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 March 31, 2008
 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.)2005 Market Street, 21stFloor, Philadelphia, PA
    
    19103(Address of principal executive offices)
    
    (Zip Code)
 (215) 564-5900
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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INDEX
 PAGEPREFACE
    
    
    2CAUTIONARY NOTE
    
    
    3PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    36ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    58ITEM 4. CONTROLS AND PROCEDURES
    
    
    63PART II OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    64ITEM 1A. RISK FACTORS
    
    
    65ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    65ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    65ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    65ITEM 5. OTHER INFORMATION
    
    
    65ITEM 6. EXHIBITS
    
    
    65SIGNATURES
    
    
    66EXHIBIT INDEX
    
    
    67
  i




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PREFACE
   2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our ability to obtain the financing we need to support our liquidity position and to
remain in business;
    
    our inability to meet real estate investment trust, or REIT, dividend and
distribution requirements;
    
    continued creditworthiness of the holders of mortgages underlying our
mortgage-related assets;
    
    the effect of the flattening of, or other changes in, the yield curve on our
investment strategies;
    
    changes in interest rates and mortgage prepayment rates;
    
    our ability to develop new fee-based asset management businesses successfully;
    
    the possible effect of negative amortization of mortgages on our financial
condition;
    
    the possible impact of our failure to maintain exemptions under the Investment
Company Act of 1940, or the 1940 Act;
    
    the possible impact of our disqualification as a REIT;
    
    the ability to trade our common stock due to the delisting of the stock from the New
York Stock Exchange, or NYSE;
    
    potential impacts of our leveraging policies on our results of operations and cash
available for distribution;
    
    the power of our board of directors to change our operating policies and strategies
without stockholder approval;
    
    whether our board of directors will declare periodic distributions to our
stockholders;
    
    effects of interest rate caps on the adjustable-rate and hybrid adjustable-rate
loans and mortgage-backed securities we own;
    
    the degree to which our hedging strategies may or may not protect us from interest
rate volatility;
    
    volatility in the timing and amount of our cash distributions; and
    
    the other important factors described in this Form 10-Q including those under the
captions Managements Discussion and Analysis of Financial Condition and Results of
Operations, Quantitative and Qualitative Disclosures about Market Risk and the risk
factors incorporated by reference under Risk Factors.
 3




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4




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INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:Condensed Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007
    
    
    6Condensed Consolidated Statements of Operations (unaudited) for the three months ended
March 31, 2008 and March 31, 2007
    
    
    7Condensed Consolidated Statement of Stockholders Deficit (unaudited) for the three months ended
March 31, 2008
    
    
    8Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended
March 31, 2008 and March 31, 2007
    
    
    9Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    11
 5




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##### 



LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(in thousands, except share and per share amounts)
    
    (Unaudited)Assets:Cash and cash equivalents
    
    $
    1,344
    
    
    $
    3,522Restricted cash
    
    
    6,210
    
    
    
    7,550Residential mortgage loans, at fair value at March 31, 2008 and at amortized
cost, net of allowance for loan losses of $38,145, at December 31, 2007
    
    
    3,443,660
    
    
    
    4,191,343Mortgage-backed securities pledged as collateral, at fair value
    
    
    220,574
    
    
    
    435,885Equity securities, at fair value
    
    
    
    
    
    
    373Interest receivable
    
    
    8,179
    
    
    
    16,129Principal receivable
    
    
    165
    
    
    
    96Derivatives, at fair value
    
    
    69
    
    
    
    101Other assets
    
    
    77,004
    
    
    
    66,919Total assets
    
    $
    3,757,205
    
    
    $
    4,721,918Liabilities:Mortgage-backed notes, at fair value at March 31, 2008
    
    $
    3,376,270
    
    
    $
    3,914,643Repurchase agreements, at fair value at March 31, 2008
    
    
    348,616
    
    
    
    526,634Collateralized debt obligations, at fair value at March 31, 2008
    
    
    53,759
    
    
    
    294,416Junior subordinated notes, at fair value at March 31, 2008
    
    
    24,591
    
    
    
    92,788Convertible senior notes, at fair value at March 31, 2008
    
    
    36,000
    
    
    
    90,000Derivatives, at fair value
    
    
    21,807
    
    
    
    10,605Revolving line of credit, at fair value at March 31, 2008
    
    
    15,833
    
    
    
    15,833Cash distributions payable
    
    
    13,857
    
    
    
    13,857Accrued interest expense
    
    
    13,739
    
    
    
    10,511Warrant liability, at fair value
    
    
    13,653
    
    
    
    22,868Accounts payable and accrued expenses
    
    
    62,144
    
    
    
    39,788Total liabilities
    
    
    3,980,269
    
    
    
    5,031,943Minority interest
    
    
    148
    
    
    
    Stockholders Deficit:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at March
31, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 43,283,339 and 43,172,839 shares issued and
outstanding at March 31, 2008 and December 31, 2007, respectively
    
    
    43
    
    
    
    43Additional paid-in capital
    
    
    548,494
    
    
    
    548,474Accumulated other comprehensive income
    
    
    2,007
    
    
    
    6,556Accumulated distributions in excess of accumulated earnings
    
    
    (773,756
    )
    
    
    (865,098
    )Total stockholders deficit
    
    
    (223,212
    )
    
    
    (310,025
    )Total liabilities and stockholders deficit
    
    $
    3,757,205
    
    
    $
    4,721,918
  6




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 For the Three Months EndedMarch 31,(in thousands, except share and per share amounts)
    
    2008
    
    
    2007Net interest income:Interest income:Mortgage loan and securitization portfolio
    
    $
    66,338
    
    
    $
    98,690Spread portfolio
    
    
    1,316
    
    
    
    30,376Credit sensitive bond portfolio
    
    
    9,112
    
    
    
    16,500Total interest income
    
    
    76,766
    
    
    
    145,566Interest expense
    
    
    68,972
    
    
    
    115,204Net interest income
    
    
    7,794
    
    
    
    30,362Other income (expenses):Unrealized gains on instruments carried at fair value, net
    
    
    141,215
    
    
    
    14,427Realized Losses on loans and mortgage-backed securities, net
    
    
    (6,024
    )
    
    
    (15,453
    )Interest income (expense) on derivative instruments
    
    
    (2,337
    )
    
    
    837Impairment losses on mortgage-backed securities
    
    
    
    
    
    
    (4
    )Other expense
    
    
    
    
    
    
    (80
    )Total other income (expenses)
    
    
    132,854
    
    
    
    (273
    )Operating Expenses:Servicing expense
    
    
    4,827
    
    
    
    5,986Provision for loan losses
    
    
    
    
    
    
    3,543Salaries and benefits
    
    
    1,524
    
    
    
    3,084Professional services
    
    
    2,225
    
    
    
    844Other general and administrative expenses
    
    
    1,527
    
    
    
    1,785Total operating expenses
    
    
    10,103
    
    
    
    15,242Income before income taxes
    
    
    130,545
    
    
    
    14,847Income taxes
    
    
    2,352
    
    
    
    460Net income
    
    $
    128,193
    
    
    $
    14,387Net income per share  basic
    
    $
    2.97
    
    
    $
    0.30Net income per share  diluted
    
    $
    1.59
    
    
    $
    0.30Weighted-average number of shares outstanding  basic
    
    
    43,108,841
    
    
    
    47,316,058Weighted-average number of shares outstanding  diluted
    
    
    80,644,547
    
    
    
    47,427,502Dividends per share
    
    $
    
    
    
    $
    0.30
  7




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
 (Unaudited)
 AccumulatedAccumulated
    
    
    DistributionsCommon Stock
    
    
    Additional
    
    
    Other
    
    
    in Excess ofPar
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance, January 1, 2008
    
    
    43,173
    
    
    $
    43
    
    
    $
    548,474
    
    
    $
    6,556
    
    
    $
    (865,098
    )
    
    
    
    
    
    $
    (310,025
    )Cumulative effect of
adoption of new
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,296
    )
    
    
    (36,847
    )
    
    $
    (4,296
    )
    
    
    (41,143
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,193
    
    
    
    128,193
    
    
    
    128,193Amortization of
derivative gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (253
    )
    
    
    
    
    
    
    (253
    )
    
    
    (253
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    123,644Issuance and amortization
of
restricted common stock
    
    
    111
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    16Balance, March 31, 2008
    
    
    43,284
    
    
    $
    43
    
    
    $
    548,494
    
    
    $
    2,007
    
    
    $
    (773,756
    )
    
    
    
    
    
    $
    (223,212
    )
  8




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the Three Months Ended March 31,(in thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    128,193
    
    
    $
    14,387Adjustments to reconcile net income to net cash provided by (used in) operating activities:Change in fair value of financial instruments
    
    
    (135,191
    )
    
    
    (4,550
    )Amortization of premium/(discount) on residential mortgage loans and mortgage-backed
securities and depreciation and amortization
    
    
    (164
    )
    
    
    4,442Impairment losses on securities
    
    
    
    
    
    
    4Provision for loan losses
    
    
    
    
    
    
    3,543Realized loss on real estate owned
    
    
    (4,465
    )
    
    
    Negative amortization of residential mortgage loans
    
    
    (8,323
    )
    
    
    (35,466
    )Share-based compensation
    
    
    17
    
    
    
    712Net losses on sales of mortgage-backed-securities available-for-sale
    
    
    
    
    
    
    15,453Changes in operating assets and liabilities:(Increase) decrease in interest receivable, net of purchased interest
    
    
    5,181
    
    
    
    (1,250
    )(Increase) decrease in other assets
    
    
    10,511
    
    
    
    (18,491
    )Increase in accounts payable and other liabilities
    
    
    16,661
    
    
    
    7,485Increase (decrease) in accrued interest expense
    
    
    3,225
    
    
    
    (2,754
    )Net cash provided by (used in) operating activities
    
    
    15,645
    
    
    
    (16,485
    )Cash flows from investing activities:Purchases of mortgage-backed securities
    
    
    
    
    
    
    (461,640
    )Proceeds from sales of mortgage-backed securities
    
    
    129,363
    
    
    
    14,887Principal payments of mortgage-backed securities
    
    
    6,182
    
    
    
    115,838Purchases of residential mortgage loans, net
    
    
    
    
    
    
    (414,262
    )Principal payments of residential mortgage loans
    
    
    100,398
    
    
    
    460,433Purchases of derivative instruments
    
    
    
    
    
    
    (8,880
    )Proceeds from derivative instruments
    
    
    
    
    
    
    6,701Net change in restricted cash
    
    
    1,340
    
    
    
    (49,947
    )Proceeds from sale of equity securities
    
    
    373
    
    
    
    Other
    
    
    
    
    
    
    (136
    )Net cash provided by (used in) investing activities
    
    
    237,656
    
    
    
    (337,006
    )Cash flows from financing activities:Capitalized financing costs
    
    
    
    
    
    
    (4,414
    )Borrowings under repurchase agreements
    
    
    1,633,530
    
    
    
    11,312,497Principal payments on repurchase agreements
    
    
    (1,823,334
    )
    
    
    (11,139,734
    )Repayments of warehouse lending facilities, net
    
    
    
    
    
    
    (349,362
    )Repayments of commercial paper facility, net
    
    
    
    
    
    
    (18,655
    )Distributions to stockholders
    
    
    
    
    
    
    (14,343
    )Proceeds from issuance of mortgage-backed notes
    
    
    
    
    
    
    718,451Principal payments on mortgage-backed notes
    
    
    (92,829
    )
    
    
    (362,535
    )Proceeds from issuance of collateralized debt obligations
    
    
    27,825
    
    
    
    266,027Principal payments on collateralized debt obligations
    
    
    (823
    )
    
    
    Proceeds from minority interest investment
    
    
    152
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (255,479
    )
    
    
    407,932Net increase (decrease) in cash and cash equivalents
    
    
    (2,178
    )
    
    
    54,441Cash and cash equivalents, beginning of the period
    
    
    3,522
    
    
    
    5,902Cash and cash equivalents, end of the period
    
    $
    1,344
    
    
    $
    60,343
 9




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
 For the Three Months Ended March 31,(in thousands)
    
    2008
    
    
    2007Supplemental disclosure of cash flow information:Interest paid
    
    $
    65,743
    
    
    $
    122,217Taxes paid (refund received)
    
    
    (3,600
    )
    
    
    56Non-cash investing and financing activities:Transfer of residential mortgage loans to real estate owned
    
    
    37,830
    
    
    
    2,879Proceeds from the sale of mortgage-backed securities
    
    
    (2,315
    )
    
    
    Repayments of repurchase agreements
    
    
    2,315
    
    
    
    Acquisition of mortgage-backed securities available-for-sale through collateralized debt obligations
    
    
    
    
    
    
    (3,986
    )(Increase) decrease in principal receivable
    
    
    (69
    )
    
    
    (433
    )Increase (decrease) in cash distributions payable to stockholders
    
    
    
    
    
    
    75Principal payments of mortgage-backed securities available-for-sale
    
    
    
    
    
    
    183Repayments of warehouse lending facilities
    
    
    
    
    
    
    (183
    )Increase in unsettled security purchases
    
    
    
    
    
    
    2,271
  10




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LUMINENT MORTGAGE CAPITAL, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1OVERVIEW
    Business Conditions and Going Concern
  11




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Fair Value Measurements, The Fair Value Option for Financial Assets and Financial Liabilities,
 Changes in Accounting Policies
  12




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Carrying Value
    
    
    Net GainPrior to
    
    
    (Loss) due to
    
    
    Carrying ValueAdoption
    
    
    Adoption
    
    
    After AdoptionResidential mortgage loans
    
    $
    4,191,343
    
    
    $
    (522,586
    )
    
    $
    3,668,757Mortgage-backed securities
    
    
    435,885
    
    
    
    
    
    
    
    435,885Debt issuance costs, a component of other assets
    
    
    17,144
    
    
    
    (17,144
    )
    
    
    Mortgage-backed notes
    
    
    3,914,643
    
    
    
    280,007
    
    
    
    3,634,636Repurchase agreements
    
    
    526,634
    
    
    
    (19,795
    )
    
    
    546,429Collateralized debt obligations
    
    
    294,416
    
    
    
    171,283
    
    
    
    123,133Junior subordinated notes
    
    
    92,788
    
    
    
    43,242
    
    
    
    49,546Convertible senior notes
    
    
    90,000
    
    
    
    23,850
    
    
    
    66,150Pre-tax cumulative effect of adoption
    
    
    
    
    
    
    (41,143
    )Effect on deferred tax asset
    
    
    
    
    
    
    Cumulative effect on stockholders equity
    
    
    
    
    
    
    (41,143
    )Reclassification from accumulated other comprehensive income
    
    
    
    
    
    
    4,296Cumulative effect on retained earnings
    
    
    
    
    
    $
    (36,847
    )
   Residential Mortgage Loans
   13




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Investment Securities
     Mortgage-Backed Notes
   Collateralized Debt Obligations
  14




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    Repurchase Agreements
  Revolving Line of Credit and Unsecured Borrowings
    Recent Accounting Pronouncements
 Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions Accounting for Derivative Instruments and
Hedging Activities.
 15




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan Amendment of Accounting Research Bulletin No. 51
 NOTE 3SECURITIES
   16




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Unrealized Gains and Losses on Available-for-Sale Securities
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2007Mortgage-backed securities,
available-for-sale
    
    $
    424,838
    
    
    $
    4,188
    
    
    $
    
    
    
    $
    429,026Equity securities
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    373Total
    
    $
    425,211
    
    
    $
    4,188
    
    
    $
    
    
    
    $
    429,399
    Weighted-Average Life of Mortgage-Backed Securities
 Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    CouponLess than one year
    
    $
    6,034
    
    
    $
    14,951
    
    
    
    4.78
    %Greater than one year and less than five years
    
    
    166,900
    
    
    
    209,877
    
    
    
    3.86Greater than five years
    
    
    47,640
    
    
    
    85,066
    
    
    
    4.26Total
    
    $
    220,574
    
    
    $
    309,894
    
    
    
    4.08
    %
 17




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##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   NOTE 4RESIDENTIAL MORTGAGE LOANS
  Components of Residential Mortgage Loans
 March 31,
    
    
    December 31,2008
    
    
    2007Principal
    
    $
    3,999,843
    
    
    $
    4,133,820Unamortized premium
    
    
    
    
    
    
    95,6683,999,843
    
    
    
    4,229,488Allowance for loan losses
    
    
    
    
    
    
    (38,145
    )Fair value adjustment
    
    
    (556,183
    )
    
    
    Total residential
mortgage loans, at fair
value at March 31, 2008
and at amortized cost,
net of allowance for
loan losses at December
31, 2007
    
    $
    3,443,660
    
    
    $
    4,191,343
  Geographic Concentrations of Residential Mortgage Loans
 March 31, 2008
    
    December 31, 2007Top five geographic concentrations (% exposure):California
    
    
    56.6
    %
    
    
    56.5
    %Florida
    
    
    9.9
    %
    
    
    9.7
    %Arizona
    
    
    4.2
    %
    
    
    4.3
    %Virginia
    
    
    3.8
    %
    
    
    3.9
    %Nevada
    
    
    3.7
    %
    
    
    3.7
    %
  18




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##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Allowance for Loan Losses
 Three MonthsEnded March 31,2007Balance, beginning of period
    
    $
    5,020Provision for loan losses
    
    
    3,543Charge-offs
    
    
    (301
    )Balance, end of period
    
    $
    8,262
   19




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  NOTE 5BORROWINGS
  Borrowings
 Weighted-Contractual
    
    
    Average
    
    
    Fair Value of
    
    
    Final StatedFair Value
    
    
    Balance
    
    
    Interest Rate
    
    
    Collateral(4)
    
    
    Maturities (5)March 31, 2008Mortgage-backed notes
    
    $
    3,376,270
    
    
    $
    3,797,843
    
    
    
    2.99
    %
    
    $
    3,442,707
    
    
    
    2046Repurchase agreements
    
    
    348,616
    
    
    
    348,616
    
    
    
    6.39
    
    
    
    165,830
    
    
    
    2008Collateralized debt obligations
    
    
    53,759
    
    
    
    358,109
    
    
    
    3.64
    
    
    
    92,814
    
    
    
    2047Junior subordinated notes
    
    
    24,591
    
    
    
    92,788
    
    
    
    7.44
    
    
    none
    

    
    
    2035Convertible senior notes
    
    
    36,000
    
    
    
    90,000
    
    
    
    8.63
    
    
    none
    

    
    
    2027Revolving line of credit
    
    
    15,833
    
    
    
    15,833
    
    
    
    7.14
    
    
    none
    

    
    
    2012Total
    
    $
    3,855,069
    
    
    $
    4,703,189
    
    
    
    3.50
    %
    
    $
    3,701,351December 31, 2007Mortgage-backed notes (1)
    
    $
    3,634,636
    
    
    $
    3,890,224
    
    
    
    3.95
    %
    
    $
    3,711,875
    
    
    
    2046Repurchase agreements (2)
    
    
    546,429
    
    
    
    546,429
    
    
    
    7.23
    
    
    
    396,657
    
    
    
    2008Collateralized debt obligations (3)
    
    
    123,133
    
    
    
    295,122
    
    
    
    5.55
    
    
    
    117,789
    
    
    
    2047Junior subordinated notes
    
    
    49,546
    
    
    
    92,788
    
    
    
    8.42
    
    
    none
    

    
    
    2035Convertible senior notes
    
    
    66,150
    
    
    
    90,000
    
    
    
    8.63
    
    
    none
    

    
    
    2027Revolving line of credit
    
    
    15,833
    
    
    
    15,833
    
    
    
    9.10
    
    
    none
    

    
    
    2012Total
    
    $
    4,435,727
    
    
    $
    4,930,396
    
    
    
    4.57
    %
    
    $
    4,226,321
 
 (1)
    
    Outstanding balances for mortgage-backed notes exclude $24.4 million in unamortized premium at December 31, 2007(2)
    
    Outstanding balances for repurchase agreements at December 31, 2007 exclude $19.8 million of unamortized discounts
for the issuance of a warrant in conjunction with obtaining certain repurchase agreement financing.(3)
    
    Outstanding balance for collateralized debt obligations excludes $0.7 million of unamortized discounts at December
31, 2007.(4)
    
    Collateral for borrowings consists of mortgage-backed securities and residential mortgage loans. Values listed as
none are unsecured borrowings.(5)
    
    Mortgage-backed notes, repurchase agreements and collateralized debt obligations mature at various dates. The date
above is the last maturity date for each type of borrowing. For mortgage-backed notes and collateralized debt
obligations, the maturity of each class of securities is directly affected by the rate of principal repayments on
the associated residential mortgage loan collateral. As a result, the actual maturity of each series of
mortgage-backed notes may be shorter than the stated maturity.  Mortgage-Backed Notes
  20




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Repurchase Agreements
  Repurchase Agreement Maturities
 March 31, 2008
    
    
    December 31, 2007Overnight 1 day or less
    
    $
    75,523
    
    
    $
    4,199Between 2 and 30 days
    
    
    273,093
    
    
    
    542,230Total
    
    $
    348,616
    
    
    $
    546,429
 
 (1)
    
    Balance at December 31, 2007 excludes $19.8 million of
unamortized discounts for the issuance of a warrant in
conjunction with obtaining certain repurchase agreement
financing. Collateralized Debt Obligations
   Junior Subordinated Notes
  21




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     Convertible Senior Notes
      22




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Revolving Line of Credit
  NOTE 6CAPITAL STOCK AND EARNINGS PER SHARE
   23




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Warrant Pricing Assumptions
 March 31,
    
    December 31,2008
    
    2007Risk-free interest rate
    
    
    2.46
    %
    
    
    3.45
    %Expected life in years
    
    
    4.42
    
    
    
    4.67Expected volatility (1)
    
    
    30.0
    %
    
    
    30.0
    %Dividend yield (2)
    
    
    0.0
    %
    
    
    0.0
    %
 
 (1)
    
    The Companys stock price volatility increased dramatically subsequent to
July 31, 2007 due to unprecedented events in the mortgage industry and the
Companys liquidity concerns. That level of volatility is not considered to be
indicative of volatility over the life of the warrant and, therefore, expected
volatility was calculated based on the Companys stock price and competitors
stock prices prior to July 31, 2007.(2)
    
    The Company has suspended the payment of its second quarter dividend and
does not currently expect to declare a dividend over the life of the warrant;
therefore the dividend yield is estimated to be zero.   Reconciliation of Basic and Diluted Earnings Per Share
 For the Three Months EndedMarch 31, 2008
    
    
    March 31, 2007Basic
    
    
    Diluted(1)
    
    
    Basic
    
    
    DilutedNet income
    
    $
    128,193
    
    
    $
    128,193
    
    
    $
    14,387
    
    
    $
    14,387Weighted-average number
of common shares
outstanding
    
    
    43,108,841
    
    
    
    43,108,841
    
    
    
    47,316,058
    
    
    
    47,316,058Additional shares due to:Assumed conversion of
dilutive warrant, common
stock options and
vesting of unvested
restricted common stock
    
    
    
    
    
    
    37,535,706
    
    
    
    
    
    
    
    111,444Adjusted
weighted-average number
of common shares
outstanding
    
    
    43,108,841
    
    
    
    80,644,547
    
    
    
    47,316,058
    
    
    
    47,427,502Net income per share
    
    $
    2.97
    
    
    $
    1.59
    
    
    $
    0.30
    
    
    $
    0.30
 
 (1)
    
    At March 31, 2008, the Company had 5,000 shares in stock options,
130,760 in unvested stock grants and 8,050,089 shares in instruments
related to convertible debt which are not included in the above
calculations due to their anti-dilutive effect. 24




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  NOTE 72003 STOCK INCENTIVE PLANS
  Common Stock Available for Grant
 2003 Outside2003 Stock
    
    Advisors StockIncentive Plan
    
    Incentive Plan
    
    TotalMarch 31, 2008Shares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    (1,140,000
    )
    
    
    (20,760
    )
    
    
    (1,160,760
    )Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    50,000
    
    
    
    
    
    
    
    50,000Total available for grant
    
    
    760,000
    
    
    
    129,240
    
    
    
    889,240
 Outstanding Stock Options
 March 31, 2008Stock options outstanding (shares)
    
    
    5,000Weighted-average exercise price
    
    $
    13.00Weighted-average remaining life (years)
    
    
    5.58
  25




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Common Stock Awards
 Number of Common
    
    Weighted-AverageShares
    
    Issue PriceOutstanding, January 1, 2008
    
    
    990,423
    
    
    $
    9.18Issued
    
    
    110,500
    
    
    
    0.65Forfeited
    
    
    
    
    
    
    Outstanding, March 31, 2008
    
    
    1,100,923
    
    
    $
    8.32
 Non-Vested Common Stock Awards
 Number of Common
    
    Weighted-AverageShares
    
    Grant-Date Fair ValueNonvested, January 1, 2008
    
    
    20,760
    
    
    $
    9.20Granted
    
    
    110,500
    
    
    
    0.65Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested, March 31, 2008
    
    
    131,260
    
    
    $
    1.92
   NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures About Fair Value of Financial Instruments
  Fair Value of Financial Instruments
 December 31, 2007CarryingValue
    
    Fair ValueResidential mortgage loans
    
    $
    4,191,343
    
    
    $
    3,668,755Mortgage-backed notes
    
    
    3,914,643
    
    
    
    3,634,636Repurchase agreements
    
    
    526,634
    
    
    
    546,429CDOs
    
    
    294,416
    
    
    
    123,133Convertible senior notes
    
    
    90,000
    
    
    
    66,150Junior subordinated notes
    
    
    92,788
    
    
    
    49,546
 26




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
        27




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Fair Value Hierarchy of Financial Assets and Liabilities
 Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs
    
    
    Total Fair(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    ValueAssetsResidential
mortgage loans
    
    $
    
    
    
    $
    
    
    
    $
    3,443,660
    
    
    $
    3,443,660Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    220,574
    
    
    
    220,574Derivatives
    
    
    
    
    
    $
    
    
    
    
    69
    
    
    
    69Total assets
    
    $
    
    
    
    $
    
    
    
    $
    3,664,303
    
    
    $
    3,664,303LiabilitiesMortgage-backed
notes
    
    $
    
    
    
    $
    
    
    
    $
    3,376,270
    
    
    $
    3,376,270Repurchase
agreements
    
    
    
    
    
    
    348,616
    
    
    
    
    
    
    
    348,616CDOs
    
    
    
    
    
    
    
    
    
    
    53,759
    
    
    
    53,759Junior subordinated
notes
    
    
    
    
    
    
    
    
    
    
    24,591
    
    
    
    24,591Convertible senior
notes
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    36,000Warrant liability
    
    
    
    
    
    
    
    
    
    
    13,653
    
    
    
    13,653Revolving line of
credit
    
    
    
    
    
    
    
    
    
    
    15,833
    
    
    
    15,833Derivatives
    
    
    
    
    
    
    
    
    
    
    21,807
    
    
    
    21,807Total liabilities
    
    $
    
    
    
    $
    348,616
    
    
    $
    3,541,913
    
    
    $
    3,890,529
 28




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
 Purchases,Beginning
    
    
    Total Realized
    
    
    Sales, Issuances,Balance at
    
    
    and Unrealized
    
    
    Repayments or
    
    
    Ending Balance atJanuary 1, 2008
    
    
    Gains (Losses)
    
    
    Settlements, net
    
    
    March 31, 2008AssetsResidential
mortgage loans (1)
    
    $
    3,668,757
    
    
    
    (99,657
    )
    
    
    (125,440
    )
    
    $
    3,443,660Mortgage-backed
securities
    
    
    435,885
    
    
    
    (80,151
    )
    
    
    (135,160
    )
    
    
    220,574Derivatives
    
    
    101
    
    
    
    (32
    )
    
    
    
    
    
    
    69Total assets
    
    $
    4,104,743
    
    
    $
    (179,840
    )
    
    $
    (260,600
    )
    
    $
    3,664,303LiabilitiesMortgage-backed
notes
    
    $
    3,634,636
    
    
    $
    165,537
    
    
    $
    (92,829
    )
    
    $
    3,376,270CDOs
    
    
    123,133
    
    
    
    96,376
    
    
    
    27,002
    
    
    
    53,759Junior subordinated
notes
    
    
    49,546
    
    
    
    24,955
    
    
    
    
    
    
    
    24,591Convertible senior
notes
    
    
    66,150
    
    
    
    30,150
    
    
    
    
    
    
    
    36,000Warrant liability
    
    
    22,868
    
    
    
    9,215
    
    
    
    
    
    
    
    13,653Revolving line of
credit
    
    
    15,833
    
    
    
    
    
    
    
    
    
    
    
    15,833Derivatives
    
    
    10,605
    
    
    
    (11,202
    )
    
    
    
    
    
    
    21,807Total liabilities
    
    $
    3,922,771
    
    
    $
    315,031
    
    
    $
    (65,827
    )
    
    $
    3,541,913
 
 (1)
    
    Purchases, sales, issuances, repayments or settlements of loans includes
increases in the loan balance due to negative amortization and transfers of loans to
real estate owned, a component of other assets.(2)
    
    There have been no transfers of balances in or out of the level three hierarchy
during the three months ended March 31, 2008. 29




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   Changes in Fair Value of Assets and Liabilities Held on the Balance Sheet
 Gains (Losses) inFair ValueFor the Three Months Ended March 31, 2008:Unrealized gains (losses)AssetsResidential mortgage loans
    
    $
    (95,585
    )Mortgage-backed securities
    
    
    (78,199
    )Derivatives
    
    
    (32
    )Total assets
    
    
    (173,816
    )LiabilitiesMortgage-backed notes
    
    
    165,537Repurchase agreements
    
    
    CDOs
    
    
    96,376Junior subordinated notes
    
    
    24,955Convertible senior notes
    
    
    30,150Warrant liability
    
    
    9,215Revolving line of credit
    
    
    Derivatives
    
    
    (11,202
    )Total liabilities
    
    
    315,031Unrealized gains, net
    
    
    141,215Realized losses, net
    
    
    (6,024
    )Realized and unrealized gains, net
    
    $
    135,191
  NOTE 9ACCUMULATED OTHER COMPREHENSIVE INCOME
 Components of Accumulated Other Comprehensive Income
 March 31, 2008
    
    
    December 31, 2007Unrealized holding losses on securities available-for-sale
    
    $
    
    
    
    $
    (658,507
    )Reclassification adjustment for net losses (gains) on sales
of securities available-for-sale included in net income
    
    
    
    
    
    
    181,149Impairment losses on securities included in net income
    
    
    
    
    
    
    481,654Net unrealized gain on securities available-for-sale
    
    
    
    
    
    
    4,296Net deferred realized and unrealized gains on cash flow hedges
    
    
    2,007
    
    
    
    2,260Accumulated other comprehensive income
    
    $
    2,007
    
    
    $
    6,556
 30




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  Derivative Contracts
 Estimated Fair ValueMarch 31,
    
    December 31,2008
    
    2007Interest rate swap contracts
    
    $
    (22,420
    )
    
    $
    (11,436
    )Interest rate cap contracts
    
    
    682
    
    
    
    932Credit default swaps
    
    
    
    
    
    
    
 Realized and Unrealized Gains and Losses on Derivative Contracts
 For the Three Months Ended March 31,2008
    
    2007Free standing derivatives:Realized gains (losses)
    
    $
    (2,337
    )
    
    $
    10,976Unrealized gains (losses)
    
    
    (11,234
    )
    
    
    4,748Purchase commitment derivatives:Realized losses
    
    
    
    
    
    
    (95
    )Unrealized losses
    
    
    
    
    
    
    (547
    )
  Cash Flow Hedging Strategies
  NOTE 11INCOME TAXES
  31




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     NOTE 12DECONSOLIDATION OF VARIABLE INTEREST ENTITIES
   NOTE 13LEGAL MATTERS
 Class Action Lawsuits
  32




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
   
    
    predict its outcome;
    
    estimate damages that might result from the case; or
    
    predict the effect that final resolution that the case might have on its
business, financial condition or results of operations, although such effect could
be materially adverse.
   Repurchase Agreement Litigation
    33




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     NOTE 14RELATED PARTY TRANSACTIONS
      NOTE 15SUBSEQUENT EVENTS
  34




---



##### 



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     
    
    reduces the fixed charge coverage ratio requirement, and allows non-cash
adjustments thereto, through December 31, 2009;
    
    changes the payment of obligations covenant to allow for lender agreement to
exclude certain items; and
    
    modifies events of default language to require notice and failure to remedy
for cross-default and judgment default items
  35




---



##### 



The following discussion of our financial condition and results of operations should be read
in conjunction with the financial statements and notes to those statements included in Item 1 of
this Form 10-Q . This discussion may contain certain forward-looking statements that involve risks
and uncertainties. Forward-looking statements are those that are not historical in nature. See
Cautionary Note Regarding Forward-Looking Statements. As a result of many factors, such as those
set forth under Risk Factors in Item 1A of this Form 10-Q , Item 1A of our Form 10-K for the year
ended December 31, 2007, elsewhere in this Form 10-Q or incorporated by reference herein, our
actual results may differ materially from those anticipated in such forward-looking statements.
 Overview
 Business Conditions and Going Concern
      
    
    First, we are offering our services as an advisor to holders of existing
mortgage-backed securities or whole loan positions to provide forensic underwriting,
loss mitigation oversight and surveillance services. We currently perform these
functions in conjunction with managing our
 36




---



##### 



loan and mortgage-backed securities
portfolios and can readily provide these services to third parties.
    
    Second, we intend to seek, through one or more taxable corporate subsidiaries, asset
management engagements from institutional investors seeking to profit from the current
turmoil in the mortgage-backed securities market. We will earn a management fee for
these services and will invest our client funds with the same investment philosophy as
we invest our own capital. Our credit underwriting, loss mitigation, surveillance and
information technology systems have recently been upgraded to accommodate any
reasonably expected increase in volume.
    
    Finally, we expect to serve as a sub-manager on investment funds. Our business plan
includes opportunities in domestic markets as well as expansion to non-U.S. markets.
We believe the current market environment provides significant opportunities for us to
develop these new services, which would be closely aligned with our current expertise.
    Exposure to Subprime Mortgage Loans
   Critical Accounting Policies
  37




---



##### 



The Fair
Value Option for Financial Assets and Financial Liabilities,
  Residential Mortgage Loans
   Investment Securities
     38




---



##### 



Mortgage-Backed Notes
   Collateralized Debt Obligations
   Repurchase Agreements
  Revolving Line of Credit and Unsecured Borrowings
   Accounting for Derivative Financial Instruments and Hedging Activities
  39




---



##### 



Accounting for Warrant
 Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Companys Own
Stock
  Results of Operations
     40




---



##### 



Components of Interest Expense
 Three Months
    
    
    Percentage
    
    
    Three Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageMarch 31,
    
    
    Financing
    
    
    March 31,
    
    
    Financing2008
    
    
    Liabilities
    
    
    2007
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    53,200
    
    
    
    4.40
    %
    
    $
    61,044
    
    
    
    2.99
    %Interest expense on repurchase agreement liabilities
    
    
    6,879
    
    
    
    0.57
    
    
    
    36,414
    
    
    
    1.78Interest expense on commercial paper facility
    
    
    
    
    
    
    
    
    
    
    9,150
    
    
    
    0.45Interest expense on warehouse lending facilities
    
    
    
    
    
    
    
    
    
    
    6,868
    
    
    
    0.34Interest expense on junior subordinated notes
    
    
    1,834
    
    
    
    0.15
    
    
    
    1,954
    
    
    
    0.10Interest expense on CDOs
    
    
    4,779
    
    
    
    0.40
    
    
    
    146
    
    
    nmInterest expense on convertible senior notes
    
    
    1,960
    
    
    
    0.16
    
    
    
    
    
    
    
    Interest expense on revolving line of credit
    
    
    311
    
    
    
    0.03
    
    
    
    
    
    
    
    Amortization of net realized gains on futures and interest
rate swap contracts
    
    
    (253
    )
    
    
    (0.02
    )
    
    
    (444
    )
    
    
    (0.02
    )Other
    
    
    262
    
    
    
    0.02
    
    
    
    72
    
    
    nmTotal interest expense
    
    $
    68,972
    
    
    
    5.71
    %
    
    $
    115,204
    
    
    
    5.64
    %
 
 nm  not meaningful 41




---



##### 



Components of Other Income
 Three Months EndedMarch 31,2008
    
    
    2007Unrealized gains (losses) on instruments
carried at fair value:Losses on the fair value of residential
mortgage loans
    
    $
    (95,585
    )
    
    $
    Losses on the fair value of securities
    
    
    (78,199
    )
    
    
    Gains on the fair value of mortgage-backed notes
    
    
    165,537
    
    
    
    Gains on the fair value of collateralized debt
obligations
    
    
    96,376
    
    
    
    Gains on the fair value of junior subordinated
notes
    
    
    24,955
    
    
    
    Gains on the fair value of convertible senior
notes
    
    
    30,150
    
    
    
    Gains on the fair value of the warrant liability
    
    
    9,215
    
    
    
    Gains (losses) on the fair value of derivative
instruments
    
    
    (11,234
    )
    
    
    14,427Gains on instruments carried at fair value, net
    
    
    141,215
    
    
    
    14,427Realized losses on sales of securities
    
    
    (1,952
    )
    
    
    (15,453
    )Realized losses on disposition of residential
mortgage loans
    
    
    (4,072
    )
    
    
    Realized losses on instruments carried at fair
value, net
    
    
    (6,024
    )
    
    
    Interest income (expense) on derivative
instruments
    
    
    (2,337
    )
    
    
    837Impairment losses on mortgage-backed securities
    
    
    
    
    
    
    (4
    )Other expense
    
    
    
    
    
    
    (80
    )Total
    
    $
    132,854
    
    
    $
    (273
    )
   42




---



##### 



Components of Operating Expenses
 Three Months EndedMarch 31,2008
    
    
    2007Servicing expense
    
    $
    4,827
    
    
    
    5,986Provision for loan losses
    
    
    
    
    
    
    3,543Salaries and benefits
    
    
    1,524
    
    
    
    3,084Professional services
    
    
    2,225
    
    
    
    844Other general and administrative expenses
    
    
    1,527
    
    
    
    1,785Total expenses
    
    $
    10,103
    
    
    
    15,242
      REIT taxable income
   43




---



##### 



Reconciliation of GAAP Net Income to REIT Taxable Income
  Three Months EndedMarch 31,2008
    
    
    2007GAAP net income
    
    $
    128,193
    
    
    $
    14,387Adjustments to GAAP net income:Interest income and interest expense, net
    
    
    5,612
    
    
    
    (15,304
    )Gains on instruments carried at fair value, net
    
    
    (135,191
    )
    
    
    Impairment losses on mortgage-backed securities
    
    
    
    
    
    
    4Provision for loan losses
    
    
    
    
    
    
    3,538Servicing expense
    
    
    4,537
    
    
    
    5,640Losses (gains) on sales of mortgage-backed
securities and loans, net
    
    
    
    
    
    
    15,453Unrealized gains on derivative instruments, net
    
    
    
    
    
    
    Other, net
    
    
    1,840
    
    
    
    (9,439
    )Net adjustments to GAAP net income
    
    
    (123,203
    )
    
    
    (108
    )REIT taxable income
    
    
    4,990
    
    
    
    14,279
 Estimated Undistributed REIT Taxable Income
 Three Months EndedMarch 31,2008
    
    
    2007Undistributed REIT taxable income, beginning of period
    
    $
    31,215
    
    
    $
    4,429REIT taxable income earned during period
    
    
    4,990
    
    
    
    14,279Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    
    
    
    
    (14,216
    )Other adjustments
    
    
    
    
    
    
    2,171Undistributed REIT taxable income, end of period
    
    $
    36,205
    
    
    $
    6,663Cash distributions per share that were declared during period
    
    $
    
    
    
    $
    0.30Percentage of current year REIT taxable income distributed
    
    
    
    %
    
    
    99.6
    %
   44




---



##### 



Financial Condition
 Mortgage-Backed Securities
  45




---



##### 



Asset Quality
 March 31, 2008
    
    
    December 31, 2007Percentage of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalMortgage-
    
    
    
    
    
    
    Mortgage-backed
    
    
    
    
    
    
    backedFair Value
    
    
    Securities
    
    
    Fair Value
    
    
    SecuritiesResidential Mortgage Credit PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    10,854
    
    
    
    4.9
    %
    
    $
    27,747
    
    
    
    6.4
    %A/A rating
    
    
    60,581
    
    
    
    27.5
    
    
    
    70,802
    
    
    
    16.1BBB/Baa rating
    
    
    26,008
    
    
    
    11.8
    
    
    
    40,904
    
    
    
    9.4Total Investment-grade MBS
    
    
    97,443
    
    
    
    44.2
    
    
    
    139,453
    
    
    
    31.9Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    
    ANon-investment-grade MBS:BB/Ba rating
    
    
    34,148
    
    
    
    15.5
    
    
    
    44,101
    
    
    
    10.1B/B2 rating
    
    
    4,543
    
    
    
    2.1
    
    
    
    7,621
    
    
    
    1.8CCC/Caa and below
    
    
    14,970
    
    
    
    6.8
    
    
    
    35,986
    
    
    
    8.3Not rated
    
    
    755
    
    
    
    0.3
    
    
    
    4,177
    
    
    
    1.0Total non-investment-grade MBS
    
    
    54,416
    
    
    
    24.7
    
    
    
    91,885
    
    
    
    21.2Weighted-average credit rating (1)
    
    
    B
    
    
    
    
    
    
    
    BTotal Residential Mortgage Credit portfolio
    
    
    151,859
    
    
    
    68.9
    
    
    
    231,338
    
    
    
    53.1Weighted-average credit rating (1)
    
    BBB
    
    
    
    
    
    
    BBBSpread PortfolioAAA/Aaa rating
    
    
    68,715
    
    
    
    31.1
    
    
    
    204,547
    
    
    
    46.9Weighted-average credit rating
    
    AAA
    

    
    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    220,574
    
    
    
    100.0
    %
    
    $
    435,885
    
    
    
    100.0
    %Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    
    A
 
 (1)
    
    Weighted-average credit rating excludes non-rated mortgage-backed securities of $0.8 million and $4.2 million at March 31,
2008 and December 31, 2007, respectively. 46




---



##### 



Residential Mortgage Loans
 Residential Mortgage Loans Product Data
 Weighted-AverageMonths toReset of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number ofLoans After
    
    
    
    
    
    
    Principal
    
    
    Seriously
    
    
    
    
    
    
    SeriouslyWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Delinquent Loans as a
    
    
    
    
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Seriously
    
    
    Percentage of
    
    
    Number of Seriously
    
    
    Loans as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Total
    
    
    Delinquent
    
    
    Percentage ofRate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    Loans (2)
    
    
    Principal
    
    
    Loans (2)
    
    
    Total LoansMarch 31, 2008Floating rate
mortgage
    
    
    7.82
    %
    
    
    2038
    
    
    
    1
    
    
    
    1
    
    
    $
    2,952,166
    
    
    $
    311,010
    
    
    
    7.78
    %
    
    
    710
    
    
    
    7.05
    %Hybrid mortgage
    
    
    6.54
    %
    
    
    2036
    
    
    
    40
    
    
    
    20
    
    
    
    1,047,677
    
    
    
    90,374
    
    
    
    2.26
    
    
    
    238
    
    
    
    2.35Total
    
    
    7.45
    %
    
    
    2037
    
    
    
    11
    
    
    
    5
    
    
    $
    3,999,843
    
    
    $
    401,384
    
    
    
    10.04
    %
    
    
    948
    
    
    
    9.40
    %December 31, 2007Floating rate
mortgage
    
    
    8.15
    %
    
    
    2038
    
    
    
    1
    
    
    
    1
    
    
    $
    3,045,983
    
    
    $
    199,985
    
    
    
    4.84
    %
    
    
    451
    
    
    
    4.30
    %Hybrid mortgage
    
    
    6.61
    %
    
    
    2036
    
    
    
    47
    
    
    
    20
    
    
    
    1,087,837
    
    
    
    54,062
    
    
    
    1.31
    
    
    
    150
    
    
    
    1.43Total
    
    
    7.72
    %
    
    
    2037
    
    
    
    12
    
    
    
    5
    
    
    $
    4,133,820
    
    
    $
    254,047
    
    
    
    6.15
    %
    
    
    601
    
    
    
    5.73
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities related to our hybrid residential mortgage loans. Amounts reflect the effect of these hedges on the months to reset
of our residential mortgage loans. In addition at March 31, 2008 and December 31, 2007, the financing for $0.2 billion and $0.3 billion of our hybrid residential mortgage loans, respectively, is, like
the underlying collateral, fixed for a period of three to five years and then becomes variable based upon the average rates of the underlying loans which will adjust based on LIBOR. The
weighted-average period to reset of the debt we use to acquire residential mortgage loans was match funded approximately five months and five months at March 31, 2008 and December 31, 2007,
respectively.(2)
    
    Seriously delinquent loans are loans 90 or more days past due and loans in foreclosure.   47




---



##### 



Residential Mortgage Loans Key Metrics
 March 31, 2008
    
    December 31, 2007Fair value
    
    $
    3,443,660
    
    
    $
    3,668,755Unpaid principal balance
    
    $
    3,999,843
    
    
    $
    4,133,820Number of loans
    
    
    10,077
    
    
    
    10,491Average loan balance
    
    $
    397
    
    
    $
    394Weighted-average coupon rate
    
    
    7.45
    %
    
    
    7.71
    %Weighted-average lifetime cap
    
    
    10.65
    %
    
    
    10.66
    %Weighted-average original term, in months
    
    
    376
    
    
    
    376Weighted-average remaining term, in months
    
    
    354
    
    
    
    356Weighted-average effective loan-to-value ratio (LTV)(1)
    
    
    72.1
    %
    
    
    71.8
    %Weighted-average FICO score
    
    
    711
    
    
    
    711Number of loans with FICO scores below 620
    
    
    8
    
    
    
    8Percentage of loans with FICO scores above 700
    
    
    55.3
    %
    
    
    55.6
    %Percentage of loans with LTV greater than 80%
    
    
    7.2
    %
    
    
    7.2
    %Percentage of loans with LTV greater than 90%
    
    
    1.3
    %
    
    
    1.3
    %Percentage of loans with effective LTV greater than 80% (1)
    
    
    0
    %
    
    
    0
    %Percentage of no documentation loans
    
    
    2.1
    %
    
    
    2.2
    %Percentage of loans originated for refinancing purposes
    
    
    58.3
    %
    
    
    58.3
    %Top five geographic concentrations (% exposure):California
    
    
    56.6
    %
    
    
    56.5
    %Florida
    
    
    9.9
    %
    
    
    9.7
    %Arizona
    
    
    4.2
    %
    
    
    4.3
    %Virginia
    
    
    3.8
    %
    
    
    3.9
    %Nevada
    
    
    3.7
    %
    
    
    3.7
    %Occupancy status:Owner-occupied
    
    
    85.7
    %
    
    
    85.8
    %Investor
    
    
    14.3
    %
    
    
    14.2
    %Property type:Single-family
    
    
    83.0
    %
    
    
    83.1
    %Condominium
    
    
    10.2
    %
    
    
    10.2
    %Other residential
    
    
    6.8
    %
    
    
    6.7
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Including the effect of mortgage insurance purchased to cover an additional $1.1 billion of loan principal
at March 31, 2008 and December 31, 2007. 48




---



##### 



Residential Mortgage Loan Quality
 FICO ScoresMarch 31, 2008
    
    <620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:£60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.8
    %60.01  70%
    
    
    0.0
    
    
    
    1.0
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    2.1
    
    
    
    6.970.01  80%
    
    
    0.0
    
    
    
    1.5
    
    
    
    2.4
    
    
    
    1.8
    
    
    
    2.0
    
    
    
    7.7> 80%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.6Total Full Documentation
    
    
    0.0
    %
    
    
    2.8
    %
    
    
    4.7
    %
    
    
    4.1
    %
    
    
    4.4
    %
    
    
    16.0
    %Reduced Documentation:(2)LTV:£60%
    
    
    0.0
    %
    
    
    0.4
    %
    
    
    1.2
    %
    
    
    1.2
    %
    
    
    2.0
    %
    
    
    4.8
    %60.01  70%
    
    
    0.0
    
    
    
    2.0
    
    
    
    10.2
    
    
    
    9.1
    
    
    
    7.6
    
    
    
    28.970.01  80%
    
    
    0.1
    
    
    
    3.4
    
    
    
    15.0
    
    
    
    14.1
    
    
    
    11.2
    
    
    
    43.8> 80%
    
    
    0.0
    
    
    
    0.5
    
    
    
    2.3
    
    
    
    1.1
    
    
    
    0.5
    
    
    
    4.4Total Reduced Documentation
    
    
    0.1
    %
    
    
    6.3
    %
    
    
    28.7
    %
    
    
    25.5
    %
    
    
    21.3
    %
    
    
    81.9
    %No Documentation:(3)LTV:£60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.6
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    1.370.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    2.1
    %Total Portfolio:LTV:£60%
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    1.6
    %
    
    
    1.6
    %
    
    
    2.4
    %
    
    
    6.2
    %60.01  70%
    
    
    0.0
    
    
    
    3.1
    
    
    
    12.4
    
    
    
    11.4
    
    
    
    10.2
    
    
    
    37.170.01  80%
    
    
    0.1
    
    
    
    4.9
    
    
    
    17.4
    
    
    
    16.0
    
    
    
    13.3
    
    
    
    51.7> 80%
    
    
    0.0
    
    
    
    0.6
    
    
    
    2.5
    
    
    
    1.3
    
    
    
    0.6
    
    
    
    5.0Total Portfolio
    
    
    0.1
    %
    
    
    9.2
    %
    
    
    33.9
    %
    
    
    30.3
    %
    
    
    26.5
    %
    
    
    100.0
    %
 49




---



##### 



FICO ScoresDecember 31, 2007
    
    <620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:£60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.8
    %60.01  70%
    
    
    0.0
    
    
    
    1.1
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    2.1
    
    
    
    7.070.01  80%
    
    
    0.0
    
    
    
    1.6
    
    
    
    2.4
    
    
    
    1.9
    
    
    
    2.1
    
    
    
    8.0> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.0
    %
    
    
    2.9
    %
    
    
    4.5
    %
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    15.8
    %Reduced Documentation:(2)LTV:£60%
    
    
    0.0
    %
    
    
    0.5
    %
    
    
    1.3
    %
    
    
    1.3
    %
    
    
    2.1
    %
    
    
    5.2
    %60.01  70%
    
    
    0.0
    
    
    
    2.1
    
    
    
    10.7
    
    
    
    9.3
    
    
    
    7.7
    
    
    
    29.870.01  80%
    
    
    0.1
    
    
    
    3.8
    
    
    
    16.7
    
    
    
    14.8
    
    
    
    11.6
    
    
    
    47.0> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.1
    %
    
    
    6.4
    %
    
    
    28.7
    %
    
    
    25.4
    %
    
    
    21.4
    %
    
    
    82.0
    %No Documentation:(3)LTV:£60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.6
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    1.370.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    2.2
    %Total Portfolio:LTV:£60%
    
    
    0.0
    %
    
    
    0.7
    %
    
    
    1.7
    %
    
    
    1.7
    %
    
    
    2.5
    %
    
    
    6.6
    %60.01  70%
    
    
    0.0
    
    
    
    3.3
    
    
    
    12.9
    
    
    
    11.6
    
    
    
    10.3
    
    
    
    38.170.01  80%
    
    
    0.1
    
    
    
    5.4
    
    
    
    19.2
    
    
    
    16.8
    
    
    
    13.8
    
    
    
    55.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    9.4
    %
    
    
    33.8
    %
    
    
    30.1
    %
    
    
    26.6
    %
    
    
    100.0
    %
 
 (1)
    
    Full documentation includes verification of the borrowers income, employment, assets and liabilities.(2)
    
    Reduced documentation, sometimes referred to as Alt-A, includes mortgages that comply with most, but
not all, of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
criteria for a conforming mortgage. Alt-A mortgages are generally high quality, with less than full
documentation verified.(3)
    
    No documentation excludes verification of borrowers income, employment or assets. Delinquencies and Allowance for loan losses
 Residential Mortgage Loan Delinquency Status
 March 31, 2008
    
    
    December 31, 2007Number of Loans
    
    
    Principal Amount
    
    
    Number of Loans
    
    
    Principal AmountDelinquency status:30 to 59 days
    
    
    520
    
    
    $
    223,025
    
    
    
    475
    
    
    $
    184,81460 to 90 days
    
    
    271
    
    
    
    111,955
    
    
    
    230
    
    
    
    98,73590 days or more
    
    
    445
    
    
    
    189,485
    
    
    
    299
    
    
    
    123,959Total
    
    
    1,236
    
    
    
    524,465
    
    
    
    1,004
    
    
    
    407,508Foreclosures
    
    
    503
    
    
    
    211,899
    
    
    
    302
    
    
    
    130,088Total Delinquencies
    
    
    1,739
    
    
    $
    736,364
    
    
    
    1,306
    
    
    $
    537,596
   50




---



##### 



51




---



##### 



Asset Repricing Characteristics
 Asset Repricing Characteristics
 March 31, 2008
    
    
    December 31, 2007Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    2,541,421
    
    
    
    69.4
    %
    
    $
    3,042,491
    
    
    
    65.7
    %Reset >1 month but < 12 months
    
    
    37,880
    
    
    
    1.0
    
    
    
    24,803
    
    
    
    0.5Reset >12 months but < 60 months
    
    
    733,500
    
    
    
    20.0
    
    
    
    909,440
    
    
    
    19.7Reset > 60 months
    
    
    130,859
    
    
    
    3.6
    
    
    
    157,085
    
    
    
    3.4Unamortized premium
    
    
    
    
    
    
    
    
    
    
    95,669
    
    
    
    2.1Allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    (38,145
    )
    
    
    (0.8
    )Sub-total
    
    
    3,443,660
    
    
    
    94.0
    
    
    
    4,191,343
    
    
    
    90.6ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    146,790
    
    
    
    4.0
    
    
    
    225,436
    
    
    
    4.9Reset >1 month but < 12 months
    
    
    2,607
    
    
    
    0.1
    
    
    
    900
    
    
    nmSub-total
    
    
    149,397
    
    
    
    4.1
    
    
    
    226,336
    
    
    
    4.9Fixed-rate residential mortgage-backed securities:
    
    
    1,382
    
    
    nm
    
    
    
    5,002
    
    
    
    0.1Spread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    69,795
    
    
    
    1.9
    
    
    
    204,547
    
    
    
    4.4Total mortgage assets
    
    $
    3,664,234
    
    
    
    100.0
    %
    
    $
    4,627,228
    
    
    
    100.0
    %
 
 nm = not meaningful    52




---



##### 



Index rates
 LIBOR
    
    
    Treasury
    
    
    MTA
    
    
    COFI
    
    
    Fixed Rate or OtherMarch 31, 2008Mortgage-backed securities
    
    
    100
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    nm
    %Residential mortgage loans
    
    
    27
    
    
    
    
    
    
    
    73
    
    
   nm
    
    
    
    December 31, 2007Mortgage-backed securities
    
    
    99
    %
    
  nm
    %
    
    
    
    %
    
    
    
    %
    
    
    1
    %Residential mortgage loans
    
    
    28
    
    
    
    
    
    
    
    72
    
    
  nm
    
    
    
    
 
 nm = not meaningful  Securitizations
 Consolidation
of Variable Interest Entities
 Mortgage-Backed Notes
  53




---



##### 



Loan Securitization Highlights
 AtSecuritization
    
    At March 31,Date
    
    2008Number of securitizations
    
    
    10
    
    
    
    10Loans, unpaid principal balance
    
    $
    6,528,104
    
    
    $
    4,685,365Mortgage-backed notes issued to third parties
    
    
    5,656,654
    
    
    
    4,386,468Debt retained
    
    
    871,450
    
    
    
    292,116Retained investment grade %(1)
    
    
    11.3
    %
    
    
    3.1
    %Retained non-investment grade %(1)
    
    
    1.6
    %
    
    
    3.3
    %Cost of debt on AAA-rated mortgage-backed
notes  spread to LIBOR(2)
    
    
    0.22
    %
    
    
    0.22
    %
 
 (1)
    
    Retained tranches as a percentage of total mortgage-backed notes issued.(2)
    
    LUM 2006-3 cost of debt excludes $0.3 billion of AAA-rated
mortgage-backed notes which, like the underlying loan collateral, are
fixed for three to five years and then become variable based upon the
average rates of the underlying loans which will adjust based on LIBOR. 54




---



##### 



Loan Securitizations Mortgage-Backed Notes Ratings
 AtSecuritization
    
    
    At March 31,Date
    
    
    2008Mortgage-backed notes issued to
third-party investorsAAA/Aaa rating
    
    $
    5,423,405
    
    
    $
    4,129,586AA/Aa rating
    
    
    208,867
    
    
    
    212,140A/A rating
    
    
    21,741
    
    
    
    31,176BBB/Baa rating
    
    
    2,641
    
    
    
    8,444Not rated
    
    
    
    
    
    
    5,122Total mortgage-backed notes issued to
third-party investors
    
    $
    5,656,654
    
    
    $
    4,386,468Percentage of total collateral
    
    
    86.7
    %
    
    
    93.6
    %Debt retainedAAA/Aaa rating
    
    $
    551,441
    
    
    $
    17,696AA/Aa rating
    
    
    57,631
    
    
    
    28,300A/A rating
    
    
    80,396
    
    
    
    46,473BBB/Bbb rating
    
    
    68,670
    
    
    
    60,856BB/Ba rating
    
    
    40,584
    
    
    
    37,752B/B rating
    
    
    24,630
    
    
    
    55,984CCC rating
    
    
    
    
    
    
    13,320Not rated
    
    
    36,055
    
    
    
    31,735Total mortgage- backed notes retained
    
    
    859,407
    
    
    
    292,116Overcollateralization
    
    
    12,043
    
    
    
    6,782Total debt retained
    
    $
    871,450
    
    
    $
    298,898Percentage of total collateral
    
    
    13.3
    %
    
    
    6.4
    %
 Collateralized Debt Obligations
    55




---



##### 



Exemption from the Investment Company Act of 1940
  
 
    Liquidity and Capital Resources
    56




---



##### 



Contractual Obligations and Commitments
  Contractual Obligations
 Payments Due by PeriodLess than 1
    
    
    
    
    
    
    3  5
    
    
    More thanTotal
    
    
    year
    
    
    1  3 years
    
    
    years
    
    
    5 yearsMarch 31, 2008Mortgage-backed notes (1)
    
    $
    4,259.6
    
    
    $
    1,166.0
    
    
    $
    1,449.8
    
    
    $
    770.5
    
    
    $
    873.3Repurchase agreements
    
    
    348.8
    
    
    
    348.8
    
    
    
    
    
    
    
    
    
    
    
    CDOs (1)
    
    
    649.9
    
    
    
    26.4
    
    
    
    41.3
    
    
    
    52.7
    
    
    
    529.5Junior subordinated notes
    
    
    313.6
    
    
    
    6.8
    
    
    
    13.7
    
    
    
    15.1
    
    
    
    278.0Convertible senior notes
    
    
    649.9
    
    
    
    26.4
    
    
    
    41.3
    
    
    
    52.7
    
    
    
    529.5Revolving credit facility (2)
    
    
    20.9
    
    
    
    1.1
    
    
    
    2.3
    
    
    
    17.5
    
    
    
    Facilities leases
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    6,242.8
    
    
    $
    1,575.6
    
    
    $
    1,548.4
    
    
    $
    908.5
    
    
    $
    2,210.3
 
 (1)
    
    The mortgage-backed notes and CDOs have stated maturities through 2047; however, the expected maturity is subject to
change based on the prepayments and loan losses of the underlying mortgage loans or mortgage-backed securities. In
addition, we may exercise a redemption option and thereby effect termination and early retirement of the debt. The payments
represented reflect our assumptions for prepayment and credit losses.(2)
    
    The revolving credit facility has a stated maturity of 2012. The terms of the facility require repayment from the sale
of assets and excess cash flows as defined in the agreement.(3)
    
    Subsequent to March 31, 2008, we entered into a new lease for office space. Contractual obligations on that lease are
approximately $0.2 million for each year of a six-year term 57




---



##### 



Off-Balance Sheet Arrangements
  
    
    If the governing documents or contractual arrangements are changed in a manner that
the obligation to absorb expected losses or rights to receive expected residual returns
are reallocated among the primary beneficiary and other unrelated parties;
    
    If we sell or otherwise dispose of all or a part of our beneficial interest to
unrelated parties; or
    
    If new interests are issued by the securitization trust.
    Recent Accounting and Reporting Developments
  
   Short-Term Financing Risks
  58




---



##### 



Credit Risk
      Concentration Risk
  59




---



##### 



Interest Rate Risk
  Effect on Net Interest Income
   60




---



##### 



Interest Rate Sensitivity
(dollars in millions)
 Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis PointsMarch 31, 2008:Mortgage-Backed SecuritiesFair value
    
    $
    220.8
    
    
    $
    220.6
    
    
    $
    220.4
    
    
    $
    220.2Change in fair value
    
    
    0.2
    
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.4
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Hedge InstrumentsFair value
    
    $
    (28.2
    )
    
    $
    (21.7
    )
    
    $
    (14.2
    )
    
    $
    (5.5
    )Change in fair value
    
    
    (6.5
    )
    
    
    
    
    
    
    7.5
    
    
    
    16.2Change as a percent of fair value
    
    
    (30.0
    )%
    
    
    
    
    
    
    34.5
    %
    
    
    74.7
    %Residential Mortgage LoansFair value
    
    $
    3,476.4
    
    
    $
    3,443.7
    
    
    $
    3,410.9
    
    
    $
    3,378.2Change in fair value
    
    
    32.7
    
    
    
    
    
    
    
    (32.7
    )
    
    
    (65.4
    )Change as a percent of fair value
    
    
    1.0
    %
    
    
    
    
    
    
    (0.9
    )%
    
    
    (1.9
    )%Mortgage-Backed NotesFair value
    
    $
    3,446.5
    
    
    $
    3,443.7
    
    
    $
    3,441.0
    
    
    $
    3,438.4Change in fair value
    
    
    2.8
    
    
    
    
    
    
    
    (2.7
    )
    
    
    (5.3
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Senior Convertible NotesFair value
    
    $
    37.2
    
    
    $
    36.0
    
    
    $
    34.9
    
    
    $
    33.8Change in fair value
    
    
    1.2
    
    
    
    
    
    
    
    (1.1
    )
    
    
    (2.2
    )Change as a percent of fair value
    
    
    3.3
    %
    
    
    
    
    
    
    (3.1
    )%
    
    
    (6.1
    )%Junior Subordinated NotesFair value
    
    $
    25.5
    
    
    $
    24.6
    
    
    $
    88.1
    
    
    $
    84.7Change in fair value
    
    
    0.9
    
    
    
    
    
    
    
    (0.9
    )
    
    
    (1.7
    )Change as a percent of fair value
    
    
    3.7
    %
    
    
    
    
    
    
    (3.7
    )%
    
    
    (6.9
    )%
   
    
    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.
 Extension Risk
  61




---



##### 



Interest Rate Cap Risk
   Prepayment Risk
  Inflation
  62




---



##### 



Conclusion Regarding Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  63




---



##### 



Class Action Lawsuits
   
    
    predict its outcome;
    
    estimate damages that might result from the case; or
    
    predict the effect that final resolution that the case might have on our
business, financial condition or results of operations, although such effect could
be materially adverse.
   Repurchase Agreement Litigation
    64




---



##### 



65




---



##### 



SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.By:
    
    /s/ Zachary H. PashelZachary H. PashelPresident and Chief Executive Officer(Principal Executive Officer)Date:
    
    May 19, 2008By:
    
    /s/ Karen ChangKaren ChangSenior Vice President, Chief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    May 19, 2008
 66




---



##### 



EXHIBIT INDEX
   ExhibitNumber
    
    Description10.1
    
    Employment Agreement dated as of January 1, 2008 between the Registrant
and Dimitri Papatheoharis (1)10.2
    
    Amended and Restated Employment Agreement dated as of January 1, 2008
between the Registrant and S. Trezevant Moore, Jr. (1)10.3
    
    Second Amendment to Amended and
Restated Credit Agreement, dated as of May 9, 2008 (2)10.4
    
    Supplement No. 1 to the
Amended and Restated Subsidiary Guarantee Agreement, dated as of
May 9, 2008 (2)10.5
    
    Assumption and Joinder Agreement to
Security Pledge Agreement, dated as of May 9, 2008 (2)10.6
    
    Joinder Agreement to Collateral
Security, Setoff and Netting Agreement, dated as of May 9, 2008
(2)10.7
    
    Separation Agreement with S.
Trezevant Moore, Jr., dated May 9, 200831.1 *
    
    Certification of Zachary H. Pashel, President 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 2002.31.2 *
    
    Certification of Karen Chang, Senior Vice President and Chief Financial
Officer of the Registrant, pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 *
    
    Certification of Zachary H. Pashel, President and Chief Executive
Officer of the Registrant, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 *
    
    Certification of Karen Chang, Senior Vice President and Chief Financial
Officer of the Registrant, pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith   67