Change as a percent of fair value
    
    
    (56.5
    )%
    
    
    
    
    
    
    54.7
    %
    
    
    128.3
    %Mortgage Loans Held-for-Investment(2)Fair value
    
    $
    5,863.2
    
    
    $
    5,802.8
    
    
    $
    5,742.3
    
    
    $
    5,683.9Change in fair value
    
    
    60.4
    
    
    
    
    
    
    
    (60.5
    )
    
    
    (118.9
    )Change as a percent of fair value
    
    
    1.0
    %
    
    
    
    
    
    
    (1.0
    )%
    
    
    (2.0
    )%Mortgage-backed Notes (2)Fair value
    
    $
    4,515.5
    
    
    $
    4,509.3
    
    
    $
    4,503.4
    
    
    $
    4,497.7Change in fair value
    
    
    6.2
    
    
    
    
    
    
    
    (5.9
    )
    
    
    (11.6
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Senior convertible notesFair value
    
    $
    98.2
    
    
    $
    95.5
    
    
    $
    92.8
    
    
    $
    90.1Change in fair value
    
    
    2.7
    
    
    
    
    
    
    
    (2.7
    )
    
    
    (5.4
    )Change as a percent of fair value
    
    
    2.8
    %
    
    
    
    
    
    
    (2.8
    )%
    
    
    (5.7
    )%Junior Subordinated Notes(2)Fair value
    
    $
    94.3
    
    
    $
    90.5
    
    
    $
    86.9
    
    
    $
    83.5Change in fair value
    
    
    3.8
    
    
    
    
    
    
    
    (3.6
    )
    
    
    (7.0
    )Change as a percent of fair value
    
    
    4.2
    %
    
    
    
    
    
    
    (4.0
    )%
    
    
    (7.7
    )%
 (1)
    
    We invest in credit default swaps, or CDS. Due to the complex nature
of CDS, we are unable to model the fair value of these instruments
when rates change, and therefore, no impact is reflected in the
sensitivity analysis.(2)
    
    This asset or liability is carried on our consolidated balance sheet
at amortized cost and therefore a change in interest rates would not
affect the carrying value of the asset or liability.
    
    
    monitoring and adjusting, if necessary, the reset index and interest rate related to our
mortgage-backed securities and our borrowings;
    
    attempting to structure our borrowing agreements to have a range of different maturities,
terms, amortizations and interest rate adjustment periods;
    
    using derivatives, financial futures, swaps, options, caps, floors and forward sales to
adjust the interest rate- sensitivity of our mortgage-backed securities and our borrowings;
and
 48




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##### Table of Contents




    
    actively managing, on an aggregate basis, the interest rate indices, interest rate
adjustment periods and gross reset margins of our mortgage-backed securities and the interest
rate indices and adjustment periods of our borrowings.
 Extension Risk
  Interest Rate Cap Risk
   Prepayment Risk
  49




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##### Table of Contents



Inflation
  
  Conclusion Regarding Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  50




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Class Action Lawsuits
    
   The current dislocations in the sub-prime mortgage sector, and the current weakness in the
broader mortgage market, have adversely affected our business and could result in further increases
in our borrowing costs, reductions in our liquidity, reductions in the value of our investment
portfolio and the possible loss of REIT status.
  51




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##### Table of Contents



Due to recent market disruptions that resulted in our need to sell assets to satisfy margin calls
on our financing agreements, we are relying on a safe harbor exemption from the Investment Company
Act of 1940 in order to not become regulated as an investment company. Failure to maintain an
exemption from the Investment Company Act would harm our results of operations
  
 
    52




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53



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(i)
    
    Each of the following persons was elected as a Class I director, whose terms
will expire at our annual meeting of stockholders in 2010.
 Name
    
    For
    
    WithheldS. Trezevant Moore, Jr.
    
    
    40,726,714
    
    
    
    156,047Joseph E. Whitters, CPA
    
    
    37,918,506
    
    
    
    2,964,255
 
   
   54




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##### Table of Contents



SIGNATURES
  LUMINENT CAPITAL, INC.By:
    /s/ S. TREZEVANT MOORE, JR.S. Trezevant Moore, Jr.Chief Executive Officer
(Principal Executive Officer)Date:
    September 26, 2007 By:
    /s/ CHRISTOPHER J. ZYDAChristopher J. ZydaChief Financial Officer
(Principal Financial and Accounting Officer)Date:
    September 26, 2007 55




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##### Table of Contents



EXHIBIT INDEX
   ExhibitNumber
    
    Description10.1
    
    
    Amended and Restated Employment Agreement effective as of May 10, 2007 between the Registrant
and Gail P. Seneca. (1)10.2
    
    
    Indenture dated as of June 5, 2007 with respect to 8.125% Convertible Senior Notes due 2027 (2)10.3
    
    
    Registration rights agreement (2)10.4
    
    
    Purchase agreement $90,000,000 Convertible Senior Notes due 2027 (2)10.5
    
    
    Capital Stock Warrant Agreement dated August 17, 2007 (3)10.6
    
    
    Letter of Intent between the Registrant and Arco Capital Corporation Ltd., dated
August 16, 2007 (3)10.7
    
    
    Credit Agreement, dated August 21, 2007 between the Registrant and Arco Capital Corporation Ltd. (4)10.8
    
    
    Security and Pledge Agreement, dated August 21, 2007, among the Registrant and
its subsidiaries of the party hereto, as grantors, and Arco Capital Corporation
Ltd., as secured party (4)10.9
    
    
    Subsidiary Guarantee Agreement, dated August 21, 2007 (4)10.10
    
    
    Retention Agreement between the Registrant and S. Trezevant Moore, Jr. dated August 31, 2007 (5)10.11
    
    
    Retention Agreement between the Registrant and Christopher J. Zyda dated August 31, 2007 (5)10.12
    
    
    Severance Agreement between Proserpine, LLC and Eleanor Melton dated August 31, 2007 (5)10.13
    
    
    Amendment to Credit Agreement, dated September 12, 2007 between the Registrant and Arco Capital
Corporation (6)31.1
    *
    
    Certification of S. Trezevant Moore, Jr., Chief Executive Officer of the Registrant, pursuant
to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    *
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    *
    
    Certification of S. Trezevant Moore, Jr., Chief Executive Officer of the Registrant, pursuant
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    *
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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57