##### 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 June 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
    
    
    46ITEM 4. CONTROLS AND PROCEDURES
    
    
    51PART IIITEM 1. LEGAL PROCEEDINGS
    
    
    52ITEM 1A. RISK FACTORS
    
    
    52ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    53ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    53ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    53ITEM 5. OTHER INFORMATION
    
    
    53ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    54SIGNATURES
    
    
    55EXHIBIT INDEX
    
    
    56EXHIBIT 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;
    
    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;
    
    potential conflicts of interest arising out of our relationship with our manager, on the one hand, and our
managers relationships with other third parties, on the other hand;
    
    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;
    
    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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INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
 Condensed Consolidated Balance Sheets (unaudited) at June 30, 2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended
June 30, 2006 and June 30, 2005
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the six months ended
June 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2006 and June 30, 2005
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6
 1




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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)
    
    2006
    
    
    2005Assets:Cash and cash equivalents
    
    $
    6,763
    
    
    $
    11,466Restricted cash
    
    
    47
    
    
    
    794Mortgage-backed securities available-for-sale, at fair value
    
    
    80,321
    
    
    
    219,148Mortgage-backed securities available-for-sale, pledged as collateral, at fair value
    
    
    1,886,274
    
    
    
    4,140,455Loans held-for-investment, net of allowance for loan losses of $1,525 at June 30, 2006
    
    
    3,545,196
    
    
    
    507,177Interest receivable
    
    
    23,955
    
    
    
    21,543Principal receivable
    
    
    1,697
    
    
    
    13,645Derivatives, at fair value
    
    
    18,440
    
    
    
    10,720Other assets
    
    
    16,512
    
    
    
    8,523Total assets
    
    $
    5,579,205
    
    
    $
    4,933,471Liabilities:Repurchase agreements
    
    $
    2,308,232
    
    
    $
    3,928,505Mortgage-backed notes
    
    
    2,709,646
    
    
    
    486,302Warehouse lending facilities
    
    
    874
    
    
    
    Unsettled security purchases
    
    
    53,181
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Margin debt
    
    
    
    
    
    
    3,548Cash distributions payable
    
    
    7,823
    
    
    
    1,218Accrued interest expense
    
    
    9,596
    
    
    
    21,123Management compensation payable, incentive compensation payable and other related
party liabilities
    
    
    1,870
    
    
    
    1,282Accounts payable and accrued expenses
    
    
    2,694
    
    
    
    2,384Total liabilities
    
    
    5,186,704
    
    
    
    4,537,150Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at June 30, 2006
and December 31, 2005
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 39,065,245 and 40,587,245 shares issued and
outstanding at June 30, 2006 and December 31, 2005, respectively
    
    
    39
    
    
    
    41Additional paid-in capital
    
    
    498,084
    
    
    
    511,941Accumulated other comprehensive income (loss)
    
    
    (8,431
    )
    
    
    7,076Accumulated distributions in excess of accumulated earnings
    
    
    (97,191
    )
    
    
    (122,737
    )Total stockholders equity
    
    
    392,501
    
    
    
    396,321Total liabilities and stockholders equity
    
    $
    5,579,205
    
    
    $
    4,933,471
  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)
    
    2006
    
    2005
    
    
    2006
    
    2005Net interest income:Interest income:Spread portfolio
    
    $
    19,845
    
    $
    42,002
    
    
    $
    50,810
    
    $
    84,315Mortgage loan and securitization portfolio
    
    
    45,398
    
    
    
    
    
    
    68,009
    
    
    Credit sensitive bond portfolio
    
    
    9,667
    
    
    461
    
    
    
    17,683
    
    
    663Total interest income
    
    
    74,910
    
    
    42,463
    
    
    
    136,502
    
    
    84,978Interest expense
    
    
    53,513
    
    
    32,098
    
    
    
    99,484
    
    
    52,637Net interest income
    
    
    21,397
    
    
    10,365
    
    
    
    37,018
    
    
    32,341Other income (expenses):Other income (expense)
    
    
    7,052
    
    
    (899
    )
    
    
    15,168
    
    
    (899
    )Impairment losses on mortgage-backed securities
    
    
    (462
    )
    
    
    
    
    
    (2,179
    )
    
    Gains (losses) on sales of mortgage-backed securities
    
    
    (1,240
    )
    
    
    
    
    
    823
    
    
    Total other income (expenses)
    
    
    5,350
    
    
    (899
    )
    
    
    13,812
    
    
    (899
    )Expenses:Management compensation expense to related party
    
    
    712
    
    
    1,082
    
    
    
    1,425
    
    
    2,180Incentive compensation expense to related parties
    
    
    142
    
    
    403
    
    
    
    240
    
    
    873Salaries and benefits
    
    
    2,018
    
    
    648
    
    
    
    4,441
    
    
    856Servicing expense
    
    
    2,538
    
    
    
    
    
    
    4,020
    
    
    Provision for loan losses
    
    
    1,525
    
    
    
    
    
    
    1,525
    
    
    Professional services
    
    
    471
    
    
    514
    
    
    
    1,093
    
    
    1,076Board of directors expense
    
    
    95
    
    
    116
    
    
    
    208
    
    
    235Insurance expense
    
    
    146
    
    
    137
    
    
    
    287
    
    
    275Custody expense
    
    
    75
    
    
    143
    
    
    
    187
    
    
    194Other general and administrative expenses
    
    
    820
    
    
    249
    
    
    
    1,409
    
    
    610Total expenses
    
    
    8,542
    
    
    3,292
    
    
    
    14,835
    
    
    6,299Income before income taxes
    
    
    18,205
    
    
    6,174
    
    
    
    35,995
    
    
    25,143Income taxes
    
    
    641
    
    
    
    
    
    
    652
    
    
    Net income
    
    $
    17,564
    
    $
    6,174
    
    
    $
    35,343
    
    $
    25,143Net income
per share  basic
    
    $
    0.45
    
    $
    0.16
    
    
    $
    0.90
    
    $
    0.67Net income
per share  diluted
    
    $
    0.45
    
    $
    0.16
    
    
    $
    0.90
    
    $
    0.67Weighted-average number of shares outstanding  basic
    
    
    38,609,963
    
    
    38,176,274
    
    
    
    39,060,284
    
    
    37,694,382Weighted-average number of shares outstanding  diluted
    
    
    38,834,435
    
    
    38,351,238
    
    
    
    39,337,203
    
    
    37,780,366Dividend per share
    
    $
    0.20
    
    $
    0.27
    
    
    $
    0.25
    
    $
    0.63
  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, 2006
    
    
    40,587
    
    
    $
    41
    
    
    $
    511,941
    
    
    $
    7,076
    
    
    $
    (122,737
    )
    
    
    
    
    
    $
    396,321Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,343
    
    
    $
    35,343
    
    
    
    35,343Mortgage-backed securities
available-for-sale, fair
value
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,969
    )
    
    
    
    
    
    
    (8,969
    )
    
    
    (8,969
    )Amortization of derivative
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,538
    )
    
    
    
    
    
    
    (6,538
    )
    
    
    (6,538
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,836Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,797
    )
    
    
    
    
    
    
    (9,797
    )Issuance and amortization of
restricted common stock
    
    
    355
    
    
    
    
    
    
    
    1,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,676Repurchase of common stock
    
    
    (1,877
    )
    
    
    (2
    )
    
    
    (15,533
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,535
    )Balance, June 30, 2006
    
    
    39,065
    
    
    $
    39
    
    
    $
    498,084
    
    
    $
    (8,431
    )
    
    $
    (97,191
    )
    
    
    
    
    
    $
    392,501
  4




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six months ended June 30,(in thousands)
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    35,343
    
    
    $
    25,143Adjustments to reconcile net income to net cash provided by (used in) operating activities:Amortization of premium/(discount)
    
    
    (1,416
    )
    
    
    12,801Impairment losses on mortgage-backed securities
    
    
    2,179
    
    
    
    Provision for loan losses
    
    
    1,525
    
    
    
    Negative amortization of loans held for investment
    
    
    (16,969
    )
    
    
    Share-based compensation
    
    
    1,676
    
    
    
    2Realized and unrealized (gains)/losses on derivative instruments
    
    
    (14,759
    )
    
    
    122Net gain on sales of mortgage-backed-securities available-for-sale
    
    
    (823
    )
    
    
    Changes in operating assets and liabilities:Increase in interest receivable, net of purchased interest
    
    
    1,130
    
    
    
    1,818Increase in other assets
    
    
    (15,305
    )
    
    
    (4,001
    )Increase in accounts payable and accrued expenses
    
    
    310
    
    
    
    185Decrease in accrued interest expense
    
    
    (11,527
    )
    
    
    (1,178
    )Increase in management compensation payable, incentive compensation payable and other
related-party payable
    
    
    588
    
    
    
    541Net cash provided by (used in) operating activities
    
    
    (18,048
    )
    
    
    35,433Cash flows from investing activities:Purchases of mortgage-backed securities available-for-sale
    
    
    (1,449,385
    )
    
    
    (551,394
    )Proceeds from sales of mortgage-backed securities available-for-sale
    
    
    3,619,558
    
    
    
    Principal payments of mortgage-backed securities available-for-sale
    
    
    289,359
    
    
    
    728,361Purchases of loans held-for-investment, net
    
    
    (3,143,481
    )
    
    
    Principal payments of loans held-for-investment
    
    
    106,707
    
    
    
    Purchases of derivative instruments
    
    
    (1,555
    )
    
    
    (1,874
    )Proceeds from sales of derivative instruments
    
    
    2,326
    
    
    
    Net change in restricted cash
    
    
    747
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (575,724
    )
    
    
    175,093Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    
    
    
    
    30,030Repurchases of common stock
    
    
    (15,534
    )
    
    
    Borrowings under repurchase agreements
    
    
    19,794,029
    
    
    
    8,333,222Principal payments on repurchase agreements
    
    
    (21,414,302
    )
    
    
    (8,578,653
    )Borrowings under warehouse lending facilities
    
    
    2,468,843
    
    
    
    Paydown of warehouse lending facilities
    
    
    (2,467,969
    )
    
    
    Distributions to stockholders
    
    
    (3,202
    )
    
    
    (29,729
    )Borrowing under junior subordinated notes
    
    
    
    
    
    
    49,964Proceeds from issuance of mortgage-backed notes
    
    
    2,324,948
    
    
    
    Principal payments on mortgage-backed notes
    
    
    (94,196
    )
    
    
    Principal payments on margin debt
    
    
    (3,548
    )
    
    
    Net realized gains on Eurodollar futures contracts
    
    
    
    
    
    
    (2,209
    )Net cash provided by (used in) financing activities
    
    
    589,069
    
    
    
    (197,375
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,703
    )
    
    
    13,151Cash and cash equivalents, beginning of the period
    
    
    11,466
    
    
    
    10,581Cash and cash equivalents, end of the period
    
    $
    6,763
    
    
    $
    23,732Supplemental disclosure of cash flow information:Interest paid
    
    $
    113,741
    
    
    $
    59,986Income taxes paid
    
    
    486
    
    
    
    Non-cash investing and financing activities:Increase in unsettled security purchases
    
    $
    53,181
    
    
    $
    471,128(Increase) decrease in principal receivable
    
    
    11,948
    
    
    
    (5,509
    )Incentive compensation payable settled through issuance of restricted common stock
    
    
    
    
    
    
    2,178Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    
    
    
    
    55Deferred compensation reclassified to stockholders equity upon issuance of restricted common stock
    
    
    
    
    
    
    (1,036
    )Increase (decrease) in dividend payable to shareholders
    
    
    6,605
    
    
    
    (5,118
    )
 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
 Premiums and Discounts on Mortgage-backed Notes Issued
  6




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 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




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 NOTE 2MORTGAGE-BACKED SECURITIES
  June 30,
    
    
    December 31,2006
    
    
    2005Amortized cost
    
    $
    1,979,884
    
    
    $
    4,363,923Unrealized gains
    
    
    3,612
    
    
    
    8,357Unrealized losses
    
    
    (16,901
    )
    
    
    (12,677
    )Fair value
    
    $
    1,966,595
    
    
    $
    4,359,603
    Weighted-Amortized
    
    
    AverageWeighted-Average Life
    
    Fair Value
    
    
    Cost
    
    
    CouponLess than one year
    
    $
    148,771
    
    
    $
    149,581
    
    
    
    4.26
    %Greater than one year and less than five years
    
    
    1,673,774
    
    
    
    1,677,413
    
    
    
    5.65Greater than five years
    
    
    144,050
    
    
    
    152,890
    
    
    
    6.26Total
    
    $
    1,966,595
    
    
    $
    1,979,884
    
    
    
    5.60
    %
 8




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##### 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
    
    $
    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
    %
     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
    
    $
    128,522
    
    
    $
    (1,291
    )
    
    $
    92,046
    
    
    $
    (663
    )
    
    $
    220,568
    
    
    $
    (1,954
    )Non-agency-backed
mortgage-backed securities
    
    
    580,703
    
    
    
    (14,947
    )
    
    
    
    
    
    
    
    
    
    
    580,703
    
    
    
    (14,947
    )Total temporarily impaired
mortgage-backed securities
    
    $
    709,225
    
    
    $
    (16,238
    )
    
    $
    92,046
    
    
    $
    (663
    )
    
    $
    801,271
    
    
    $
    (16,901
    )
 9




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##### 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
    
    
    
    
    
    
    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




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  NOTE 3LOANS HELD-FOR-INVESTMENT
  June 30, 2006Principal
    
    $
    3,479,846Unamortized premium
    
    
    66,875Amortized cost
    
    
    3,546,721Allowance for loan losses
    
    
    (1,525
    )Total residential loans, net of allowance for loan losses
    
    $
    3,545,196
  December 31,2005Principal
    
    $
    506,498Unamortized premium
    
    
    679Amortized cost
    
    
    507,177Allowance for loan losses
    
    
    Total residential loans, net of allowance for loan losses
    
    $
    507,177
  11




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  June 30, 2006Balance, beginning of period
    
    $
    Provision for loan losses
    
    
    1,525Charge-offs, net of recoveries
    
    
    Balance, end of period
    
    $
    1,525
  NOTE 4BORROWINGS
   Weighted-AverageOutstanding
    
    
    Interest
    
    
    Fair Value ofBorrowings
    
    
    Rate
    
    
    Collateral (1)Repurchase agreements
    
    $
    2,308,232
    
    
    
    5.10
    %
    
    $
    2,492,409LUM 2005-1
    
    
    425,092
    
    
    
    5.60
    
    
    
    425,657LUM 2006-1
    
    
    532,168
    
    
    
    5.61
    
    
    
    533,017LUM 2006-2
    
    
    733,706
    
    
    
    5.55
    
    
    
    733,954LUM 2006-3
    
    
    644,060
    
    
    
    5.69
    
    
    
    646,685LUM 2006-4
    
    
    371,127
    
    
    
    5.52
    
    
    
    371,226Junior subordinated notes
    
    
    92,788
    
    
    
    8.57
    
    
    noneWarehouse lending facilities
    
    
    874
    
    
    
    5.99
    
    
    
    874Total
    
    $
    5,108,047
    
    
    
    5.43
    %
    
    $
    5,203,822
 
 (1)
    
    Collateral for borrowings consist of mortgage-backed securities available-for-sale and
loans held-for-investment. 12




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Weighted-AverageOutstanding
    
    
    Interest
    
    
    Fair Value ofBorrowings
    
    
    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
    
    
    1,065,324Between 31 and 90 days
    
    
    1,242,90891 days or more
    
    
    Total
    
    $
    2,308,232
  Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    1,902,729Between 31 and 90 days
    
    
    929,023Between 91 and 237 days
    
    
    1,082,268Total
    
    $
    3,914,020
 13




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##### 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
    
    $
    581
    
    
    
    10Barclays Capital, Inc.
    
    
    4,691
    
    
    
    22Bear Stearns & Co.
    
    
    64,419
    
    
    
    30Cantor Fitzgerald
    
    
    4,904
    
    
    
    26Citigroup
    
    
    2,967
    
    
    
    11Countrywide
    
    
    23,153
    
    
    
    24Credit Suisse First Boston
    
    
    2,494
    
    
    
    19Deutsche Bank Securities Inc.
    
    
    4,609
    
    
    
    3Greenwich Capital Markets
    
    
    9,818
    
    
    
    14HSBC Securities Inc.
    
    
    1,276
    
    
    
    25Merrill Lynch Government Securities Inc./Merrill Lynch
Pierce, Fenner & Smith, Inc.
    
    
    3,436
    
    
    
    5UBS Paine Webber
    
    
    18,530
    
    
    
    47Washington Mutual
    
    
    40,888
    
    
    
    24Total
    
    $
    181,766
    
    
    
    28
 
 (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




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Mortgage-backed Notes
   Warehouse Lending Facilities
    15




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Junior Subordinated Notes
  June 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
    
    
    
    9.08
    
    
    
    41,238
    
    
    
    8.21Total
    
    $
    92,788
    
    
    
    8.57
    %
    
    $
    92,788
    
    
    
    8.18
    %
   Margin Lending Facility
  NOTE 5CAPITAL STOCK AND EARNINGS PER SHARE
  16




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
    For the Three Months
    
    
    For the Six MonthsEnded June 30, 2006
    
    
    Ended June 30, 2006Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    17,564
    
    
    $
    17,564
    
    
    $
    35,343
    
    
    $
    35,343Weighted-average number
of common shares
outstanding
    
    
    38,609,963
    
    
    
    38,609,963
    
    
    
    39,060,284
    
    
    
    39,060,284Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    224,472
    
    
    
    
    
    
    
    276,919Adjusted
weighted-average number
of common shares
outstanding
    
    
    38,609,963
    
    
    
    38,834,435
    
    
    
    39,060,284
    
    
    
    39,337,203Net income per share
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    0.90
    
    
    $
    0.90
  For the Three Months
    
    
    For the Six MonthsEnded June 30, 2005
    
    
    Ended June 30, 2005Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    6,174
    
    
    $
    6,174
    
    
    $
    25,143
    
    
    $
    25,143Weighted-average number
of common shares
outstanding
    
    
    38,176,274
    
    
    
    38,176,274
    
    
    
    37,694,382
    
    
    
    37,694,382Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    174,964
    
    
    
    
    
    
    
    85,894Adjusted
weighted-average number
of common shares
outstanding
    
    
    38,176,274
    
    
    
    38,351,238
    
    
    
    37,694,382
    
    
    
    37,780,366Net income per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.67
    
    
    $
    0.67
 17




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 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
  2006Weighted-Number
    
    Averageof
    
    ExerciseOptions
    
    PriceOutstanding, beginning of period
    
    
    55,000
    
    
    $
    14.82Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, end of period
    
    
    55,000
    
    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-Average
    
    
    
    
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Remaining
    
    Weighted-
    
    
    
    
    
    Average
    
    Weighted-Exercise
    
    Number of
    
    Life
    
    Average
    
    Number of
    
    Remaining Life
    
    AveragePrices
    
    Options
    
    (in years)
    
    Exercise Price
    
    Options
    
    (in years)
    
    Exercise Price$13.00$14.00
    
    
    5,000
    
    
    
    7.3
    
    
    $
    13.00
    
    
    
    3,334
    
    
    
    7.3
    
    
    $
    13.00$14.01$15.00
    
    
    50,000
    
    
    
    7.1
    
    
    
    15.00
    
    
    
    33,333
    
    
    
    7.1
    
    
    
    15.00$13.00$15.00
    
    
    55,000
    
    
    
    
    
    
    $
    14.82
    
    
    
    36,667
    
    
    
    
    
    
    $
    14.82
 18




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   Weighted-AverageNumber of
    
    Grant-DateOptions
    
    Fair ValueNonvested, beginning of the period
    
    
    18,333
    
    
    $
    0.22Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    18,333
    
    
    $
    0.22
  Number of
    
    Weighted-Common
    
    Average IssueShares
    
    PriceOutstanding, beginning of period
    
    
    202,829
    
    
    $
    10.53Issued
    
    
    355,000
    
    
    
    7.95Repurchased
    
    
    
    
    
    
    Outstanding, end of period
    
    
    557,829
    
    
    $
    8.89
   Weighted-Number of
    
    AverageCommon
    
    Grant-DateShares
    
    Fair ValueNonvested, beginning of the period
    
    
    194,453
    
    
    $
    10.46Granted
    
    
    355,000
    
    
    
    7.95Vested
    
    
    (134,887
    )
    
    
    8.71Repurchased
    
    
    
    
    
    
    Nonvested, end of the period
    
    
    414,566
    
    
    $
    8.88
  19




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  NOTE 7THE MANAGEMENT AGREEMENT
  
    
    base management compensation equal to a percentage of the Companys applicable average net
worth, as defined in the Amended Agreement, payable quarterly in arrears, calculated at the
following rates per annum: (1) 0.90% of the first $750 million; plus (2) 0.70% of the next $750
million plus (3) 0.50% of the amount in excess of $1.5 billion;
    
    incentive management compensation equal to a percentage of applicable average net worth, as
defined in the Amended Agreement, payable annually, calculated at the following rates per annum:
(1) 0.35% for the first $750 million of applicable average net worth; (2) 0.20% for the next $750
million of applicable average net worth and (3) 0.15% for the applicable average net worth in
excess of $1.5 billion if the return on assets, as defined in the Amended Agreement, for any such
fiscal year exceeds the threshold return, which is defined as the average of the weekly values for
any period of the sum of (i) the 10-year U.S. Treasury rate for such period plus (ii) two percent
(2%); and
    
    out-of-pocket expenses and certain other costs incurred by the Manager and related directly
to the Company.
      20




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##### 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)
  June 30,
    
    
    December 31,2006
    
    
    2005Unrealized
holding losses on mortgage-backed securities available-for-sale
    
    $
    (14,645
    )
    
    $
    (116,397
    )Reclassification adjustment for net losses on mortgage-backed
securities available-for-sale included in net income
    
    
    (823
    )
    
    
    69Impairment losses on mortgage-backed securities
    
    
    2,179
    
    
    
    112,008Net unrealized losses on mortgage-backed securities available-for-sale
    
    
    (13,289
    )
    
    
    (4,320
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    4,858
    
    
    
    11,396Accumulated other comprehensive income (loss)
    
    $
    (8,431
    )
    
    $
    7,076
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  21




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  EstimatedFair ValueFree Standing Derivatives:Interest rate swap contracts
    
    $
    16,985Interest rate cap contracts
    
    
    1,326Interest rate corridor contracts
    
    
    129Total
    
    $
    18,440
  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




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   Purchase Commitment Derivatives
  NOTE 11SUBSEQUENT EVENTS
   23




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##### 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




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##### 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
      Loans Held-for-Investment
 26
    Table of Contents   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




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##### Table of Contents



Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Results of Operations
    29




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    6.55
    %
    
    
    3.65
    %
    
    
    6.01
    %
    
    
    3.65
    %Weighted-average cost of total liabilities
    
    
    4.83
    
    
    
    2.96
    
    
    
    4.67
    
    
    
    2.44Net interest spread
    
    
    1.72
    %
    
    
    0.69
    %
    
    
    1.34
    %
    
    
    1.21
    %
    Three Months
    
    
    Percentage
    
    
    Six Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageJune 30,
    
    
    Financing
    
    
    June 30,
    
    
    Financing2006
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on repurchase agreement liabilities
    
    $
    22,488
    
    
    
    2.03
    %
    
    $
    50,503
    
    
    
    2.37
    %Interest expense on mortgage-backed notes
    
    
    31,974
    
    
    
    2.90
    
    
    
    45,748
    
    
    
    2.15Interest expense on warehouse lending facilities
    
    
    2,269
    
    
    
    0.20
    
    
    
    5,470
    
    
    
    0.26Interest expense on junior subordinated notes
    
    
    1,927
    
    
    
    0.17
    
    
    
    3,818
    
    
    
    0.18Amortization of net realized gains on futures and interest
rate swap contracts
    
    
    (4,729
    )
    
    
    (0.43
    )
    
    
    (6,344
    )
    
    
    (0.30
    )Net interest (income) expense on interest rate swap
contracts
    
    
    (416
    )
    
    
    (0.04
    )
    
    
    289
    
    
    
    0.01Total interest expense
    
    $
    53,513
    
    
    
    4.83
    %
    
    $
    99,484
    
    
    
    4.67
    %
  Three Months
    
    
    Percentage
    
    
    Six Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageJune 30,
    
    
    Financing
    
    
    June 30,
    
    
    Financing2005
    
    
    Liabilities
    
    
    2005
    
    
    LiabilitiesInterest expense on repurchase agreement liabilities
    
    $
    30,789
    
    
    
    2.84
    %
    
    $
    57,287
    
    
    
    2.66
    %Net hedge ineffectiveness gains on futures and
interest rate swap contracts
    
    
    120
    
    
    
    0.01
    
    
    
    (472
    )
    
    
    (0.02
    )Amortization of net realized (gains) losses on
futures and interest rate swap contracts
    
    
    2,534
    
    
    
    0.23
    
    
    
    (2,194
    )
    
    
    (0.10
    )Net interest (income) expense on interest rate swap
contracts
    
    
    (2,380
    )
    
    
    (0.22
    )
    
    
    (3,199
    )
    
    
    (0.15
    )Interest expense on junior subordinated notes
    
    
    1,027
    
    
    
    .10
    
    
    
    1,205
    
    
    
    0.05Other
    
    
    8
    
    
    nm
    
    
    
    10
    
    
    nmTotal interest expense
    
    $
    32,098
    
    
    
    2.96
    %
    
    $
    52,637
    
    
    
    2.44
    %
 
 nm
    
    = not meaningful 30




---



##### Table of Contents



31




---



##### Table of Contents



REIT taxable net income
   32




---



##### Table of Contents



For the Six Months Ended June 30, 2006
    
    
    For the Six Months Ended June 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
    
    $
    50,810
    
    
    $
    (7,225
    )
    
    $
    43,585
    
    
    $
    84,315
    
    
    $
    
    
    
    $
    84,315Mortgage loan and
securitization portfolio
    
    
    68,009
    
    
    
    (41,147
    )
    
    
    26,862
    
    
    
    
    
    
    
    
    
    
    
    Credit sensitive bond portfolio
    
    
    17,683
    
    
    
    (52
    )
    
    
    17,631
    
    
    
    663
    
    
    
    
    
    
    
    663Total interest income
    
    
    136,502
    
    
    
    (48,424
    )
    
    
    88,078
    
    
    
    84,978
    
    
    
    
    
    
    
    84,978Interest expense
    
    
    99,484
    
    
    
    (40,789
    )
    
    
    58,695
    
    
    
    52,637
    
    
    
    2,986
    
    
    
    55,623Net interest income
    
    
    37,018
    
    
    
    (7,635
    )
    
    
    29,383
    
    
    
    32,341
    
    
    
    (2,986
    )
    
    
    29,355Other Income (expense):Other income (expense)
    
    
    15,168
    
    
    
    (15,371
    )
    
    
    (203
    )
    
    
    (899
    )
    
    
    899
    
    
    
    Impairment losses on
mortgage-backed securities
    
    
    (2,179
    )
    
    
    2,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gains on sales of mortgage-backed
securities
    
    
    823
    
    
    
    (823
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total other income (expense)
    
    
    13,812
    
    
    
    (14,015
    )
    
    
    (203
    )
    
    
    (899
    )
    
    
    899
    
    
    
    Expenses:Management compensation expense
to related party
    
    
    1,425
    
    
    
    (181
    )
    
    
    1,244
    
    
    
    2,180
    
    
    
    
    
    
    
    2,180Incentive compensation expense to
related parties
    
    
    240
    
    
    
    219
    
    
    
    459
    
    
    
    873
    
    
    
    (573
    )
    
    
    300Salaries and benefits
    
    
    4,441
    
    
    
    (463
    )
    
    
    3,978
    
    
    
    856
    
    
    
    (138
    )
    
    
    718Servicing expense
    
    
    4,020
    
    
    
    (3,105
    )
    
    
    915
    
    
    
    
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    1,525
    
    
    
    (1,525
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Professional services
    
    
    1,093
    
    
    
    (127
    )
    
    
    966
    
    
    
    1,076
    
    
    
    
    
    
    
    1,076Board of directors expense
    
    
    208
    
    
    
    
    
    
    
    208
    
    
    
    235
    
    
    
    
    
    
    
    235Insurance expense
    
    
    287
    
    
    
    
    
    
    
    287
    
    
    
    275
    
    
    
    
    
    
    
    275Custody expense
    
    
    187
    
    
    
    (9
    )
    
    
    178
    
    
    
    194
    
    
    
    
    
    
    
    194Other general and administrative
expenses
    
    
    1,409
    
    
    
    (130
    )
    
    
    1,279
    
    
    
    610
    
    
    
    329
    
    
    
    939Total expenses
    
    
    14,835
    
    
    
    (5,321
    )
    
    
    9,514
    
    
    
    6,299
    
    
    
    (382
    )
    
    
    5,917Income before taxes
    
    $
    35,995
    
    
    $
    (16,329
    )
    
    $
    19,666
    
    
    $
    25,143
    
    
    $
    (1,705
    )
    
    $
    23,438Income taxes
    
    
    652
    
    
    
    (561
    )
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    35,343
    
    
    $
    (15,768
    )
    
    $
    19,575
    
    
    $
    25,143
    
    
    $
    (1,705
    )
    
    $
    23,438Net income per share  basic
    
    $
    0.90
    
    
    
    
    
    
    
    
    
    
    $
    0.67Net income per share  diluted
    
    $
    0.90
    
    
    
    
    
    
    
    
    
    
    $
    0.67Weighted-average number of shares
outstanding  basic
    
    
    39,060,284
    
    
    
    
    
    
    
    
    
    
    
    37,694,382Weighted-average number of shares
outstanding  diluted
    
    
    39,337,203
    
    
    
    
    
    
    
    
    
    
    
    37,780,366REIT taxable net income per share
    
    
    
    
    
    
    
    
    
    $
    0.50
    
    
    
    
    
    
    
    
    
    
    $
    0.58Actual shares outstanding on
dividend record date
    
    
    
    
    
    
    
    
    
    
    39,065,245
    
    
    
    
    
    
    
    
    
    
    
    40,151,117
 33




---



##### Table of Contents



Six Months
    
    
    Six MonthsEnded June
    
    
    Ended June30,2006
    
    
    30, 2005Undistributed REIT taxable net income, beginning of period
    
    $
    3,154
    
    
    $
    1,791REIT taxable net income earned during period
    
    
    19,575
    
    
    
    23,438Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    (9,642
    )
    
    
    (24,298
    )Adjustments related to finalizing prior year tax return
    
    
    724
    
    
    
    Undistributed REIT taxable net income, end of period
    
    $
    13,811
    
    
    $
    931Cash distributions per share declared during period
    
    $
    0.25
    
    
    $
    0.63Percentage of REIT taxable net income distributed
    
    
    49.3
    %
    
    
    103.7
    %
  Financial Condition
 Mortgage Assets
 Mortgage-backed securities
  34




---



##### Table of Contents



June 30, 2006
    
    
    December 31, 2005Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalMortgage-
    
    
    
    
    
    
    Mortgage-Market
    
    
    backed
    
    
    Market
    
    
    backedValue
    
    
    securities
    
    
    Value
    
    
    securities(dollars in thousands)Residential Mortgage Credit PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    125,398
    
    
    
    6.4
    %
    
    $
    30,623
    
    
    
    0.7
    %A/A rating
    
    
    208,830
    
    
    
    10.6
    
    
    
    64,957
    
    
    
    1.5BBB/Baa rating
    
    
    41,975
    
    
    
    2.1
    
    
    
    28,546
    
    
    
    0.6Total Investment-grade MBS
    
    
    376,203
    
    
    
    19.1
    
    
    
    124,126
    
    
    
    2.8Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    
    ANon-investment-grade MBS:BB/Ba rating
    
    
    116,520
    
    
    
    5.9
    
    
    
    121,128
    
    
    
    2.8Not rated
    
    
    12,984
    
    
    
    0.7
    
    
    
    20,818
    
    
    
    0.5Total non-investment-grade MBS
    
    
    129,504
    
    
    
    6.6
    
    
    
    141,946
    
    
    
    3.3
    %Weighted-average credit rating
    
    
    BB
    
    
    
    
    
    
    BB+Total Residential Mortgage Credit portfolio
    
    
    505,707
    
    
    
    25.7
    
    
    
    266,072
    
    
    
    6.1Weighted-average credit rating
    
    
    A-
    
    
    
    
    
    
    
    BBBSpread PortfolioAgency MBS
    
    
    282,931
    
    
    
    14.4
    
    
    
    1,203,255
    
    
    
    27.6AAA/Aaa rating
    
    
    1,177,957
    
    
    
    59.9
    
    
    
    2,890,276
    
    
    
    66.3Total Spread portfolio
    
    
    1,460,888
    
    
    
    74.3
    
    
    
    4,093,531
    
    
    
    93.9Weighted-average credit rating
    
    
    AAA
    
    
    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    1,966,595
    
    
    
    100.0
    %
    
    $
    4,359,603
    
    
    
    100.0
    %Weighted-average credit rating
    
    
    AA
    
    
    
    
    
    
    AA+
 Loans held-for-investment
  35




---



##### Table of Contents



Weighted-AverageMonths toReset ofLoans After
    
    
    
    
    
    
    Principal
    
    
    LoansWeighted-
    
    
    
    
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Delinquent >Average
    
    
    Weighted-
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Loans
    
    
    90 days as aInterest
    
    
    Average
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Rate
    
    
    Maturity Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    > 90 days
    
    
    Total PrincipalFloating rate mortgage
    
    
    7.25
    %
    
    
    2036
    
    
    
    1
    
    
    
    1
    
    
    $
    2,727,889
    
    
    $
    2,308
    
    
    
    0.07
    %3-Year hybrid mortgage
    
    
    6.29
    %
    
    
    2036
    
    
    
    31
    
    
    
    22
    
    
    
    81,114
    
    
    
    
    
    
    
    5-Year hybrid mortgage
    
    
    6.26
    %
    
    
    2035
    
    
    
    53
    
    
    
    23
    
    
    
    670,843
    
    
    
    4,456
    
    
    
    0.12
    %Total
    
    
    7.03
    %
    
    
    2036
    
    
    
    12
    
    
    
    6
    
    
    $
    3,479,846
    
    
    $
    6,764
    
    
    
    0.19
    %
 
 (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 $295.3 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 six months at June 30, 2006.  Weighted-AverageMonths toReset ofLoans AfterEffect of
    
    
    
    
    
    
    PrincipalWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Cost of
    
    
    
    
    
    
    Amount of LoansAverage
    
    
    Average
    
    
    Average
    
    
    Funds
    
    
    Principal
    
    
    DelinquentDescription
    
    Interest Rate
    
    
    Maturity Date
    
    
    Months to 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. 36




---



##### Table of Contents



Unpaid principal balance
    
    $
    3,479,846Number of loans
    
    
    8,824Average loan balance
    
    $
    394Weighted-average coupon rate
    
    
    7.03
    %Weighted-average lifetime cap
    
    
    10.57
    %Weighted-average original term, in months
    
    
    367Weighted-average remaining term, in months
    
    
    361Weighted-average loan-to-value ratio (LTV)
    
    
    76.0
    %Weighted-average FICO score
    
    
    710Top five geographic concentrations (% exposure):California
    
    
    61.1
    %Florida
    
    
    8.3
    %Virginia
    
    
    3.9
    %Nevada
    
    
    3.4
    %Arizona
    
    
    3.7
    %Occupancy status:Owner occupied
    
    
    86.6
    %Investor
    
    
    13.4
    %Property type:Single-family
    
    
    83.4
    %Condominium
    
    
    9.9
    %Other residential
    
    
    6.7
    %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
    %
   37




---



##### Table of Contents



Mortgage-Backed Notes
    38




---



##### Table of Contents



39




---



##### Table of Contents



LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    Total2005-1
    
    2006-1
    
    2006-2
    
    2006-3
    
    2006-4
    
    2006-5
    
    PortfolioLoans, unpaid principal balance
    
    $
    520,568
    
    
    $
    576,122
    
    
    $
    801,474
    
    
    $
    682,536
    
    
    $
    497,220
    
    
    $
    508,789
    
    
    $
    3,586,709Mortgage-backed notes issued
to third parties
    
    
    500,267
    
    
    
    536,657
    
    
    
    746,973
    
    
    
    654,270
    
    
    
    376,148
    
    
    
    
    
    
    
    2,814,315Debt retained
    
    
    20,301
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    28,265
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    772,402Retained
investment grade % (1)
    
    
    3.1
    %
    
    
    3.9
    %
    
    
    3.7
    %
    
    
    2.9
    %
    
    
    21.1
    %
    
    
    97.2
    %
    
    
    19.2
    %Retained
non-investment grade %
(1)
    
    
    0.8
    %
    
    
    3.0
    %
    
    
    3.1
    %
    
    
    1.3
    %
    
    
    3.2
    %
    
    
    2.8
    %
    
    
    2.4
    %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
    %
    
    
    0.24
    %
 
 (1)
    
    Retained tranches as a percentage of total mortgage-backed notes issued.(2)
    
    LUM 2006-3 cost of debt excludes $290.5 million of
AAA-rated 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.  LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    Total2005-1
    
    
    2006-1
    
    
    2006-2
    
    
    2006-3
    
    
    2006-4
    
    
    2006-5
    
    
    PortfolioMortgage-backed
notes issued to
third-party
investorsAAA/Aaa rating
    
    $
    482,307
    
    
    $
    517,069
    
    
    $
    717,320
    
    
    $
    620,743
    
    
    $
    376,148
    
    
    
    
    
    
    $
    2,713,587AA/Aa rating
    
    
    17,960
    
    
    
    19,588
    
    
    
    29,653
    
    
    
    33,527
    
    
    
    
    
    
    
    
    
    
    
    100,728Total
Mortgage-backed
notes issues to
third-party
investors
    
    $
    500,267
    
    
    $
    536,657
    
    
    $
    746,973
    
    
    $
    654,270
    
    
    $
    376,148
    
    
    
    
    
    
    $
    2,814,315Percentage of total
collateral
    
    
    96.1
    %
    
    
    93.1
    %
    
    
    93.2
    %
    
    
    95.9
    %
    
    
    75.7
    %
    
    
    
    
    
    
    78.5
    %Debt retainedAAA/Aaa rating
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    66,378
    
    
    $
    457,910
    
    
    $
    524,288AA/Aa rating
    
    
    6,767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,397
    
    
    
    31,036
    
    
    
    56,200A/A rating
    
    
    4,165
    
    
    
    13,251
    
    
    
    18,434
    
    
    
    9,852
    
    
    
    12,430
    
    
    
    
    
    
    
    58,132BBB/Bbb rating
    
    
    5,206
    
    
    
    8,930
    
    
    
    11,221
    
    
    
    9,649
    
    
    
    7,707
    
    
    
    5,851
    
    
    
    48,564BB/Ba rating
    
    
    1,301
    
    
    
    7,202
    
    
    
    10,419
    
    
    
    1,879
    
    
    
    6,215
    
    
    
    
    
    
    
    27,016B/B rating
    
    
    
    
    
    
    5,761
    
    
    
    8,015
    
    
    
    1,569
    
    
    
    5,469
    
    
    
    3,816
    
    
    
    24,630Not rated
    
    
    
    
    
    
    4,321
    
    
    
    6,412
    
    
    
    1,257
    
    
    
    4,476
    
    
    
    10,176
    
    
    
    26,642Total mortgage-backed notes
retained
    
    
    17,439
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    24,206
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    765,472Overcollateralization
    
    
    2,862
    
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    6,921Total debt retained
    
    $
    20,301
    
    
    $
    39,465
    
    
    $
    54,501
    
    
    $
    28,265
    
    
    $
    121,072
    
    
    $
    508,789
    
    
    $
    772,393Percentage of total
collateral
    
    
    3.9
    %
    
    
    6.9
    %
    
    
    6.8
    %
    
    
    4.1
    %
    
    
    24.3
    %
    
    
    100.0
    %
    
    
    21.5
    %
 40




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##### Table of Contents



Asset Repricing Characteristics
  June 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    2,727,488
    
    
    
    49.5
    %
    
    $
    
    
    
    
    
    %Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    752,358
    
    
    
    13.6
    
    
    
    506,498
    
    
    
    10.4Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unamortized premium
    
    
    66,875
    
    
    
    1.2
    
    
    
    679
    
    
    nmAllowance for loan losses
    
    
    (1,525
    )
    
    nm
    
    
    
    
    
    
    
    Sub-total
    
    
    3,545,196
    
    
    
    64.3
    
    
    
    507,177
    
    
    
    10.4ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    505,707
    
    
    
    9.2
    
    
    
    266,072
    
    
    
    5.5Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    505,707
    
    
    
    9.2
    
    
    
    266,072
    
    
    
    5.5Spread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    1,242,255
    
    
    
    22.5
    
    
    
    8,610
    
    
    
    0.2Reset >1 month but < 12 months
    
    
    47,387
    
    
    
    0.9
    
    
    
    476,828
    
    
    
    9.8Reset >12 months but < 60 months
    
    
    100,214
    
    
    
    1.8
    
    
    
    2,756,195
    
    
    
    56.6Reset > 60 months
    
    
    71,032
    
    
    
    1.3
    
    
    
    851,898
    
    
    
    17.5Sub-total
    
    
    1,460,888
    
    
    
    26.5
    
    
    
    4,093,531
    
    
    
    84.1Total Mortgage Assets
    
    $
    5,511,791
    
    
    
    100.0
    %
    
    $
    4,866,780
    
    
    
    100.0
    %
      41




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##### Table of Contents



LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    96
    %
    
    
    4
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    23
    
    
    
    
    
    
    
    77
    
    
    
    
  LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    65
    %
    
    
    35
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
  Liquidity and Capital Resources
    42




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##### Table of Contents



LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM2006-1
    
    2006-2
    
    2006-3
    
    2006-4
    
    2006-5Date of issuance
    
    January 26, 2006
    February 23, 2006
    April 28, 2006
    
    May 28, 2006
    
    June 29, 2006Loans, unpaid
principal balance
    
    $
    576,122
    
    
    $
    801,474
    
    
    $
    682,536
    
    
    $
    497,220
    
    
    $
    508,789Mortgage-backed
notes issued
    
    
    536,657
    
    
    
    746,973
    
    
    
    654,270
    
    
    
    376,148
    
    
    
    Debt retained
    
    
    39,465
    
    
    
    54,501
    
    
    
    28,265
    
    
    
    121,072
    
    
    
    508,798
        43




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##### Table of Contents



Inflation
  44




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodMoreLess than
    
    
    1  3
    
    
    3  5
    
    
    than 5(in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsRepurchase agreements
    
    $
    2,308.2
    
    
    $
    2,308.2
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage-backed notes (1)
    
    
    2,706.2
    
    
    
    513.3
    
    
    
    1,293.9
    
    
    
    730.6
    
    
    
    168.4Warehouse lending
facilities
    
    
    0.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    92.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92.8Facilities leases
    
    
    1,189.6
    
    
    
    241.6
    
    
    
    431.9
    
    
    
    303.0
    
    
    
    213.1Management fees
    
    
    4.6
    
    
    
    3.5
    
    
    
    1.1
    
    
    
    
    
    
    
    Total
    
    $
    6,302.3
    
    
    $
    3,067.5
    
    
    $
    1,726.9
    
    
    $
    1,033.6
    
    
    $
    474.3
 
 (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 June 30, 2006 and assume we will exercise our redemption option.  Off-Balance Sheet Arrangements
  45




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Credit Risk
     Concentration Risk
  Interest Rate Risk
  Effect on Net Interest Income
  46




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Extension Risk
  47




---



##### Table of Contents



Interest Rate Cap Risk
     Prepayment Risk
  48




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##### Table of Contents



Effect on Fair Value
   49




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##### 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
    
    $
    1,974.8
    
    
    $
    1,966.6
    
    
    $
    1,958.4
    
    
    $
    1,950.2Change in fair value
    
    
    8.2
    
    
    
    
    
    
    
    (8.2
    )
    
    
    (16.4
    )Change as a percent of fair value
    
    
    0.4
    %
    
    
    
    
    
    
    (0.4
    )%
    
    
    (0.8
    )%Hedge InstrumentsFair value
    
    $
    (0.1
    )
    
    $
    18.4
    
    
    $
    41.0
    
    
    $
    67.9Change in fair value
    
    
    (18.5
    )
    
    
    
    
    
    
    22.6
    
    
    
    49.5Change as a percent of fair value
    
    
    nm
    
    
    
    
    
    
    
    nm
    
    
    
    nmMortgage Loans Held-for-Investment (2)Fair value
    
    $
    3,597.6
    
    
    $
    3,562.0
    
    
    $
    3,526.4
    
    
    $
    3,490.8Change in fair value
    
    
    35.6
    
    
    
    
    
    
    
    (35.6
    )
    
    
    (71.2
    )Change as a percent of fair value
    
    
    1.0
    %
    
    
    
    
    
    
    (1.0
    )%
    
    
    (2.0
    )%Repurchase Agreements (1)(2)Fair value
    
    $
    2,308.2
    
    
    $
    2,308.2
    
    
    $
    2,308.2
    
    
    $
    2,308.2Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed Notes (1)(2)Fair value
    
    $
    2,410.9
    
    
    $
    2,410.9
    
    
    $
    2,410.9
    
    
    $
    2,410.9Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed Notes (1)(3)Fair value
    
    $
    300.3
    
    
    $
    293.6
    
    
    $
    287.0
    
    
    $
    280.6Change in fair value
    
    
    2.6
    
    
    
    
    
    
    
    (10.7
    )
    
    
    (17.1
    )Change as a percent of fair value
    
    
    0.9
    %
    
    
    
    
    
    
    (3.6
    )%
    
    
    (5.7
    )%Warehouse Lending Facility (1)(2)Fair value
    
    $
    0.9
    
    
    $
    0.9
    
    
    $
    0.9
    
    
    $
    0.9Change in fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change as a percent of fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior Subordinated Notes (2)Fair value
    
    $
    93.2
    
    
    $
    90.2
    
    
    $
    86.0
    
    
    $
    82.6Change in fair value
    
    
    3.0
    
    
    
    
    
    
    
    (4.2
    )
    
    
    (7.6
    )Change as a percent of fair value
    
    
    3.3
    %
    
    
    
    
    
    
    (4.7
    )%
    
    
    (8.4
    )%
 
 (1)
    
    The fair value of the repurchase agreements, mortgage-backed notes and warehouse
lending facilities 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.   50




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##### 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, corridors 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
  51




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##### 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.
     The timing and amount of our cash distributions may experience volatility.
  52




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##### Table of Contents



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.
  
   
   
  th
 (i)
    
    Each of the following persons was elected as a Class III director, whose terms will expire at
our annual meeting of stockholders in 2009:
 Name
    
    For
    
    WithheldBruce A. Miller, CPA
    
    
    34,354,781
    
    
    
    1,883,821Donald H. Putnam
    
    
    35,599,972
    
    
    
    638,630
 
   53




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##### Table of Contents



54




---



##### Table of Contents



SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.By:
    
    /s/ GAIL P. SENECA

Gail P. SenecaChief Executive Officer(Principal Executive Officer)Date:
    
    August 9, 2006By:
    
    /s/ CHRISTOPHER J. ZYDAChristopher J. ZydaChief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    August 9, 2006
 55




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##### 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
    
    
    Amended and Restated Management Agreement, dated as of March 1, 2005, by and between the
Registrant and Seneca Capital Management LLC (Seneca) (7)10.2
    
    
    Cost-Sharing Agreement, dated as of June 11, 2003, by and between the Registrant and Seneca (1)10.3
    
    
    2003 Stock Incentive Plan, as amended (10)10.4
    
    
    Form of Incentive Stock Option under the 2003 Stock Incentive Plan (1)10.5
    
    
    Form of Non Qualified Stock Option under the 2003 Stock Incentive Plan (1)10.6
    
    
    2003 Outside Advisors Stock Incentive Plan, as amended (10)10.7
    
    
    Form of Non Qualified Stock Option under the 2003 Outside Advisors Stock Incentive Plan (1)10.8
    
    
    Form of Indemnity Agreement (1)10.9
    
    
    Employment Agreement dated as of December 20, 2005, by and between the Registrant and
Christopher J. Zyda (12)10.10
    
    
    Form of Restricted Stock Award Agreement for Christopher J. Zyda (1)10.11
    
    
    Form of Restricted Stock Award Agreement for Seneca (3)10.12
    
    
    Controlled Equity Offering Sales Agreement dated February 7, 2005, between the Registrant and
Cantor Fitzgerald & Co. (6)10.13
    
    
    Employment Agreement dated December 20, 2005, between the Registrant and S. Trezevant Moore,
Jr. (12)10.14
    
    
    Employment Agreement dated December 20, 2005, between the Registrant and Gail P. Seneca (12)10.15
    
    
    Direct Stock Purchase and Dividend Reinvestment Plan dated June 29, 2005 (11)
 56




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##### Table of Contents



ExhibitNumber
    
    Description14.1
    
    
    Code of Business Conduct and Ethics (1)14.2
    
    
    Corporate Governance Guidelines (5)31.1
    *
    
    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. 57