##### Table of Contents



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 September 30, 2006
 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
    
    06-1694835(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)101 California Street, Suite 1350, San Francisco, California
    
    94111(Address of principal executive offices)
    
    (Zip Code)
 (415) 217-4500
 N/A
 
 þ o
  o þ o
 o þ




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##### 



INDEX
 PAGEPART IITEM 1. FINANCIAL STATEMENTS
    
    
    1ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    24ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    47ITEM 4. CONTROLS AND PROCEDURES
    
    
    52PART IIITEM 1. LEGAL PROCEEDINGS
    
    
    53ITEM 1A. RISK FACTORS
    
    
    53ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    54ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    55ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    55ITEM 5. OTHER INFORMATION
    
    
    55ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    55SIGNATURES
    
    
    56EXHIBIT INDEX
    
    
    57EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    the flattening of, or other changes in the yield curve, on our investment strategies;
 
    
    interest rate mismatches between our mortgage loans and mortgage-backed securities and the borrowings we use to
fund our purchases of such loans and securities;
 
    
    changes in interest rates and mortgage prepayment rates;
 
    
    our ability to obtain or renew sufficient funding to maintain our leverage strategies;
 
    
    continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
 
    
    the possible effect of negative amortization of mortgages on our financial condition and REIT qualification;
 
    
    potential impacts of our leveraging policies on our net income and cash available for distribution;
 
    
    the ability of our board of directors to change our operating policies and strategies without stockholder approval;
 
    
    the 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;
 
    
    our ability to attract and retain talented and experienced professionals;
 
    
    volatility in the timing and amount of our cash distributions;
 
    
    the inability of investors to review the assets that we will acquire with the net proceeds of any securities we
offer before investors purchase our securities; and
 
    
    the other important factors described in this Quarterly Report on 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.




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
 Condensed Consolidated Balance Sheets (unaudited) at September 30, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended
September 30, 2006 and September 30, 2005
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the nine months ended
September 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 2006 and September 30, 2005
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6
 1




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 September 30,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2006
    
    
    2005Assets:Cash and cash equivalents
    
    $
    18,676
    
    
    $
    11,466Restricted cash
    
    
    123
    
    
    
    794Mortgage-backed securities available-for-sale, at fair value
    
    
    28,653
    
    
    
    219,148Mortgage-backed securities available-for-sale, pledged as collateral, at fair value
    
    
    2,089,887
    
    
    
    4,140,455Loans held-for-investment, net of allowance for loan losses of $3,289 at September 30, 2006 and
zero at December 31, 2005
    
    
    4,196,941
    
    
    
    507,177Interest receivable
    
    
    26,329
    
    
    
    21,543Principal receivable
    
    
    1,167
    
    
    
    13,645Derivatives, at fair value
    
    
    7,005
    
    
    
    10,720Other assets
    
    
    22,280
    
    
    
    8,523Total assets
    
    $
    6,391,061
    
    
    $
    4,933,471Liabilities:Mortgage-backed notes
    
    $
    3,342,362
    
    
    $
    486,302Repurchase agreements
    
    
    2,528,935
    
    
    
    3,928,505Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Unsettled security purchases
    
    
    3,000
    
    
    
    Margin debt
    
    
    
    
    
    
    3,548Cash distributions payable
    
    
    12,224
    
    
    
    1,218Accrued interest expense
    
    
    7,940
    
    
    
    21,123Management compensation payable, incentive compensation payable and other related party liabilities
    
    
    6,231
    
    
    
    1,282Accounts payable and accrued expenses
    
    
    3,274
    
    
    
    2,384Total liabilities
    
    
    5,996,754
    
    
    
    4,537,150Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at
September 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 40,460,510 and 40,587,245 shares issued and
outstanding at September 30, 2006 and December 31, 2005, respectively
    
    
    40
    
    
    
    41Additional paid-in capital
    
    
    512,986
    
    
    
    511,941Accumulated other comprehensive income (loss)
    
    
    (2,710
    )
    
    
    7,076Accumulated distributions in excess of accumulated earnings
    
    
    (116,009
    )
    
    
    (122,737
    )Total stockholders equity
    
    
    394,307
    
    
    
    396,321Total liabilities and stockholders equity
    
    $
    6,391,061
    
    
    $
    4,933,471
  2




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except share and per share amounts)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net interest income:Interest income:Mortgage loan and securitization portfolio
    
    $
    65,658
    
    
    $
    715
    
    
    $
    133,667
    
    
    $
    715Spread portfolio
    
    
    18,947
    
    
    
    42,590
    
    
    
    69,757
    
    
    
    126,906Credit sensitive bond portfolio
    
    
    10,493
    
    
    
    3,041
    
    
    
    28,176
    
    
    
    3,703Total interest income
    
    
    95,098
    
    
    
    46,346
    
    
    
    231,600
    
    
    
    131,324Interest expense
    
    
    73,149
    
    
    
    38,241
    
    
    
    172,633
    
    
    
    90,878Net interest income
    
    
    21,949
    
    
    
    8,105
    
    
    
    58,967
    
    
    
    40,446Other income (expenses):Realized and unrealized gains (losses) on derivative instruments, net
    
    
    (11,689
    )
    
    
    588
    
    
    
    4,087
    
    
    
    (311
    )Gains (losses) on sales of mortgage-backed securities, net
    
    
    167
    
    
    
    (69
    )
    
    
    990
    
    
    
    (69
    )Impairment losses on mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    (2,179
    )
    
    
    Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (608
    )
    
    
    Total other income (expenses)
    
    
    (11,522
    )
    
    
    519
    
    
    
    2,290
    
    
    
    (380
    )Expenses:Management compensation expense to related party
    
    
    5,497
    
    
    
    1,074
    
    
    
    6,921
    
    
    
    3,254Incentive compensation expense to related parties
    
    
    551
    
    
    
    255
    
    
    
    791
    
    
    
    1,128Salaries and benefits
    
    
    2,934
    
    
    
    846
    
    
    
    7,375
    
    
    
    1,702Servicing expense
    
    
    3,526
    
    
    
    47
    
    
    
    7,546
    
    
    
    47Provision for loan losses
    
    
    1,779
    
    
    
    
    
    
    
    3,304
    
    
    
    Professional services
    
    
    1,088
    
    
    
    512
    
    
    
    2,181
    
    
    
    1,588Board of directors expense
    
    
    93
    
    
    
    116
    
    
    
    301
    
    
    
    351Insurance expense
    
    
    157
    
    
    
    140
    
    
    
    444
    
    
    
    415Custody expense
    
    
    137
    
    
    
    125
    
    
    
    324
    
    
    
    319Other general and administrative expenses
    
    
    855
    
    
    
    280
    
    
    
    2,265
    
    
    
    890Total expenses
    
    
    16,617
    
    
    
    3,395
    
    
    
    31,452
    
    
    
    9,694Income (loss) before income taxes
    
    
    (6,190
    )
    
    
    5,229
    
    
    
    29,805
    
    
    
    30,372Income taxes
    
    
    405
    
    
    
    
    
    
    
    1,057
    
    
    
    Net income (loss)
    
    $
    (6,595
    )
    
    $
    5,229
    
    
    $
    28,748
    
    
    $
    30,372Net income (loss) per share  basic
    
    $
    (0.17
    )
    
    $
    0.13
    
    
    $
    0.74
    
    
    $
    0.79Net income (loss) per share  diluted
    
    $
    (0.17
    )
    
    $
    0.13
    
    
    $
    0.74
    
    
    $
    0.79Weighted-average number of shares outstanding  basic
    
    
    38,695,800
    
    
    
    40,021,698
    
    
    
    38,937,454
    
    
    
    38,478,679Weighted-average number of shares outstanding  diluted
    
    
    38,695,800
    
    
    
    40,226,523
    
    
    
    39,066,406
    
    
    
    38,615,869Dividends per share
    
    $
    0.30
    
    
    $
    0.11
    
    
    $
    0.55
    
    
    $
    0.74
  3




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##### Table of Contents



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, 2006
    
    
    40,587
    
    
    $
    41
    
    
    $
    511,941
    
    
    $
    7,076
    
    
    $
    (122,737
    )
    
    
    
    
    
    $
    396,321Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,748
    
    
    $
    28,748
    
    
    
    28,748Mortgage-backed securities
available-for-sale, fair value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,668
    )
    
    
    
    
    
    
    (2,668
    )
    
    
    (2,668
    )Amortization of derivative gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,118
    )
    
    
    
    
    
    
    (7,118
    )
    
    
    (7,118
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,962Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,020
    )
    
    
    
    
    
    
    (22,020
    )Issuance of common stock
    
    
    1,793
    
    
    
    1
    
    
    
    14,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,282Repurchase of common stock
    
    
    (1,919
    )
    
    
    (2
    )
    
    
    (15,830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,832
    )Amortization of restricted common stock
    
    
    
    
    
    
    
    
    
    
    2,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,594Balance, September 30, 2006
    
    
    40,461
    
    
    $
    40
    
    
    $
    512,986
    
    
    $
    (2,710
    )
    
    $
    (116,009
    )
    
    
    
    
    
    $
    394,307
  4




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    28,748
    
    
    $
    30,372Adjustments to reconcile net income to net cash provided by (used in) operating activities:Amortization of premium/(discount)
    
    
    (941
    )
    
    
    20,671Impairment losses on mortgage-backed securities
    
    
    2,179
    
    
    
    Provision for loan losses
    
    
    3,304
    
    
    
    Negative amortization of loans held for investment, net
    
    
    (35,004
    )
    
    
    Share-based compensation
    
    
    2,594
    
    
    
    2Realized and unrealized (gains)/losses on derivative instruments
    
    
    (3,459
    )
    
    
    42Net (gains) losses on sales of mortgage-backed-securities available-for-sale
    
    
    (990
    )
    
    
    69Changes in operating assets and liabilities:Decrease in interest receivable, net of purchased interest
    
    
    73
    
    
    
    2,408Increase in other assets
    
    
    (2,042
    )
    
    
    (3,942
    )Increase in accounts payable and accrued expenses
    
    
    890
    
    
    
    163Decrease in accrued interest expense
    
    
    (13,183
    )
    
    
    (2,995
    )Increase in management compensation payable, incentive compensation payable and other
related-party payable
    
    
    4,949
    
    
    
    251Net cash provided by (used in) operating activities
    
    
    (12,882
    )
    
    
    47,041Cash flows from investing activities:Purchases of mortgage-backed securities available-for-sale
    
    
    (1,849,595
    )
    
    
    (1,220,271
    )Proceeds from sales of mortgage-backed securities available-for-sale
    
    
    3,750,554
    
    
    
    136,549Principal payments of mortgage-backed securities available-for-sale
    
    
    364,781
    
    
    
    1,194,191Purchases of loans held-for-investment, net
    
    
    (3,949,480
    )
    
    
    (146,541
    )Principal payments of loans held-for-investment
    
    
    272,476
    
    
    
    2,836Purchases of derivative instruments
    
    
    (2,792
    )
    
    
    (1,874
    )Proceeds from derivative instruments
    
    
    3,484
    
    
    
    Net change in restricted cash
    
    
    671
    
    
    
    Net cash used in investing activities
    
    
    (1,409,901
    )
    
    
    (35,110
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    11,747
    
    
    
    35,802Repurchases of common stock
    
    
    (15,832
    )
    
    
    Borrowings under repurchase agreements
    
    
    27,681,403
    
    
    
    15,337,837Principal payments on repurchase agreements
    
    
    (29,080,973
    )
    
    
    (15,535,253
    )Borrowings under warehouse lending facilities
    
    
    3,806,251
    
    
    
    140,378Paydown of warehouse lending facilities
    
    
    (3,806,251
    )
    
    
    Distributions to stockholders
    
    
    (11,014
    )
    
    
    (40,569
    )Borrowing under junior subordinated notes, net
    
    
    
    
    
    
    49,978Proceeds from issuance of mortgage-backed notes, net
    
    
    3,062,397
    
    
    
    Principal payments on mortgage-backed notes
    
    
    (214,187
    )
    
    
    Principal payments on margin debt
    
    
    (3,548
    )
    
    
    Net realized gains on Eurodollar futures contracts
    
    
    
    
    
    
    5Net cash provided by (used in) financing activities
    
    
    1,429,993
    
    
    
    (11,822
    )Net increase in cash and cash equivalents
    
    
    7,210
    
    
    
    109Cash and cash equivalents, beginning of the period
    
    
    11,466
    
    
    
    10,581Cash and cash equivalents, end of the period
    
    $
    18,676
    
    
    $
    10,690Supplemental disclosure of cash flow information:Interest paid
    
    $
    186,786
    
    
    $
    102,608Income taxes paid
    
    
    994
    
    
    
    Non-cash investing and financing activities:Increase in unsettled security purchases
    
    $
    3,000
    
    
    $
    (Increase) decrease in principal receivable
    
    
    12,478
    
    
    
    (9,877
    )Increase (decrease) in dividend payable to stockholders
    
    
    11,006
    
    
    
    (5,118
    )Incentive compensation payable settled through issuance of restricted common stock
    
    
    
    
    
    
    1,660Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    
    
    
    
    55Deferred compensation reclassified to stockholders equity upon issuance of restricted common stock
    
    
    
    
    
    
    (159
    )
  5




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
 Real Estate Owned
 6
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 Premiums and Discounts on Mortgage-Backed Notes Issued
  Income Taxes
    Recent Accounting Pronouncements
 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities Accounting
for Certain Investments in Debt and Equity Securities
 .
  7
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Fair Value Measurements
 Financial
Statements  Considering the Effect of Prior Year Misstatements
 NOTE 2MORTGAGE-BACKED SECURITIES
  September 30,
    
    
    December 31,2006
    
    
    2005Amortized cost
    
    $
    2,125,528
    
    
    $
    4,363,923Unrealized gains
    
    
    6,053
    
    
    
    8,357Unrealized losses
    
    
    (13,041
    )
    
    
    (12,677
    )Fair value
    
    $
    2,118,540
    
    
    $
    4,359,603
   8
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    CouponLess than one year
    
    $
    552,670
    
    
    $
    560,680
    
    
    
    6.48
    %Greater than one year and less than five years
    
    
    1,506,320
    
    
    
    1,505,354
    
    
    
    5.62Greater than five years
    
    
    59,550
    
    
    
    59,494
    
    
    
    5.58Total
    
    $
    2,118,540
    
    
    $
    2,125,528
    
    
    
    5.85
    %
  Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    CouponLess than one year
    
    $
    690,568
    
    
    $
    690,539
    
    
    
    4.51
    %Greater than one year and less than five years
    
    
    3,489,302
    
    
    
    3,489,179
    
    
    
    4.35Greater than five years
    
    
    179,733
    
    
    
    184,205
    
    
    
    6.15Total
    
    $
    4,359,603
    
    
    $
    4,363,923
    
    
    
    4.46
    %
    9
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFir
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    48,945
    
    
    $
    (171
    )
    
    $
    
    
    
    $
    
    
    
    $
    48,945
    
    
    $
    (171
    )Non-agency-backed
mortgage-backed securities
    
    
    500,760
    
    
    
    (6,225
    )
    
    
    6,482
    
    
    
    (6,645
    )
    
    
    507,242
    
    
    
    (12,870
    )Total temporarily impaired
mortgage-backed securities
    
    $
    549,705
    
    
    $
    (6,396
    )
    
    $
    6,482
    
    
    $
    (6,645
    )
    
    $
    556,187
    
    
    $
    (13,041
    )
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesAgency-backed
mortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Non-agency-backed
mortgage-backed securities
    
    
    172,646
    
    
    
    (12,677
    )
    
    
    
    
    
    
    
    
    
    
    172,646
    
    
    
    (12,677
    )Total temporarily impaired
mortgage-backed securities
    
    $
    172,646
    
    
    $
    (12,677
    )
    
    $
    
    
    
    $
    
    
    
    $
    172,646
    
    
    $
    (12,677
    )
    10
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets
  NOTE 3LOANS HELD-FOR-INVESTMENT
  September 30,
    
    
    December 31,2006
    
    
    2005Principal
    
    $
    4,116,128
    
    
    $
    506,498Unamortized premium
    
    
    84,102
    
    
    
    679Amortized cost
    
    
    4,200,230
    
    
    
    507,177Allowance for loan losses
    
    
    (3,289
    )
    
    
    Total residential loans, net of
allowance for loan losses
    
    $
    4,196,941
    
    
    $
    507,177
  11
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2006Balance, beginning of period
    
    $
    1,525
    
    
    $
    Provision for loan losses
    
    
    1,779
    
    
    
    3,304Charge-offs
    
    
    (15
    )
    
    
    (15
    )Balance, end of period
    
    $
    3,289
    
    
    $
    3,289
  NOTE 4BORROWINGS
   Weighted-Outstanding
    
    
    Average
    
    
    Fair Value ofBorrowings
    
    
    Interest Rate
    
    
    Collateral (1)Repurchase agreements
    
    $
    2,528,935
    
    
    
    5.42
    %
    
    $
    2,719,722LUM 2005-1
    
    
    397,117
    
    
    
    5.61
    
    
    
    397,721LUM 2006-1
    
    
    510,124
    
    
    
    5.62
    
    
    
    510,891LUM 2006-2
    
    
    716,351
    
    
    
    5.56
    
    
    
    716,622LUM 2006-3
    
    
    616,334
    
    
    
    5.65
    
    
    
    621,190LUM 2006-4
    
    
    346,236
    
    
    
    5.54
    
    
    
    346,236LUM 2006-6
    
    
    753,415
    
    
    
    5.56
    
    
    
    753,415Junior subordinated notes
    
    
    92,788
    
    
    
    8.60
    
    
    
    noneTotal
    
    $
    5,961,300
    
    
    
    5.56
    %
    
    $
    6,065,797
 
 (1)
    
    Collateral for borrowings consist of mortgage-backed securities available-for-sale and loans
held-for-investment. 12
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-Outstanding
    
    
    Average
    
    
    Fair Value ofBorrowings
    
    
    Interest Rate
    
    
    Collateral (1)Repurchase agreements
    
    $
    3,928,505
    
    
    
    4.25
    %
    
    $
    4,157,117LUM 2005-1
    
    
    486,302
    
    
    
    4.66
    
    
    
    486,304Junior subordinated notes
    
    
    92,788
    
    
    
    8.18
    
    
    
    noneMargin lending facility
    
    
    3,548
    
    
    
    3.85
    
    
    
    3,548Total
    
    $
    4,511,143
    
    
    
    4.37
    %
    
    $
    4,646,969
 
 (1)
    
    Collateral for borrowings consist of mortgage-backed securities available-for-sale and
loans held-for-investment. Repurchase Agreements
   Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    2,093,935Between 31 and 90 days
    
    
    Between 91 days and 730 days
    
    
    435,000Total
    
    $
    2,528,935
  Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    1,917,214Between 31 and 90 days
    
    
    929,023Between 91 and 237 days
    
    
    1,082,268Total
    
    $
    3,928,505
 13
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageMaturity ofRepurchaseAmount at
    
    
    AgreementsRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    (in days)Banc of America Securities LLC
    
    $
    663
    
    
    
    13Barclays Capital, Inc.
    
    
    24,872
    
    
    
    558Bear Stearns & Co.
    
    
    50,664
    
    
    
    12Cantor Fitzgerald
    
    
    4,992
    
    
    
    25Citigroup
    
    
    3,182
    
    
    
    17Countrywide
    
    
    21,782
    
    
    
    19Credit Suisse First Boston
    
    
    3,969
    
    
    
    18Deutsche Bank Securities Inc.
    
    
    1,171
    
    
    
    25Greenwich Capital Markets
    
    
    23,150
    
    
    
    15HSBC Securities Inc.
    
    
    1,634
    
    
    
    23Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    5,121
    
    
    
    5UBS Paine Webber
    
    
    7,073
    
    
    
    13Washington Mutual
    
    
    41,314
    
    
    
    12Total
    
    $
    189,587
    
    
    
    128
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued interest income
minus the sum of repurchase agreement liabilities and accrued interest expense.  Weighted-AverageMaturity ofRepurchaseAmount at
    
    
    AgreementsRepurchase Agreement Counterparties
    
    Risk(1)
    
    
    (in days)Banc of America Securities LLC
    
    $
    6,992
    
    
    
    153Barclays Capital
    
    
    3,656
    
    
    
    27Bear Stearns & Co.
    
    
    63,412
    
    
    
    46Citigroup
    
    
    8,367
    
    
    
    172Countrywide Securities Corporation
    
    
    9,618
    
    
    
    129Credit Suisse First Boston
    
    
    3,293
    
    
    
    17Deutsche Bank Securities Inc.
    
    
    28,326
    
    
    
    63Goldman Sachs & Co.
    
    
    17,421
    
    
    
    28Greenwich Capital Markets
    
    
    7,618
    
    
    
    15Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    24,018
    
    
    
    78Morgan Stanley & Co. Inc.
    
    
    5,922
    
    
    
    21Nomura Securities International, Inc.
    
    
    16,682
    
    
    
    86UBS Securities LLC
    
    
    22,331
    
    
    
    170Wachovia Securities, LLC
    
    
    3,950
    
    
    
    19Washington Mutual
    
    
    3,478
    
    
    
    27Total
    
    $
    225,084
    
    
    
    76
 
 (1)
    
    Equal to the sum of the fair value of the securities sold and accrued interest income minus
the sum of repurchase agreement liabilities and accrued interest expense. 14
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 Mortgage-backed Notes
   Commercial Paper Facility
  Warehouse Lending Facilities
 Mortgage Loan Financing.
  Asset-backed Securities Financing.
 15
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   Junior Subordinated Notes
  September 30, 2006
    
    
    December 31, 2005Borrowings
    
    
    Interest
    
    
    Borrowings
    
    
    InterestOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateJunior subordinated notes:DST I
    
    $
    51,550
    
    
    
    8.16
    %
    
    $
    51,550
    
    
    
    8.16
    %DST II
    
    
    41,238
    
    
    
    9.14
    
    
    
    41,238
    
    
    
    8.21Total
    
    $
    92,788
    
    
    
    8.60
    %
    
    $
    92,788
    
    
    
    8.18
    %
   Margin Lending Facility
  16
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 NOTE 5CAPITAL STOCK AND EARNINGS PER SHARE
     For the Three Months
    
    
    For the Nine MonthsEnded September 30, 2006
    
    
    Ended September 30, 2006Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (loss) (in thousands)
    
    $
    (6,595
    )
    
    $
    (6,595
    )
    
    $
    28,748
    
    
    $
    28,748Weighted-average number of
common shares outstanding
    
    
    38,695,800
    
    
    
    38,695,800
    
    
    
    38,937,454
    
    
    
    38,937,454Additional shares due to
assumed conversion of dilutive
instruments
    
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    128,952Adjusted weighted-average
number of common shares
outstanding
    
    
    38,695,800
    
    
    
    38,365,800
    
    
    
    38,937,454
    
    
    
    39,066,406Net income (loss) per share
    
    $
    (0.17
    )
    
    $
    (0.17
    )
    
    $
    0.74
    
    
    $
    0.74
 
 (1)
    
    Conversion of stock options and unvested restricted common stock considered
anti-dilutive. 17
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  For the Three Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2005Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    5,229
    
    
    $
    5,229
    
    
    $
    30,372
    
    
    $
    30,372Weighted-average number of common shares outstanding
    
    
    40,021,698
    
    
    
    40,021,698
    
    
    
    38,478,679
    
    
    
    38,478,679Additional shares due to assumed conversion of
dilutive instruments
    
    
    
    
    
    
    204,825
    
    
    
    
    
    
    
    137,190Adjusted weighted-average number of common shares
outstanding
    
    
    40,021,698
    
    
    
    40,226,523
    
    
    
    38,478,679
    
    
    
    38,615,869Net income per share
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.79
    
    
    $
    0.79
 NOTE 62003 STOCK INCENTIVE PLANS
   2003 Outside2003 Stock
    
    
    Advisors StockIncentive Plan
    
    
    Incentive Plan
    
    
    TotalShares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    617,666
    
    
    
    
    
    
    
    617,666Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    1,232,334
    
    
    
    150,000
    
    
    
    1,382,334
 18
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-Number
    
    Averageof
    
    ExerciseOptions
    
    PriceOutstanding, beginning of period
    
    
    55,000
    
    
    $
    14.82Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, end of period
    
    
    55,000
    
    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Remaining
    
    Weighted-
    
    
    
    
    
    Remaining
    
    Weighted-Exercise
    
    Number of
    
    Life
    
    Average
    
    Number of
    
    Life
    
    AveragePrices
    
    Options
    
    (in years)
    
    Exercise Price
    
    Options
    
    (in years)
    
    Exercise Price$13.00-$14.00
    
    
    5,000
    
    
    
    7.1
    
    
    $
    13.00
    
    
    
    3,334
    
    
    
    7.1
    
    
    $
    13.00$14.01-$15.00
    
    
    50,000
    
    
    
    6.8
    
    
    
    15.00
    
    
    
    50,000
    
    
    
    6.8
    
    
    
    15.00$13.00-$15.00
    
    
    55,000
    
    
    
    
    
    
    $
    14.82
    
    
    
    53,334
    
    
    
    
    
    
    $
    14.87
   Weighted-AverageNumber of
    
    
    Grant-DateOptions
    
    
    Fair ValueNonvested, beginning of the period
    
    
    18,333
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Vested
    
    
    (16,667
    )
    
    
    (.22
    )Forfeited
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    1,666
    
    
    $
    0.00
  Weighted-Number of
    
    AverageCommon Shares
    
    Issue PriceOutstanding, beginning of period
    
    
    202,829
    
    
    $
    10.53Issued
    
    
    355,000
    
    
    
    7.95Repurchased
    
    
    
    
    
    
    Outstanding, end of period
    
    
    557,829
    
    
    $
    8.89
  19
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageNumber of
    
    Grant-DateCommon Shares
    
    Fair ValueNonvested, beginning of the period
    
    
    194,453
    
    
    $
    10.46Granted
    
    
    355,000
    
    
    
    7.95Vested
    
    
    (136,622
    )
    
    
    8.75Repurchased
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    412,831
    
    
    $
    8.87
  NOTE 7THE MANAGEMENT AGREEMENT
     20
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosure About Fair Value of Financial Instruments
 NOTE 9ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
  September 30,
    
    
    December 31,2006
    
    
    2005Unrealized holding losses on mortgage-backed securities available-for-sale
    
    $
    (8,177
    )
    
    $
    (116,397
    )Reclassification adjustment for net (gains) losses on mortgage-backed
securities available-for-sale included in net income
    
    
    (990
    )
    
    
    69Impairment losses on mortgage-backed securities
    
    
    2,179
    
    
    
    112,008Net unrealized losses on mortgage-backed securities available-for-sale
    
    
    (6,988
    )
    
    
    (4,320
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    4,278
    
    
    
    11,396Accumulated other comprehensive income (loss)
    
    $
    (2,710
    )
    
    $
    7,076
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  21
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   EstimatedFair ValueFree Standing Derivatives:Interest rate swap contracts
    
    $
    5,907Interest rate cap contracts
    
    
    1,098Total
    
    $
    7,005
  EstimatedFair ValueFree Standing Derivatives:Swaption contracts
    
    $
    1,531Interest rate cap contracts
    
    
    74Cash Flow Hedges:Eurodollar futures contracts sold short
    
    
    4,895Interest rate swap contracts
    
    
    4,220Total
    
    $
    10,720
 Free Standing Derivatives
  Cash Flow Hedging Strategies
  22
    Table of Contents  LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   Purchase Commitment Derivatives
  NOTE 11SUBSEQUENT EVENTS
   23
    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 Quarterly Report on 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. The words anticipate, estimate, should, expect, believe, intend and similar
expressions or the negatives of these words or phrases are intended to identify forward-looking
statements. As a result of many factors, such as those set forth under Risk Factors in Item 1A of
this Quarterly Report on Form 10-Q , Item 1A of our 2005 Annual Report on 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
     24
    Table of Contents  
    
    interest rate trends and changes in the yield curve;
    
    rates of prepayment on our mortgage loans and the mortgages underlying
our mortgage-backed securities;
    
    continued creditworthiness of the holders of mortgages underlying our mortgage-related assets;
    
    highly competitive markets for investment opportunities; and
    
    other market developments.
  
    
    credit risk as defined by prepayments, delinquencies and defaults on
our mortgage loans and the mortgage loans underlying our
mortgage-backed securities;
    
    overall leverage of our portfolio;
    
    access to funding and adequate borrowing capacity;
    
    negative amortization;
    
    increases in our borrowing costs;
    
    the ability to use derivatives to mitigate our interest rate and prepayment risks;
    
    the market value of our investments; and
    
    compliance with REIT requirements and the requirements to qualify for
an exemption under the Investment Company Act of 1940.
  Critical Accounting Policies
  25
    Table of Contents  Classifications of Investment Securities
  Valuations of Mortgage-backed Securities
      26
    Table of Contents  Loans Held-for-Investment
  Allowance and Provision for Loan Losses
     Interest Income Recognition
 Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets
 27
    Table of Contents  Securitizations
 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities Consolidation of Variable Interest
Entities
 Accounting for Derivative Financial Instruments and Hedging Activities
   Recent Accounting Pronouncements
  28
    Table of Contents  .
   Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Fair Value Measurements
 Financial
Statements  Considering the Effect of Prior Year Misstatements
 Results of Operations
  29
    Table of Contents  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    6.84
    %
    
    
    3.79
    %
    
    
    6.32
    %
    
    
    3.70
    %Weighted-average cost of total liabilities
    
    
    5.40
    
    
    
    3.29
    
    
    
    4.94
    
    
    
    2.74Net interest spread
    
    
    1.44
    %
    
    
    0.50
    %
    
    
    1.38
    %
    
    
    0.96
    %
   30
    Table of Contents  Three Months
    
    
    Percentage
    
    
    Nine Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageSeptember 30,
    
    
    Financing
    
    
    September 30,
    
    
    Financing2006
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    38,372
    
    
    
    2.83
    %
    
    $
    84,119
    
    
    
    2.41
    %Interest expense on repurchase agreement liabilities
    
    
    31,043
    
    
    
    2.29
    
    
    
    81,547
    
    
    
    2.33Interest expense on warehouse lending facilities
    
    
    3,378
    
    
    
    0.25
    
    
    
    8,849
    
    
    
    0.25Interest expense on junior subordinated notes
    
    
    1,973
    
    
    
    0.15
    
    
    
    5,790
    
    
    
    0.17Amortization of net realized gains on futures and interest
rate swap contracts
    
    
    (580
    )
    
    
    (0.04
    )
    
    
    (6,924
    )
    
    
    (0.20
    )Net interest income on interest rate swap contracts
    
    
    (1,087
    )
    
    
    (0.08
    )
    
    
    (798
    )
    
    
    0.02
    )Other
    
    
    50
    
    
    nm
    
    
    50
    
    
    nmTotal interest expense
    
    $
    73,149
    
    
    
    5.40
    %
    
    $
    172,633
    
    
    
    4.94
    %
 
 nm = not meaningful  Three Months
    
    
    Percentage
    
    
    Nine Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageSeptember 30,
    
    
    Financing
    
    
    September 30,
    
    
    Financing2005
    
    
    Liabilities
    
    
    2005
    
    
    LiabilitiesInterest expense on repurchase agreement liabilities
    
    $
    39,578
    
    
    
    3.41
    %
    
    $
    96,865
    
    
    
    2.92
    %Interest expense on warehouse lending facilities
    
    
    585
    
    
    
    0.05
    
    
    
    585
    
    
    
    0.02Interest expense on junior subordinated notes
    
    
    1,034
    
    
    
    0.09
    
    
    
    2,239
    
    
    
    0.06Net hedge ineffectiveness (gains) losses on futures and
interest rate swap contracts
    
    
    430
    
    
    
    0.03
    
    
    
    (42
    )
    
    
    nmAmortization of net realized (gains) losses on futures
and interest rate swap contracts
    
    
    799
    
    
    
    0.07
    
    
    
    (1,395
    )
    
    
    (0.04
    )Net interest income on interest rate swap
contracts
    
    
    (4,196
    )
    
    
    (0.36
    )
    
    
    (7,395
    )
    
    
    (0.22
    )Other
    
    
    11
    
    
    nm
    
    
    21
    
    
    nmTotal interest expense
    
    $
    38,241
    
    
    
    3.29
    %
    
    $
    90,878
    
    
    
    2.74
    %
 
 nm = not meaningful   31
    Table of Contents  For the Three
    
    
    For the NineMonths Ended
    
    
    Months Ended2006
    
    
    2005
    
    
    2006
    
    
    2005Realized and unrealized gains
(losses) on derivative instruments,
net
    
    $
    (11.7
    )
    
    $
    0.6
    
    
    $
    4.1
    
    
    $
    (0.3
    )Sales of mortgage-backed securities:Gains
    
    
    0.3
    
    
    
    
    
    
    
    10.0
    
    
    
    Losses
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (9.0
    )
    
    
    (0.1
    )Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (2.2
    )
    
    
    Other expense
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    Total
    
    $
    (11.5
    )
    
    $
    0.5
    
    
    $
    2.3
    
    
    $
    (0.4
    )
     32
    Table of Contents  REIT taxable net income
   33
    Table of Contents  For the Nine Months Ended September 30, 2006
    
    
    For the Nine Months Ended September 30, 2005GAAP
    
    
    Adjustments
    
    
    REIT
    
    
    GAAP
    
    
    Adjustments
    
    
    REITStatement
    
    
    to GAAP
    
    
    Taxable
    
    
    Statement
    
    
    to GAAP
    
    
    Taxableof
    
    
    Statement of
    
    
    Statement of
    
    
    of
    
    
    Statement of
    
    
    Statement ofOperations
    
    
    Operations
    
    
    Operations
    
    
    Operations
    
    
    Operations
    
    
    OperationsNet Interest Income:Interest income:Spread portfolio
    
    $
    69,757
    
    
    $
    (7,904
    )
    
    $
    61,853
    
    
    $
    126,906
    
    
    $
    
    
    
    $
    126,906Mortgage loan and
securitization portfolio
    
    
    133,667
    
    
    
    (80,070
    )
    
    
    53,597
    
    
    
    715
    
    
    
    (4
    )
    
    
    711Credit sensitive bond portfolio
    
    
    28,176
    
    
    
    (68
    )
    
    
    28,108
    
    
    
    3,703
    
    
    
    
    
    
    
    3,703Total interest income
    
    
    231,600
    
    
    
    (88,042
    )
    
    
    143,558
    
    
    
    131,324
    
    
    
    (4
    )
    
    
    131,320Interest expense
    
    
    172,633
    
    
    
    (76,432
    )
    
    
    96,201
    
    
    
    90,878
    
    
    
    182
    
    
    
    91,060Net interest income
    
    
    58,967
    
    
    
    (11,610
    )
    
    
    47,357
    
    
    
    40,446
    
    
    
    (186
    )
    
    
    40,260Other Income (expense):Realized and unrealized gains
(losses) on derivative
instruments
    
    
    4,087
    
    
    
    (4,087
    )
    
    
    
    
    
    
    (311
    )
    
    
    311
    
    
    
    Gains (losses) on sales of
mortgage-backed securities
    
    
    990
    
    
    
    (990
    )
    
    
    
    
    
    
    (69
    )
    
    
    69
    
    
    
    Impairment losses on
mortgage-backed securities
    
    
    (2,179
    )
    
    
    2,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense)
    
    
    (608
    )
    
    
    405
    
    
    
    (203
    )
    
    
    
    
    
    
    
    
    
    
    Total other income (expense)
    
    
    2,290
    
    
    
    (2,493
    )
    
    
    (203
    )
    
    
    (380
    )
    
    
    380
    
    
    
    Expenses:Management compensation expense
to related party
    
    
    6,921
    
    
    
    (3,942
    )
    
    
    2,979
    
    
    
    3,254
    
    
    
    
    
    
    
    3,254Incentive compensation expense to
related parties
    
    
    791
    
    
    
    1,706
    
    
    
    2,497
    
    
    
    1,128
    
    
    
    (502
    )
    
    
    626Salaries and benefits
    
    
    7,375
    
    
    
    (650
    )
    
    
    6,725
    
    
    
    1,702
    
    
    
    (240
    )
    
    
    1,462Servicing expense
    
    
    7,546
    
    
    
    (6,231
    )
    
    
    1,315
    
    
    
    47
    
    
    
    
    
    
    
    47Provision for loan losses
    
    
    3,304
    
    
    
    (3,304
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Professional services
    
    
    2,181
    
    
    
    (176
    )
    
    
    2,005
    
    
    
    1,588
    
    
    
    
    
    
    
    1,588Board of directors expense
    
    
    301
    
    
    
    
    
    
    
    301
    
    
    
    351
    
    
    
    
    
    
    
    351Insurance expense
    
    
    444
    
    
    
    
    
    
    
    444
    
    
    
    415
    
    
    
    
    
    
    
    415Custody expense
    
    
    324
    
    
    
    (62
    )
    
    
    262
    
    
    
    319
    
    
    
    
    
    
    
    319Other general and administrative
expenses
    
    
    2,265
    
    
    
    79
    
    
    
    2,344
    
    
    
    890
    
    
    
    387
    
    
    
    1,277Total expenses
    
    
    31,452
    
    
    
    (12,580
    )
    
    
    18,872
    
    
    
    9,694
    
    
    
    (355
    )
    
    
    9,339Income before taxes
    
    
    29,805
    
    
    
    (1,523
    )
    
    
    28,282
    
    
    
    30,372
    
    
    
    549
    
    
    
    30,921Income taxes
    
    
    1,057
    
    
    
    (1,038
    )
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    28,748
    
    
    $
    (485
    )
    
    $
    28,263
    
    
    $
    30,372
    
    
    $
    549
    
    
    $
    30,921Net income per share  basic
    
    $
    0.74
    
    
    
    
    
    
    
    
    
    
    $
    0.79Net income per share  diluted
    
    $
    0.74
    
    
    
    
    
    
    
    
    
    
    $
    0.79Weighted-average number of shares
outstanding  basic
    
    
    38,937,454
    
    
    
    
    
    
    
    
    
    
    
    38,478,679Weighted-average number of shares
outstanding  diluted
    
    
    39,066,406
    
    
    
    
    
    
    
    
    
    
    
    38,615,869REIT taxable net income per share
    
    
    
    
    
    
    
    
    
    $
    0.71
    
    
    
    
    
    
    
    
    
    
    $
    0.78Average shares outstanding on
dividend record dates during the
year
    
    
    
    
    
    
    
    
    
    
    39,652,028
    
    
    
    
    
    
    
    
    
    
    
    39,775,656
 34
    Table of Contents  Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005Undistributed REIT taxable net income, beginning of period
    
    $
    3,154
    
    
    $
    1,794REIT taxable net income earned during period
    
    
    28,263
    
    
    
    30,921Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    (21,742
    )
    
    
    (28,750
    )Other adjustments
    
    
    (214
    )
    
    
    Undistributed REIT taxable net income, end of period
    
    $
    9,461
    
    
    $
    3,965Cash distributions per share declared during period
    
    $
    0.55
    
    
    $
    0.74Percentage of REIT taxable net income distributed
    
    
    76.9
    %
    
    
    93.0
    %
   Financial Condition
 Mortgage Assets
 Mortgage-backed securities
  35
    Table of Contents  September 30, 2006
    
    
    December 31, 2005Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalMortgage-
    
    
    
    
    
    
    Mortgage-Market
    
    
    backed
    
    
    Market
    
    
    backed(dollars in thousands)
    
    Value
    
    
    securities
    
    
    Value
    
    
    securitiesResidential Mortgage Credit PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    106,937
    
    
    
    5.0
    %
    
    $
    30,623
    
    
    
    0.7
    %A/A rating
    
    
    236,402
    
    
    
    11.2
    
    
    
    64,957
    
    
    
    1.5BBB/Baa rating
    
    
    123,295
    
    
    
    5.8
    
    
    
    28,546
    
    
    
    0.6Total Investment-grade MBS
    
    
    466,634
    
    
    
    22.0
    
    
    
    124,126
    
    
    
    2.8Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    
    ANon-investment-grade MBS:BB/Ba rating
    
    
    124,868
    
    
    
    5.9
    
    
    
    121,128
    
    
    
    2.8Not rated
    
    
    9,010
    
    
    
    0.4
    
    
    
    20,818
    
    
    
    0.5Total non-investment-grade MBS
    
    
    133,878
    
    
    
    6.3
    
    
    
    141,946
    
    
    
    3.3
    %Weighted-average credit rating (1)
    
    
    BB
    
    
    
    
    
    
    
    BB+Total Residential Mortgage Credit portfolio
    
    
    600,512
    
    
    
    28.3
    
    
    
    266,072
    
    
    
    6.1Weighted-average credit rating (1)
    
    

    A-


    
    
    
    
    
    
    
    BBBSpread PortfolioAgency MBS
    
    
    121,764
    
    
    
    5.7
    
    
    
    1,203,255
    
    
    
    27.6AAA/Aaa rating
    
    
    1,396,264
    
    
    
    65.9
    
    
    
    2,890,276
    
    
    
    66.3Total Spread portfolio
    
    
    1,518,028
    
    
    
    71.7
    
    
    
    4,093,531
    
    
    
    93.9Weighted-average credit rating
    
    
    AAA
    

    
    
    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    2,118,540
    
    
    
    100.0
    %
    
    $
    4,359,603
    
    
    
    100.0
    %Weighted-average credit rating
    
    
    AA
    

    
    
    
    
    
    
    AA+
 
 (1)
    
    Weighted-average credit rating excludes non-rated mortgage-backed securities of
$9.0 million and $20.8 million at September 30, 2006 and December 31, 2005,
respectively. Loans held-for-investment
  36
    Table of Contents  Weighted-AverageMonths toReset ofLoans After
    
    
    
    
    
    
    Principal
    
    
    LoansWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Delinquent >Average
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Loans
    
    
    90 days as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Rate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    > 90 days
    
    
    Total PrincipalFloating rate mortgage
    
    7.68%
    
    2036
    
    1
    
    1
    
    $
    3,409,000
    
    
    $
    9,377
    
    
    0.23%3-Year hybrid mortgage
    
    6.28%
    
    2036
    
    28
    
    20
    
    
    77,573
    
    
    
    679
    
    
    0.02%5-Year hybrid mortgage
    
    6.25%
    
    2035
    
    50
    
    23
    
    
    629,555
    
    
    
    7,508
    
    
    0.18%Total
    
    7.44%
    
    2036
    
    9
    
    5
    
    $
    4,116,128
    
    
    $
    17,564
    
    
    0.43%
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities
related to our 3-year and 5-year hybrid residential mortgage loans. Amounts reflect the
effect of these hedges on the months to reset of our residential mortgage loans. In
addition, the financing for $278.5 million of our 3-year and 5-year hybrid residential
mortgage loans is, like the underlying collateral, fixed for a period of three to five
years 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 5 months at September 30, 2006.  Weighted-AverageMonths toReset ofLoans AfterWeighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    PrincipalWeighted-
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Amount of LoansAverage
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    DelinquentDescription
    
    Interest Rate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    > 90 days3-Year hybrid mortgage
    
    5.83%
    
    2035
    
    34
    
    2
    
    $
    32,890
    
    
    $
    5-Year hybrid mortgage
    
    6.11%
    
    2035
    
    57
    
    2
    
    
    473,608
    
    
    
    Total
    
    6.09%
    
    2035
    
    56
    
    2
    
    $
    506,498
    
    
    $
    
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities
related to our 3-year and 5-year hybrid residential mortgage loans. Amounts reflect the
effect of these hedges on the months to reset of our residential mortgage loans. The
weighted-average period to reset of the debt we use to acquire residential mortgage loans
was match funded approximately one month at December 31, 2005. 37
    Table of Contents  Unpaid principal balance
    
    $
    4,116,128Number of loans
    
    
    10,504Average loan balance
    
    $
    392Weighted-average coupon rate
    
    
    7.44
    %Weighted-average lifetime cap
    
    
    10.45
    %Weighted-average original term, in months
    
    
    368Weighted-average remaining term, in months
    
    
    360Weighted-average loan-to-value ratio (LTV)
    
    
    75.7
    %Weighted-average FICO score
    
    
    711Top five geographic concentrations (% exposure):California
    
    
    59.8
    %Florida
    
    
    8.3
    %Arizona
    
    
    4.2
    %Virginia
    
    
    3.7
    %Nevada
    
    
    3.2
    %Occupancy status:Owner occupied
    
    
    87.2
    %Investor
    
    
    12.8
    %Property type:Single-family
    
    
    84.0
    %Condominium
    
    
    9.9
    %Other residential
    
    
    6.1
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
  Unpaid principal balance
    
    $
    506,498Number of loans
    
    
    1,163Average loan balance
    
    $
    436Weighted-average coupon rate
    
    
    6.09
    %Weighted-average lifetime cap
    
    
    11.31
    %Weighted-average original term, in months
    
    
    360Weighted-average remaining term, in months
    
    
    357Weighted-average loan-to-value ratio (LTV)
    
    
    75.1
    %Weighted-average FICO score
    
    
    712Top five geographic concentrations (% exposure):California
    
    
    38.9
    %Virginia
    
    
    11.1
    %Florida
    
    
    8.5
    %Arizona
    
    
    6.2
    %Maryland
    
    
    5.4
    %Occupancy status:Owner occupied
    
    
    93.7
    %Investor
    
    
    6.3
    %Property type:Single-family
    
    
    87.0
    %Condominium
    
    
    9.7
    %Other residential
    
    
    3.3
    %Collateral type:Alt A-first lien
    
    
    100.0
    %
   38
    Table of Contents  Mortgage-Backed Notes
    39
    Table of Contents  LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    Total2005-1
    
    2006-1
    
    2006-2
    
    2006-3
    
    2006-4
    
    2006-5
    
    2006-6
    
    PortfolioLoans, unpaid
principal balance
    
    $
    520,568
    
    
    $
    576,122
    
    
    $
    801,474
    
    
    $
    682,535
    
    
    $
    497,220
    
    
    $
    508,789
    
    
    $
    772,732
    
    
    $
    4,359,440Mortgage-backed
notes issued to
third parties
    
    
    500,267
    
    
    
    536,657
    
    
    
    746,973
    
    
    
    654,270
    
    
    
    376,148
    
    
    
    
    
    
    
    753,415
    
    
    
    3,567,730Debt retained
    
    
    20,301
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    28,265
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    19,317
    
    
    
    791,710Retained investment
grade % (1)
    
    
    3.1
    %
    
    
    3.9
    %
    
    
    3.7
    %
    
    
    2.9
    %
    
    
    21.1
    %
    
    
    97.2
    %
    
    
    1.0
    %
    
    
    16.0
    %Retained
non-investment
grade % (1)
    
    
    0.8
    %
    
    
    3.0
    %
    
    
    3.1
    %
    
    
    1.3
    %
    
    
    3.2
    %
    
    
    2.8
    %
    
    
    1.5
    %
    
    
    2.2
    %Cost of debt on
AAA-rated
mortgage-backed
notes  spread to
LIBOR (2)
    
    
    0.27
    %
    
    
    0.28
    %
    
    
    0.22
    %
    
    
    0.23
    %
    
    
    0.21
    %
    
    
    0.21
    %
    
    
    0.22
    %
    
    
    0.23
    %
 
 (1)
    
    Retained tranches as a percentage of total mortgage-backed notes issued.(2)
    
    LUM 2006-3 cost of debt excludes $267.4 million of AAA mortgage-backed notes which, like the
underlying loan collateral, are fixed for three to five years then become variable based upon
the average rates of the underlying loans which will adjust based on LIBOR. 40
    Table of Contents  LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    Total2005-1
    
    
    2006-1
    
    
    2006-2
    
    
    2006-3
    
    
    2006-4
    
    
    2006-5
    
    
    2006-6
    
    
    PortfolioTransaction
execution date
    
    
    11/2/05
    
    
    
    1/26/06
    
    
    
    2/23/06
    
    
    
    4/28/06
    
    
    
    5/28/06
    
    
    
    6/29/06
    
    
    
    9/28/06Mortgage-backed notes issued
to third-party investorsAAA/Aaa rating
    
    $
    482,307
    
    
    $
    517,069
    
    
    $
    717,320
    
    
    $
    597,700
    
    
    $
    376,148
    
    
    $
    
    
    
    $
    712,846
    
    
    $
    3,403,390AA/Aa rating
    
    
    17,960
    
    
    
    19,588
    
    
    
    29,653
    
    
    
    56,570
    
    
    
    
    
    
    
    
    
    
    
    29,364
    
    
    
    153,135A/A rating
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,205
    
    
    
    11,205Total Mortgage-backed notes
issues to third-party
investors
    
    $
    500,267
    
    
    $
    536,657
    
    
    $
    746,973
    
    
    $
    654,270
    
    
    $
    376,148
    
    
    $
    
    
    
    $
    753,415
    
    
    $
    3,567,730Percentage of total collateral
    
    
    96.1
    %
    
    
    93.1
    %
    
    
    93.2
    %
    
    
    95.9
    %
    
    
    75.7
    %
    
    
    
    
    
    
    97.5
    %
    
    
    81.8
    %Debt retainedAAA/Aaa rating
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    66,378
    
    
    $
    457,910
    
    
    $
    
    
    
    $
    524,288AA/Aa rating
    
    
    6,767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,397
    
    
    
    21,369
    
    
    
    
    
    
    
    46,533A/A rating
    
    
    4,165
    
    
    
    13,251
    
    
    
    18,434
    
    
    
    9,852
    
    
    
    12,430
    
    
    
    9,667
    
    
    
    3,864
    
    
    
    71,663BBB/Bbb rating
    
    
    5,206
    
    
    
    8,930
    
    
    
    11,221
    
    
    
    9,649
    
    
    
    7,707
    
    
    
    5,851
    
    
    
    3,864
    
    
    
    52,428BB/Ba rating
    
    
    1,301
    
    
    
    7,202
    
    
    
    10,419
    
    
    
    1,879
    
    
    
    6,215
    
    
    
    6,614
    
    
    
    6,954
    
    
    
    40,584B/B rating
    
    
    
    
    
    
    5,761
    
    
    
    8,015
    
    
    
    1,569
    
    
    
    5,469
    
    
    
    3,816
    
    
    
    
    
    
    
    24,630Not rated
    
    
    
    
    
    
    4,321
    
    
    
    6,412
    
    
    
    1,257
    
    
    
    4,476
    
    
    
    3,562
    
    
    
    4,635
    
    
    
    24,663Total mortgage-backed notes
retained
    
    
    17,439
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    24,206
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    19,317
    
    
    
    784,789Overcollateralization
    
    
    2,862
    
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,922Total debt retained
    
    $
    20,301
    
    
    $
    39,465
    
    
    $
    54,501
    
    
    $
    28,265
    
    
    $
    121,072
    
    
    $
    508,789
    
    
    $
    19,317
    
    
    $
    791,710Percentage of total collateral
    
    
    3.9
    %
    
    
    6.9
    %
    
    
    6.8
    %
    
    
    4.1
    %
    
    
    24.3
    %
    
    
    100.0
    %
    
    
    2.5
    %
    
    
    18.2
    %
 41
    Table of Contents  Asset Repricing Characteristics
  September 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    3,409,000
    
    
    
    54.0
    %
    
    $
    
    
    
    
    
    %Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60
months
    
    
    707,128
    
    
    
    11.2
    
    
    
    506,498
    
    
    
    10.4Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unamortized premium
    
    
    84,102
    
    
    
    1.3
    
    
    
    679
    
    
    nmAllowance for loan losses
    
    
    (3,289
    )
    
    nm
    

    
    
    
    
    
    
    Sub-total
    
    
    4,196,941
    
    
    
    66.5
    
    
    
    507,177
    
    
    
    10.4ARM residential mortgage-backed
securities:Reset 1 month or less
    
    
    599,049
    
    
    
    9.5
    
    
    
    266,072
    
    
    
    5.5Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60
months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    599,049
    
    
    
    9.5
    
    
    
    266,072
    
    
    
    5.5Fixed-rate residential mortgage-backed
securities:
    
    
    1,463
    
    
    nm
    

    
    
    
    
    
    
    Spread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    1,396,264
    
    
    
    22.1
    
    
    
    8,610
    
    
    
    0.2Reset >1 month but < 12 months
    
    
    121,764
    
    
    
    1.9
    
    
    
    476,828
    
    
    
    9.8Reset >12 months but < 60
months
    
    
    
    
    
    
    
    
    
    
    2,756,195
    
    
    
    56.6Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    851,898
    
    
    
    17.5Sub-total
    
    
    1,518,028
    
    
    
    24.0
    
    
    
    4,093,531
    
    
    
    84.1Total Mortgage Assets
    
    $
    6,315,481
    
    
    
    100.0
    %
    
    $
    4,866,780
    
    
    
    100.0
    %
 
      42
    Table of Contents  LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    97
    %
    
    
    3
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    19
    
    
    
    
    
    
    
    81
    
    
    nm
 
   LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    65
    %
    
    
    35
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
  Liquidity and Capital Resources
   43
    Table of Contents  Principal payments received on residential mortgage loans
    
    $
    182,267Principal distributed to mortgage-backed note holders (1)
    
    
    (142,923
    )Principal receipts used for interest payments on mortgage-backed notes
    
    
    39,344Interest cash receipts on residential mortgage loans for interest and other fee income,
net of servicing and other reimbursements
    
    
    54,676Interest payments to mortgage-backed note holders (1)
    
    
    (94,020
    )Interest payments on mortgage-backed notes in excess of interest cash receipts
    
    
    (39,344
    )Net cash flow
    
    $
    
 
 (1)
    
    Amount includes principal and interest distributed on bonds retained by us.   44
    Table of Contents  LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM2006-1
    
    2006-2
    
    2006-3
    
    2006-4
    
    2006-5
    
    2006-6Transaction execution date:
    
    
    1/26/06
    
    
    
    2/23/06
    
    
    
    4/28/06
    
    
    
    5/28/06
    
    
    
    6/29/06
    
    
    
    9/28/06Loans, unpaid principal
balance
    
    $
    576,122
    
    
    $
    801,474
    
    
    $
    682,535
    
    
    $
    497,220
    
    
    $
    508,789
    
    
    $
    772,732Mortgage-backed notes
issued to third parties
    
    
    536,657
    
    
    
    746,973
    
    
    
    654,270
    
    
    
    376,148
    
    
    
    
    
    
    
    753,415Debt retained
    
    
    39,465
    
    
    
    54,501
    
    
    
    28,265
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    19,317
        45
    Table of Contents  Inflation
  46
    Table of Contents  Contractual Obligations and Commitments
  Payments Due by PeriodLess than 1
    
    
    
    
    
    
    3  5(in millions)
    
    Total
    
    
    year
    
    
    1  3 years
    
    
    years
    
    
    More than 5 yearsRepurchase agreements
    
    $
    2,528.9
    
    
    $
    2,528.9
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage-backed notes (1)
    
    
    3,339.6
    
    
    
    706.0
    
    
    
    1,579.8
    
    
    
    993.4
    
    
    
    60.4Junior subordinated notes
(2)
    
    
    107.4
    
    
    
    4.1
    
    
    
    10.5
    
    
    
    
    
    
    
    92.8Facilities leases
    
    
    1,129.6
    
    
    
    243.7
    
    
    
    407.0
    
    
    
    305.4
    
    
    
    173.5Management fees
    
    
    3.8
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,109.3
    
    
    $
    3,486.5
    
    
    $
    1,997.3
    
    
    $
    1,298.8
    
    
    $
    326.7
 
 (1)
    
    The mortgage-backed notes have stated maturities through 2046; however, the expected maturity is subject to change based on the
prepayments and loan losses of the underlying mortgage loans. In addition, we may exercise a redemption option and thereby effect
termination and early retirement of the mortgage-backed notes. The payments represented reflect our assumptions for prepayment and
credit losses at September 30, 2006 and assume we will exercise our redemption option.(2)
    
    Certain of our junior subordinated notes bear interest at a fixed rate per annum through March 30, 2010 and, thereafter, at a
variable rate. Payments due by period reflect total principal due on all junior subordinated notes plus interest payments due
during the fixed rate period of certain of the notes. See Note 4 to our consolidated financial statements in Part 1, Item 1 of this
Quarterly Report on Form 10-Q for further discussion about the preferred securities of subsidiary trusts and junior subordinated
notes. Off-Balance Sheet Arrangements
  
   Credit Risk
  47
    Table of Contents  Concentration Risk
  Interest Rate Risk
  Effect on Net Interest Income
    48
    Table of Contents  Extension Risk
    Interest Rate Cap Risk
  49
    Table of Contents  Prepayment Risk
  Effect on Fair Value
   50
    Table of Contents  Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200(in millions)
    
    Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis PointsMortgage-Backed SecuritiesFair value
    
    $
    2,120.6
    
    
    $
    2,118.5
    
    
    $
    2,116.4
    
    
    $
    2,114.4Change in fair value
    
    
    2.1
    
    
    
    
    
    
    
    (2.1
    )
    
    
    (4.2
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Hedge InstrumentsFair value
    
    $
    (5.9
    )
    
    $
    7.0
    
    
    $
    25.0
    
    
    $
    47.5Change in fair value
    
    
    (12.9
    )
    
    
    
    
    
    
    18.0
    
    
    
    40.5Change as a percent of fair value
    
    nm
    

    
    
    
    
    
    nm
    

    
    nmMortgage Loans Held-for-Investment (2)Fair value
    
    $
    4,147.0
    
    
    $
    4,116.1
    
    
    $
    4,085.3
    
    
    $
    4,054.4Change in fair value
    
    
    30.9
    
    
    
    
    
    
    
    (30.9
    )
    
    
    (61.7
    )Change as a percent of fair value
    
    
    0.8
    %
    
    
    
    
    
    
    (0.8
    )%
    
    
    (1.5
    )%Repurchase Agreements (1)(2)Fair value
    
    $
    2,528.9
    
    
    $
    2,528.9
    
    
    $
    2,528.9
    
    
    $
    2,528.9Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed Notes (1)(2)Fair value
    
    $
    3,342.4
    
    
    $
    3,342.4
    
    
    $
    3,342.4
    
    
    $
    3,342.4Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed Notes (2)(3)Fair value
    
    $
    285.5
    
    
    $
    279.2
    
    
    $
    273.1
    
    
    $
    267.2Change in fair value
    
    
    6.3
    
    
    
    
    
    
    
    (6.1
    )
    
    
    (12.0
    )Change as a percent of fair value
    
    
    2.2
    %
    
    
    
    
    
    
    (2.2
    )%
    
    
    (4.3
    )%Junior Subordinated Notes (2)Fair value
    
    $
    95.1
    
    
    $
    91.4
    
    
    $
    87.7
    
    
    $
    84.3Change in fair value
    
    
    3.7
    
    
    
    
    
    
    
    (3.7
    )
    
    
    (7.1
    )Change as a percent of fair value
    
    
    4.0
    %
    
    
    
    
    
    
    (4.0
    )%
    
    
    (7.8
    )%
 
 (1)
    
    The fair value of the repurchase agreements and mortgage-backed notes would not change
materially due to the short-term nature of these instruments.(2)
    
    This asset or liability is carried on the consolidated balance sheet at amortized cost
and therefore a change in interest rates would not affect the carrying value of the asset
or liability.(3)
    
    Represents mortgage-backed notes which are not short-term in nature.   51
    Table of Contents  Risk Management
  
    
    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
    
    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.
 
  Conclusion Regarding Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  52
    Table of Contents  A significant portion of our mortgages permit negative amortization. Negative amortization
can increase the overall risk of our Residential Mortgage Credit portfolio and could adversely
impact our results of operations or financial condition.
     53
    Table of Contents  The timing and amount of our cash distributions may experience volatility.
   We may be subject to the risks associated with inadequate or untimely services from
third-party service providers, which could adversely impact our results of operations or financial
condition.
  
     (a) Total
    
    (b)
    
    (c) Total Number of
    
    (d) Maximum NumberNumber of
    
    Average
    
    Shares Purchased as Part
    
    of Shares that May YetShares
    
    Price Paid
    
    of Publicly Announced
    
    Be Purchased Under thePeriod
    
    Purchased
    
    per Share
    
    Program
    
    Programs (1)July 1  31, 2006
    
    
    1,200
    
    
    $
    9.00
    
    
    
    1,200
    
    
    
    2,446,750August 1  31, 2006
    
    
    41,035
    
    
    
    7.00
    
    
    
    41,035
    
    
    
    2,405,715September 1  30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,405,715
 
 (1)
    
    Our initial stock repurchase program was announced on November 7, 2005 and authorized us to repurchase up
to a total of 2,000,000 of our common shares. In February 2006, we announced an additional stock repurchase
program to repurchase up to 3,000,000 shares of our common stock. We can repurchase shares in the open market
or through privately negotiated transactions from time to time at managements discretion until we repurchase
a total of 5,000,000 common shares or our Board of Directors determines to terminate the program. 54
    Table of Contents  55
    Table of Contents  SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.By:
    /s/ GAIL P. SENECAGail P. SenecaChief Executive Officer
(Principal Executive Officer) Date: November 9, 2006By:
    /s/ CHRISTOPHER J. ZYDAChristopher J. ZydaChief Financial Officer
(Principal Financial and Accounting Officer)Date: November 9, 2006 56
    Table of Contents  EXHIBIT INDEX
   ExhibitNumber
    
    Description3.1
    
    Second Articles of Amendment and Restatement (4)3.2
    
    Third Amended and Restated Bylaws (9)4.1
    
    Form of Common Stock Certificate (1)4.2
    
    Registration Rights Agreement, dated as of June 11, 2003, by and between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. (for itself and for the benefit of the holders from
time to time of registrable securities issued in the Registrants June 2003, private
offering) (1)10.1 
    
    2003 Stock Incentive Plan, as amended (10)10.2 
    
    Form of Incentive Stock Option under the 2003 Stock Incentive Plan (1)10.3 
    
    Form of Non Qualified Stock Option under the 2003 Stock Incentive Plan (1)10.4 
    
    2003 Outside Advisors Stock Incentive Plan, as amended (10)10.5 
    
    Form of Non Qualified Stock Option under the 2003 Outside Advisors Stock Incentive Plan (1)10.6 
    
    Form of Indemnity Agreement (1)10.7 
    
    Form of Restricted Stock Award Agreement for Christopher J. Zyda (1)10.8 
    
    Form of Restricted Stock Award Agreement for Seneca (3)10.9
    
    Controlled Equity Offering Sales Agreement dated February 7, 2005, between the Registrant
and Cantor Fitzgerald & Co. (6)10.10 
    
    Employment Agreement dated December 20, 2005, between the Registrant and S. Trezevant Moore,
Jr. (12)10.11 
    
    Employment Agreement dated December 20, 2005, between the Registrant and Gail P. Seneca (12)10.12 
    
    Employment Agreement dated as of December 20, 2005, by and between the Registrant and
Christopher J. Zyda (12)10.13
    
    Direct Stock Purchase and Dividend Reinvestment Plan dated June 29, 2005 (11)14.1
    
    Code of Business Conduct and Ethics (1)14.2
    
    Corporate Governance Guidelines (5)
 57
    Table of Contents  ExhibitNumber
    
    Description31.1 *
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and 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 200231.2 *
    
    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 200232.1 *
    
    Certification of Gail P. Seneca, Chairman of the Board of Directors and Chief Executive
Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2 *
    
    Certification of Christopher J. Zyda, Chief Financial Officer of the Registrant, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Charter of the Audit Committee of the Board of Directors (1)99.2
    
    Charter of the Compensation Committee of the Board of Directors (1)99.3
    
    Charter of the Governance and Nominating Committee of the Registrants Board of Directors (1)
 
 (1)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-107984)
which became effective under the Securities Act of 1933, as amended, on December 18, 2003.(2)
    
    Incorporated by reference to our Current Report Form 8-K filed on December 23, 2003.(3)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-107981)
which became effective under the Securities Act of 1933, as amended, on February 13, 2004.(4)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.(5)
    
    Incorporated by reference to our Registration Statement on Form S-11 (Registration No. 333-113493)
which became effective under the Securities act of 1933, as amended, on March 30, 2004.(6)
    
    Incorporated by reference to our Current Report on Form 8-K filed on February 8, 2005.(7)
    
    Incorporated by reference to our Current Report on Form 8-K filed on April 1, 2005.(8)
    
    Incorporated by reference to our Current Report on Form 8-K filed on March 14, 2005.(9)
    
    Incorporated by reference to our Current Report on Form 8-K filed on August 9, 2005.(10)
    
    Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.(11)
    
    Incorporated by reference to our Registration Statement on Form S-3 (Registration No. 333-125479)
which became effective under the Securities act of 1933, as amended, on June 28, 2005.(12)
    
    Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2005.*
    
    Filed herewith.
    
    Denotes a management contract or compensatory plan. 58