##### 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 March 31, 2007
 OR
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from            to
 Commission File Number: 000-31828
 
 LUMINENT MORTGAGE CAPITAL, INC.
  Maryland
    
    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
    
    
    23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    51ITEM 4. CONTROLS AND PROCEDURES
    
    
    54PART IIITEM 1. LEGAL PROCEEDINGS
    
    
    56ITEM 1A. RISK FACTORS
    
    
    56ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    56ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    56ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    56ITEM 5. OTHER INFORMATION
    
    
    56ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    56SIGNATURES
    
    
    57EXHIBIT INDEX
    
    
    58EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our ability to purchase sufficient mortgages for our securitization business;
 
    
    the flattening of, or other changes in the yield curve, on our investment strategies;
 
    
    changes in interest rates and mortgage prepayment rates;
 
    
    our ability to obtain or renew sufficient funding to maintain our leverage strategies;
 
    
    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 power of our board of directors to change our operating policies and strategies without
stockholder approval;
 
    
    the effects of interest rate caps on our adjustable-rate and hybrid adjustable-rate loans
and mortgage-backed securities;
 
    
    the degree to which our hedging strategies may or may not protect us from interest rate
volatility;
 
    
    our ability to invest up to 10% of our investment portfolio in residuals, leveraged
mortgage derivative securities and shares of other REITs as well as other investments;
 
    
    volatility in the timing and amount of our cash distributions; and




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Condensed Consolidated Financial Statements of Luminent Mortgage Capital, Inc.:
 Condensed Consolidated Balance Sheets (unaudited) at March 31, 2007 and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2007 and March 31, 2006
    
    
    3Condensed Consolidated Statement of Stockholders Equity (unaudited) for the three months ended March 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2007 and March 31, 2006
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    7
 1




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2007
    
    
    2006Assets:Cash and cash equivalents
    
    $
    60,343
    
    
    $
    5,902Restricted cash
    
    
    57,445
    
    
    
    7,498Loans held-for-investment, net of allowance for loan losses of $8,262 at March 31, 2007
and
$5,020 at December 31, 2006
    
    
    5,569,169
    
    
    
    5,591,717Mortgage-backed securities (including $65,880 of trading securities
at March 31, 2007) at fair value
    
    
    200,918
    
    
    
    141,556Mortgage-backed securities pledged as collateral (including $70,609 of trading securities
at March 31, 2007) at fair value
    
    
    3,052,451
    
    
    
    2,789,382Debt securities, at fair value
    
    
    1,263
    
    
    
    Equity securities, at fair value
    
    
    925
    
    
    
    1,098Interest receivable
    
    
    38,117
    
    
    
    36,736Principal receivable
    
    
    1,462
    
    
    
    1,029Derivatives, fair value
    
    
    19,401
    
    
    
    13,021Other assets
    
    
    52,072
    
    
    
    25,856Total assets
    
    $
    9,053,566
    
    
    $
    8,613,795Liabilities:Mortgage-backed notes
    
    $
    4,273,596
    
    
    $
    3,917,677Repurchase agreements
    
    
    2,880,678
    
    
    
    2,707,915Commercial paper
    
    
    619,022
    
    
    
    637,677Collateralized debt obligations
    
    
    270,013
    
    
    
    Warehouse lending facilities
    
    
    403,232
    
    
    
    752,777Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Unsettled security purchases
    
    
    2,271
    
    
    
    Cash distributions payable
    
    
    14,418
    
    
    
    14,343Accrued interest expense
    
    
    9,340
    
    
    
    12,094Accounts payable and accrued expenses
    
    
    14,885
    
    
    
    6,969Total liabilities
    
    
    8,580,243
    
    
    
    8,142,240Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at March 31, 2007 and
December 31, 2006
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000
shares authorized; 47,958,510 and 47,808,510 shares issued and
outstanding at March 31, 2007 and December 31, 2006, respectively
    
    
    48
    
    
    
    48Additional paid-in capital
    
    
    584,204
    
    
    
    583,492Accumulated other comprehensive income
    
    
    4,929
    
    
    
    3,842Accumulated distributions in excess of accumulated earnings
    
    
    (115,858
    )
    
    
    (115,827
    )Total stockholders equity
    
    
    473,323
    
    
    
    471,555Total liabilities and stockholders equity
    
    $
    9,053,566
    
    
    $
    8,613,795
  2




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended March 31,(in thousands, except share and per share amounts)
    
    2007
    
    
    2006Revenues:Interest income:Mortgage loan and securitization portfolio
    
    $
    98,690
    
    
    $
    22,611Spread portfolio
    
    
    30,376
    
    
    
    30,965Credit sensitive bond portfolio
    
    
    16,500
    
    
    
    8,016Total interest income
    
    
    145,566
    
    
    
    61,592Interest expense
    
    
    115,204
    
    
    
    46,072Net interest income
    
    
    30,362
    
    
    
    15,520Other Income (Expense):Gains on derivatives, net
    
    
    15,264
    
    
    
    8,694Impairment losses on mortgage-backed securities
    
    
    (4
    )
    
    
    (1,717
    )Gains (losses) on sales of mortgage-backed securities
    
    
    (15,453
    )
    
    
    2,063Other expense
    
    
    (80
    )
    
    
    (477
    )Total other income (expense)
    
    
    (273
    )
    
    
    8,563Expenses:Salaries and benefits
    
    
    3,084
    
    
    
    2,423Servicing expense
    
    
    5,986
    
    
    
    1,482Provision for loan losses
    
    
    3,543
    
    
    
    Due diligence expense
    
    
    254
    
    
    
    83Professional services
    
    
    844
    
    
    
    622Board of directors expense
    
    
    80
    
    
    
    113Insurance expense
    
    
    162
    
    
    
    141Custody expense
    
    
    151
    
    
    
    112Management compensation expense to related party
    
    
    
    
    
    
    712Incentive compensation expense to related parties
    
    
    
    
    
    
    98Other general and administrative expenses
    
    
    1,138
    
    
    
    507Total expenses
    
    
    15,242
    
    
    
    6,293Income before income taxes
    
    
    14,847
    
    
    
    17,790Income tax expense
    
    
    460
    
    
    
    11Net income
    
    $
    14,387
    
    
    $
    17,779Net income per share  basic
    
    $
    0.30
    
    
    $
    0.45Net income per share  diluted
    
    $
    0.30
    
    
    $
    0.45Weighted-average number of shares outstanding  basic
    
    
    47,316,058
    
    
    
    39,491,786Weighted-average number of shares outstanding  diluted
    
    
    47,427,502
    
    
    
    39,718,552Dividend declared per share
    
    $
    0.30
    
    
    $
    0.05
  3




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (Unaudited)
 AccumulatedAccumulated
    
    
    DistributionsCommon Stock
    
    
    Additional
    
    
    Other
    
    
    in Excess ofPar
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive(in thousands)
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    TotalBalance, January 1, 2007
    
    
    47,809
    
    
    $
    48
    
    
    $
    583,492
    
    
    $
    3,842
    
    
    $
    (115,827
    )
    
    
    
    
    
    $
    471,555Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,387
    
    
    $
    14,387
    
    
    
    14,387Securities available-for-sale,
fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,531
    
    
    
    
    
    
    
    1,531
    
    
    
    1,531Amortization of derivative
gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (444
    )
    
    
    
    
    
    
    (444
    )
    
    
    (444
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,474Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,418
    )
    
    
    
    
    
    
    (14,418
    )Issuance and amortization of
restricted common stock
    
    
    150
    
    
    
    
    
    
    
    712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    712Balance, March 31, 2007
    
    
    47,959
    
    
    $
    48
    
    
    $
    584,204
    
    
    $
    4,929
    
    
    $
    (115,858
    )
    
    
    
    
    
    $
    473,323
  4




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended March 31,(in thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    14,387
    
    
    $
    17,779Adjustments to reconcile net income to net cash used in operating activities:Amortization of premium/(discount) on loans held-for-investment and
mortgage-backed securities and depreciation
    
    
    4,442
    
    
    
    (1,733
    )Impairment losses on mortgage-backed securities
    
    
    4
    
    
    
    1,717Provision for loan losses
    
    
    3,543
    
    
    
    Negative amortization of loans held-for-investment
    
    
    (35,466
    )
    
    
    (3,428
    )Share-based compensation
    
    
    712
    
    
    
    1,199Net realized and unrealized gains on derivative instruments
    
    
    (4,550
    )
    
    
    (5,209
    )Net gain (losses) on sales of mortgage-backed-securities available-for-sale
    
    
    15,453
    
    
    
    (2,063
    )Changes in operating assets and liabilities:(Increase) decrease in interest receivable, net of purchased interest
    
    
    (1,251
    )
    
    
    6,106(Increase) in other assets
    
    
    (18,492
    )
    
    
    (245
    )Increase (decrease) in accounts payable and other liabilities
    
    
    7,485
    
    
    
    (361
    )Decrease in accrued interest expense
    
    
    (2,754
    )
    
    
    (14,774
    )Increase in management compensation payable, incentive compensation
payable and other related-party payable
    
    
    
    
    
    
    221Net cash used in operating activities
    
    
    (16,485
    )
    
    
    (791
    )Cash flows from investing activities:Purchases of mortgage-backed securities
    
    
    (461,640
    )
    
    
    (1,079,321
    )Proceeds from sales of mortgage-backed securities
    
    
    14,887
    
    
    
    3,151,447Principal payments of mortgage-backed securities
    
    
    115,838
    
    
    
    201,647Purchases of loans held-for-investment, net
    
    
    (414,262
    )
    
    
    (1,671,093
    )Principal payments of loans held-for-investment
    
    
    460,433
    
    
    
    21,744Purchases of derivative instruments
    
    
    (8,880
    )
    
    
    (77
    )Proceeds from derivative instruments
    
    
    6,701
    
    
    
    Net change in restricted cash
    
    
    (49,947
    )
    
    
    777Other
    
    
    (136
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (337,006
    )
    
    
    625,124Cash flows from financing activities:Repurchases of common stock
    
    
    
    
    
    
    (9,008
    )Capitalized financing costs
    
    
    (4,414
    )
    
    
    (3,902
    )Borrowings under repurchase agreements
    
    
    11,312,497
    
    
    
    12,975,841Principal payments on repurchase agreements
    
    
    (11,139,734
    )
    
    
    (14,946,878
    )Borrowings under warehouse lending facilities
    
    
    834,153
    
    
    
    1,634,658Paydown of warehouse lending facilities
    
    
    (1,183,515
    )
    
    
    (1,375,181
    )Borrowings under commercial paper facility
    
    
    1,840,410
    
    
    
    Paydown of commercial paper facility
    
    
    (1,859,065
    )
    
    
    Distributions to stockholders
    
    
    (14,343
    )
    
    
    (1,218
    )Proceeds from issuance of mortgage-backed notes
    
    
    718,451
    
    
    
    1,283,630Principal payments on mortgage-backed notes
    
    
    (362,535
    )
    
    
    (26,060
    )Proceeds from issuance of collateralized debt obligations
    
    
    266,027
    
    
    
    Principal payments on margin debt
    
    
    
    
    
    
    (3,548
    )Net cash provided by (used in) financing activities
    
    
    407,932
    
    
    
    (470,856
    )Net increase in cash and cash equivalents
    
    
    54,441
    
    
    
    153,477Cash and cash equivalents, beginning of the period
    
    
    5,902
    
    
    
    11,466Cash and cash equivalents, end of the period
    
    $
    60,343
    
    
    $
    164,943
 5




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LUMINENT MORTGAGE CAPITAL, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 (Unaudited)
 Three months ended March 31,(in thousands)
    
    2007
    
    2006Supplemental disclosure of cash flow information:Interest paid
    
    $
    122,217
    
    
    $
    48,795Taxes paid
    
    
    56
    
    
    
    Non-cash investing and financing activities:Increase in unsettled security purchases
    
    $
    2,271
    
    
    $
    179,773(Increase) decrease in principal receivable
    
    
    (433
    )
    
    
    9,215Transfer of loans held-for-investment to real estate owned
    
    
    2,879
    
    
    
    Acquisition of mortgage-backed securities available-for-sale through collateralized debt obligations
    
    
    (3,986
    )
    
    
    Principal payments of mortgage-backed securities available-for-sale
    
    
    183
    
    
    
    Paydown of warehouse lending facilities
    
    
    (183
    )
    
    
    Increase in cash distributions payable to stockholders
    
    
    75
    
    
    
    766
  6




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Disclosures about Segments
of an Enterprise and Related Information.
  Accounting for Certain Hybrid Financial Instruments  an Amendment of FASB Statement
No. 133 and 140
 Recent Accounting Pronouncements
 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
 .
  7




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 Accounting for Certain Hybrid Financial
Instruments  an Amendment of FASB Statements No. 133 and 140. , Embedded Derivatives: Application of Paragraph 13(b) to Securitized
Interests in Prepayable Financial Assets (B40).
 Accounting for Uncertainty in
Income Taxes. Accounting for Income Taxes.
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 8




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 NOTE 2SECURITIES
 Mortgage-backed securities
  March 31,
    
    
    December 31,2007
    
    
    2006Amortized cost
    
    $
    3,251,597
    
    
    $
    2,930,878Unrealized gains
    
    
    10,051
    
    
    
    7,549Unrealized losses
    
    
    (8,279
    )
    
    
    (7,489
    )Fair value
    
    $
    3,253,369
    
    
    $
    2,930,938
     Weighted-Amortized
    
    
    AverageWeighted-Average Life
    
    Fair Value
    
    
    Cost
    
    
    CouponLess than one year
    
    $
    297,025
    
    
    $
    296,494
    
    
    
    5.77
    %Greater than one year and less than five years
    
    
    2,905,998
    
    
    
    2,900,655
    
    
    
    5.88Greater than five years
    
    
    50,346
    
    
    
    54,448
    
    
    
    6.93Total
    
    $
    3,253,369
    
    
    $
    3,251,597
    
    
    
    5.88
    %
 9




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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
    
    $
    235,186
    
    
    $
    234,932
    
    
    
    5.52
    %Greater than one year and less than five years
    
    
    2,612,020
    
    
    
    2,608,627
    
    
    
    5.89Greater than five years
    
    
    83,732
    
    
    
    87,319
    
    
    
    6.46Total
    
    $
    2,930,938
    
    
    $
    2,930,878
    
    
    
    5.88
    %
    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
    
    $
    5,986
    
    
    $
    (29
    )
    
    $
    1,210
    
    
    $
    (17
    )
    
    $
    7,196
    
    
    $
    (46
    )Non-agency-backed
mortgage-backed securities
    
    
    1,109,960
    
    
    
    (3,321
    )
    
    
    180,997
    
    
    
    (4,912
    )
    
    
    1,290,957
    
    
    
    (8,233
    )Total temporarily impaired
mortgage-backed securities
    
    $
    1,115,946
    
    
    $
    (3,350
    )
    
    $
    182,207
    
    
    $
    (4,929
    )
    
    $
    1,298,153
    
    
    $
    (8,279
    )
 10




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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
    
    $
    8,850
    
    
    $
    (66
    )
    
    $
    
    
    
    $
    
    
    
    $
    8,850
    
    
    $
    (66
    )Non-agency-backed
mortgage-backed securities
    
    
    971,034
    
    
    
    (3,058
    )
    
    
    138,210
    
    
    
    (4,365
    )
    
    
    1,109,244
    
    
    
    (7,423
    )Total temporarily impaired
mortgage-backed securities
    
    $
    979,884
    
    
    $
    (3,124
    )
    
    $
    138,210
    
    
    $
    (4,365
    )
    
    $
    1,118,094
    
    
    $
    (7,489
    )
    Recognition of interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets,
 11




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
    Other securities
  March 31, 2007
    
    
    December 31, 2006Equity
    
    
    Debt
    
    
    
    
    
    
    Equity
    
    
    DebtSecurities
    
    
    Securities
    
    
    Total
    
    
    Securities
    
    
    Securities
    
    
    TotalAmortized cost
    
    $
    1,050
    
    
    $
    1,271
    
    
    $
    2,321
    
    
    $
    1,050
    
    
    $
    
    
    
    $
    1,050Unrealized gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48Unrealized losses
    
    
    (125
    )
    
    
    (8
    )
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    Fair value
    
    $
    925
    
    
    $
    1,263
    
    
    $
    2,188
    
    
    $
    1,098
    
    
    $
    
    
    
    $
    1,098
 NOTE 3LOANS HELD-FOR-INVESTMENT
  March 31,
    
    
    December 31,2007
    
    
    2006Principal
    
    $
    5,452,591
    
    
    $
    5,472,325Unamortized premium
    
    
    124,840
    
    
    
    124,412Amortized cost
    
    
    5,577,431
    
    
    
    5,596,737Allowance for loan losses
    
    
    (8,262
    )
    
    
    (5,020
    )Total residential loans,
net of allowance for
loan losses
    
    $
    5,569,169
    
    
    $
    5,591,717
 12




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
   For the ThreeMonths EndedMarch 31,2007Balance, beginning of period
    
    $
    5,020Provision for loan losses
    
    
    3,543Usage of allowance
    
    
    (301
    )Balance, end of period
    
    $
    8,262
  NOTE 4BORROWINGS
   March 31, 2007
    
    
    December 31, 2006Weighted-
    
    
    
    
    
    
    
    
    
    
    Weighted-Borrowings
    
    
    Average
    
    
    Fair Value of
    
    
    Borrowings
    
    
    Average
    
    
    Fair Value ofOutstanding(1)
    
    
    Interest Rate
    
    
    Collateral(2)
    
    
    Outstanding(1)
    
    
    Interest Rate
    
    
    Collateral(2)Mortgage-backed notes
    
    
    4,270,888
    
    
    
    5.56
    %
    
    $
    4,270,739
    
    
    $
    3,914,932
    
    
    
    5.60
    %
    
    $
    3,919,354Repurchase agreements
    
    
    2,880,678
    
    
    
    5.42
    
    
    
    3,046,210
    
    
    
    2,707,915
    
    
    
    5.45
    
    
    
    2,909,895Commercial paper facility
    
    
    619,022
    
    
    
    5.36
    
    
    
    625,041
    
    
    
    637,677
    
    
    
    5.36
    
    
    
    643,823Collateralized debt obligations
    
    
    271,000
    
    
    
    6.44
    
    
    
    268,390
    
    
    
    
    
    
    
    
    
    
    
    Warehouse lending facilities
    
    
    403,232
    
    
    
    5.82
    
    
    
    420,925
    
    
    
    752,777
    
    
    
    5.80
    
    
    
    794,420Junior subordinated notes
    
    
    92,788
    
    
    
    8.58
    
    
    none
    
    
    
    92,788
    
    
    
    8.58
    
    
    noneTotal
    
    $
    8,537,608
    
    
    
    5.57
    %
    
    $
    8,631,305
    
    
    $
    8,104,089
    
    
    
    5.58
    %
    
    $
    8,267,492
 
 (1)
    
    Outstanding balances for mortgage-backed notes exclude $2.7 million in
unamortized premium at March 31, 2007 and December 31, 2006.
Outstanding balances of collateralized debt obligations exclude
unamortized discounts of $1.0 million at March 31, 2007.(2)
    
    Collateral for borrowings consists of mortgage-backed securities
available-for-sale and loans held-for-investment. Mortgage-backed Notes
  13




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
    March 31, 2007
    
    
    December 31, 2006Weighted-
    
    
    
    
    
    
    Weighted-Borrowings
    
    
    Average
    
    
    Borrowings
    
    
    AverageOutstanding(1)
    
    
    Interest Rate
    
    
    Outstanding(1)
    
    
    Interest RateLUM 2005-1
    
    $
    343,966
    
    
    
    5.60
    %
    
    $
    368,203
    
    
    
    5.63
    %LUM 2006-1
    
    
    421,909
    
    
    
    5.61
    
    
    
    495,453
    
    
    
    5.64LUM 2006-2
    
    
    581,403
    
    
    
    5.55
    
    
    
    668,049
    
    
    
    5.58LUM 2006-3
    
    
    548,254
    
    
    
    5.67
    
    
    
    588,999
    
    
    
    5.69LUM 2006-4
    
    
    292,568
    
    
    
    5.52
    
    
    
    324,819
    
    
    
    5.55LUM 2006-6
    
    
    664,131
    
    
    
    5.55
    
    
    
    712,959
    
    
    
    5.58LUM 2006-7
    
    
    752,061
    
    
    
    5.53
    
    
    
    756,450
    
    
    
    5.55LUM 2007-1
    
    
    666,596
    
    
    
    5.49
    
    
    
    
    
    
    
    Total
    
    $
    4,270,888
    
    
    
    5.56
    %
    
    $
    3,914,932
    
    
    
    5.60
    %
 
 (1)
    
    Outstanding balances for mortgage-backed notes
exclude $2.7 million in unamortized premium as of March 31, 2007
and December 31, 2006. Collateral for borrowings consists of loans
held-for-investment. Repurchase Agreements
   Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    2,377,123Between 31 and 90 days
    
    
    60,800Between 91 and 1,094 days
    
    
    442,755Total
    
    
    2,880,678
 14




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Overnight 1 day or less
    
    $
    Between 2 and 30 days
    
    
    2,070,939Between 31 and 90 days
    
    
    201,976Between 91 and 636 days
    
    
    435,000Total
    
    $
    2,707,915
 Commercial Paper Facility
  Collateralized Debt Obligations
  Warehouse Lending Facilities
 Mortgage
Loan Financing.
  Asset-backed Securities Financing.
 15




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
    At March 31, 2007
    
    
    At December 31, 2006Weighted-
    
    
    
    
    
    
    
    
    
    
    Weighted-Borrowing
    
    
    Borrowings
    
    
    Average
    
    
    Borrowing
    
    
    Borrowings
    
    
    AverageCounterparty
    
    Capacity
    
    
    Outstanding
    
    
    Interest Rate
    
    
    Capacity
    
    
    Outstanding
    
    
    Interest RateMortgage loan financing:Greenwich Capital Financial
Products, Inc.
    
    $
    1,000.0
    
    
    $
    403.2
    
    
    
    5.82
    %
    
    $
    1,000.0
    
    
    $
    455.2
    
    
    
    5.80
    %Barclays Bank plc
    
    
    1,000.0
    
    
    
    
    
    
    
    
    
    
    
    1,000.0
    
    
    
    290.1
    
    
    
    5.78Bear Stearns Mortgage Capital Corp.
    
    
    500.0
    
    
    
    
    
    
    
    
    
    
    
    500.0
    
    
    
    7.5
    
    
    
    5.77Asset-backed securities financing:Greenwich Capital Financial
Products, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500.0
    
    
    
    
    
    
    
    Total
    
    $
    2,500.0
    
    
    $
    403.2
    
    
    
    5.82
    %
    
    $
    3,000.0
    
    
    $
    752.8
    
    
    
    5.80
    %
  Junior Subordinated Notes
  March 31, 2007
    
    
    December 31, 2006Borrowings
    
    
    Interest
    
    
    Borrowings
    
    
    InterestOutstanding
    
    
    Rate
    
    
    Outstanding
    
    
    RateJunior subordinated notes:DST I
    
    $
    51,550
    
    
    
    8.16
    %
    
    $
    51,550
    
    
    
    8.16
    %DST II
    
    
    41,238
    
    
    
    9.10
    
    
    
    41,238
    
    
    
    9.11Total
    
    $
    92,788
    
    
    
    8.58
    %
    
    $
    92,788
    
    
    
    8.58
    %
  16




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Margin Lending Facility
  Capitalized Financing Costs
  NOTE 5CAPITAL STOCK AND EARNINGS PER SHARE
    17




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Three Months Ended March 31,2007
    
    
    2006Basic
    
    
    Diluted
    
    
    Basic
    
    
    DilutedNet income (in thousands)
    
    $
    14,387
    
    
    $
    14,387
    
    
    $
    17,779
    
    
    $
    17,779Weighted-average number
of common shares
outstanding
    
    
    47,316,058
    
    
    
    47,316,058
    
    
    
    39,491,786
    
    
    
    39,491,786Additional shares due to
assumed conversion of
dilutive instruments
    
    
    
    
    
    
    111,444
    
    
    
    
    
    
    
    226,766Adjusted
weighted-average number
of common shares
outstanding
    
    
    47,316,058
    
    
    
    47,427,502
    
    
    
    39,491,786
    
    
    
    39,718,552Net income per share
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.45
    
    
    $
    0.45
 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
    
    
    931,166
    
    
    
    
    
    
    
    931,166Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    918,834
    
    
    
    150,000
    
    
    
    1,068,834
 18




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
 2007Weighted-Number
    
    Averageof
    
    ExerciseOptions
    
    PriceOutstanding, beginning of period
    
    
    55,000

    
    $
       14.82Granted
    
    
    

    
    
    Exercised
    
    
    

    
    
    Forfeited
    
    
    

    
    
    Outstanding, end of period
    
    
    55,000

    
    $
    14.82
  Outstanding
    
    ExercisableWeighted-
    
    
    
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Remaining
    
    Weighted-
    
    
    
    
    
    Remaining
    
    Weighted-Exercise
    
    Number of
    
    Life
    
    Average
    
    Number of
    
    Life
    
    AveragePrices
    
    Options
    
    (in years)
    
    Exercise Price
    
    Options
    
    (in years)
    
    Exercise Price$13.00-$14.00
    
    
    5,000

    
    
 6.6

    
    $
13.00

    
    
5,000

    
    
   6.6

    
    $
13.00$14.01-$15.00
    
    
50,000

    
    
    6.3

    
    
15.00

    
    
50,000

    
    
6.3

    
    
   15.00$13.00-$15.00
    
    
55,000

    
    
    
    
    
    $
14.82

    
    
 55,000

    
    
    
    
    
    $
14.82
   Number of
    
    Weighted-AverageCommon Shares
    
    Issue PriceOutstanding, beginning of period
    
    
    721,329

    
    $
    9.13Issued
    
    
150,000

    
    
9.71Repurchased
    
    


    
    
Outstanding, end of period
    
    
871,329

    
    $
9.23
   Weighted-AverageNumber of
    
    Grant-Date FairCommon Shares
    
    ValueNonvested, beginning of the period
    
    
555,923

    
    $
9.20Granted
    
    
150,000

    
    
9.71Vested
    
    
(133,316
    )

    
8.68Repurchased
    
    


    
    
   Nonvested, end of the period
    
    
   572,607

    
    $
9.46
  19




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  NOTE 7FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosure About Fair Value of Financial Instruments
 NOTE 8ACCUMULATED OTHER COMPREHENSIVE INCOME
  March 31,
    
    
    December 31,2007
    
    
    2006Unrealized holding losses on mortgage-backed securities available-for-sale
    
    $
    (13,685
    )
    
    $
    (5,957
    )Reclassification adjustment for net losses (gains) on mortgage-backed
securities available-for-sale included in net income
    
    
    15,453
    
    
    
    (993
    )Impairment losses on mortgage-backed securities
    
    
    4
    
    
    
    7,010Net unrealized gain on mortgage-backed securities available-for-sale
    
    
    1,772
    
    
    
    60Net deferred realized and unrealized gains on cash flow hedges
    
    
    3,290
    
    
    
    3,734Net unrealized losses (gains) on equity securities available-for-sale
    
    
    (125
    )
    
    
    48Net unrealized losses on debt securities available-for-sale
    
    
    (8
    )
    
    
    Accumulated other comprehensive income
    
    $
    4,929
    
    
    $
    3,842
 NOTE 9DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  20




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LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  Estimated Fair ValueMarch 31,
    
    December 31,2007
    
    2006Eurodollar futures contracts sold short
    
    $
    740

    
    $
149Interest rate swap contracts
    
    
1,469

    
    
4,383Interest rate cap contracts
    
    
1,782

    
    
1,531Credit default swaps
    
    
15,852

    
    
6,958Forward sales of TBA mortgage-backed
securities
    
    
105

    
    

 Free Standing Derivatives
   Cash Flow Hedging Strategies
    Purchase Commitment Derivatives
  21




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (Unaudited)
  NOTE 10INCOME TAXES
    NOTE 11SUBSEQUENT EVENTS
     22




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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.
Cautionary Note regarding Forward-looking Statements. As a result of many factors, such as those
set forth under Risk Factors in Item 1A of this Form 10-Q, Item 1A of our 2006 Form 10-K,
elsewhere in this Quarterly Report or incorporated by reference herein, our actual results may
differ materially from those anticipated in such forward-looking statements.


Overview


Executive Summary




Financial performance:Return on equity
    
    
    12.1
    %Net interest spread
    
    
    1.33
    %Quarterly dividend declared
    
    $0.30 Per shareMortgage-backed assets:Percentage
of total securitized assets rated AAA
    
    81.5
    %Weighted
average credit rating of mortgage-backed securities
    
    
    AAPercentage of total assets that are
non-investment grade
    
    
    3.0
    %Asset/liability duration gap
    
    1 monthMortgage loans:Weighted average loan-to-value (1)
    
    
    72.8
    %Weighted average FICO score
    
    
    714Number of loans with FICO scores below 620
    
    
    11Percentage of loans with FICO scores above 700
    
    
    59.4
    %Percentage of no documentation loans
    
    
    2.3
    %Percentage owner occupied properties
    
    
    86.4
    %Percentage single family properties
    
    
    83.5
    %





|    |  |                                           
|--- |  | ------------------------------------------
|(1) |  | Including the effect of mortgage insurance



23




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24



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##### Table of Contents



25
    Table of Contents      
    
    interest rate trends and changes in the yield curve;
 
    
    the availability of a sufficient supply of mortgage loans and mortgage-backed securities
for purchase that meet our standards;
 
    
    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, credit risk and prepayment risks;
 
    
    the market value of our investments; and
 
    
    compliance with REIT requirements and the requirements we must meet to qualify for an
exemption under the Investment Company Act of 1940.
  26




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##### Table of Contents



Critical Accounting Policies
  Classifications of Investment Securities
 Accounting for Certain Hybrid
Financial Instruments  an Amendment of FASB Statements No. 133 and 140
 Valuations of Mortgage-backed Securities
    27
    Table of Contents     Loans Held-for-Investment
  Allowance and Provision for Loan Losses
    28




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##### Table of Contents



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.
  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
  29




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##### Table of Contents



Recent Accounting Pronouncements
  .
  . , Embedded
Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets
(B40).
 30




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##### Table of Contents



Accounting for Uncertainty in Income Taxes. Accounting for Income Taxes.
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 Results of Operations
   Three Months Ended March 31,2007
    
    2006Weighted-average yield on average earning
assets, net of premium amortization or
discount accretion
    
    
    6.97
    %
    
    
    5.46
    %Weighted-average cost of financing liabilities
    
    
    5.64
    
    
    
    4.51Net interest spread
    
    
    1.33
    %
    
    
    0.95
    %
   31




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Three Months
    
    
    Percentage
    
    
    Three Months
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageMarch 31,
    
    
    Financing
    
    
    March 31,
    
    
    Financing2007
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    61,044
    
    
    
    2.99
    %
    
    $
    13,774
    
    
    
    1.35
    %Interest expense on repurchase agreement liabilities
    
    
    36,414
    
    
    
    1.78
    
    
    
    28,015
    
    
    
    2.74Interest expense on commercial paper facility
    
    
    9,150
    
    
    
    0.45
    
    
    
    
    
    
    
    Interest expense on warehouse lending facilities
    
    
    6,868
    
    
    
    0.34
    
    
    
    3,201
    
    
    
    0.31Interest expense on junior subordinated notes
    
    
    1,954
    
    
    
    0.10
    
    
    
    1,891
    
    
    
    0.18Interest expense on CDOs
    
    
    146
    
    
    
    nm
    
    
    
    
    
    
    
    Amortization of net realized gains on futures and
interest rate swap contracts
    
    
    (444
    )
    
    
    (0.02
    )
    
    
    (1,414
    )
    
    
    (0.13
    )Net interest expense on interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    605
    
    
    
    0.06Other
    
    
    72
    
    
    
    nm
    
    
    
    
    
    
    
    Total interest expense
    
    $
    115,204
    
    
    
    5.64
    %
    
    $
    46,072
    
    
    
    4.51
    %
 
 nm = not meaningful    For the Three MonthsEnded March 31,2007
    
    
    2006Realized gains on derivative instruments, net
    
    $
    10.7
    
    
    $
    0.1Unrealized gains (losses) on derivative instruments, net
    
    
    4.2
    
    
    
    8.6Net interest income on interest rate swaps
    
    
    0.8
    
    
    
    Other derivative related expenses
    
    
    (0.4
    )
    
    
    Gains on derivatives, net
    
    
    15.3
    
    
    
    8.7Other-than-temporary impairment losses
    
    
    nm
    
    
    
    (1.7
    )Sales of mortgage-backed securities:Gains
    
    
    
    
    
    
    9.6Losses
    
    
    (15.5
    )
    
    
    (7.5
    )Sub-total
    
    
    (15.4
    )
    
    
    2.1Other expense
    
    
    (0.1
    )
    
    
    (0.5
    )Total
    
    $
    (0.3
    )
    
    $
    8.6
 
 nm = not meaningful  32




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REIT taxable net income
    For the Three
    
    
    For the ThreeMonths
    
    
    MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2007
    
    
    2006GAAP net income
    
    $
    14,387
    
    
    $
    17,779Adjustments to GAAP net income:Interest income and interest expense, net
    
    
    (15,304
    )
    
    
    (2,220
    )Impairment losses on mortgage-backed securities
    
    
    4
    
    
    
    1,717Provision for loan losses
    
    
    3,538
    
    
    
    Servicing expense
    
    
    5,640
    
    
    
    1,019Sales of mortgage-backed securities, net
    
    
    15,453
    
    
    
    (2,063
    )Other, net
    
    
    (9,439
    )
    
    
    (7,905
    )Net adjustments to GAAP net income
    
    
    (108
    )
    
    
    (9,452
    )REIT taxable net income
    
    $
    14,279
    
    
    $
    8,327REIT taxable net income per share
    
    $
    0.30
    
    
    $
    0.21Average shares outstanding on dividend record
date during the quarter
    
    
    48,056,594
    
    
    
    39,681,445
 33




---



##### Table of Contents



Three Months EndedMarch 31,2007
    
    
    2006Undistributed REIT taxable net income, beginning of period
    
    $
    4,429
    
    
    $
    3,154REIT taxable net income earned during period
    
    
    14,279
    
    
    
    8,327Distributions declared during period, net of dividend
equivalent rights on restricted stock
    
    
    (14,216
    )
    
    
    (1,954
    )Other adjustments
    
    
    2,171
    
    
    
    Undistributed REIT taxable net income, end of period
    
    $
    6,663
    
    
    $
    9,527Cash distributions per share declared during period
    
    $
    0.30
    
    
    $
    0.05Percentage of current year REIT taxable net income distributed
    
    
    99.6
    %
    
    
    23.5
    %
  Financial Condition
 Mortgage-backed securities
  34




---



##### Table of Contents



March 31, 2007
    
    
    December 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalMortgage-
    
    
    
    
    
    
    Mortgage-backed
    
    
    
    
    
    
    backedMarket Value
    
    
    securities
    
    
    Market Value
    
    
    securitiesResidential Mortgage Credit PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    192,449
    
    
    
    5.9
    %
    
    $
    129,096
    
    
    
    4.4
    %A/A rating
    
    
    347,163
    
    
    
    10.7
    
    
    
    238,623
    
    
    
    8.1BBB/Baa rating
    
    
    285,580
    
    
    
    8.8
    
    
    
    273,359
    
    
    
    9.3Total Investment-grade MBS
    
    
    825,192
    
    
    
    25.4
    
    
    
    641,078
    
    
    
    21.8Weighted-average credit rating
    
    
    A-
    
    
    
    
    
    
    
    A-Non-investment-grade MBS:BB/Ba rating
    
    
    129,260
    
    
    
    4.0
    
    
    
    145,741
    
    
    
    5.0Not rated
    
    
    10,731
    
    
    
    0.3
    
    
    
    11,196
    
    
    
    0.4Total non-investment-grade MBS
    
    
    139,991
    
    
    
    4.3
    
    
    
    156,937
    
    
    
    5.4Weighted-average credit rating (1)
    
    
    BB
    
    
    
    
    
    
    
    BBTotal Residential Mortgage Credit portfolio
    
    
    965,183
    
    
    
    29.7
    
    
    
    798,015
    
    
    
    27.2Weighted-average credit rating (1)
    
    
    A-
    
    
    
    
    
    
    
    BBB+Spread PortfolioAgency MBS
    
    
    93,530
    
    
    
    2.8
    
    
    
    106,648
    
    
    
    3.7AAA/Aaa rating
    
    
    2,194,656
    
    
    
    67.5
    
    
    
    2,026,275
    
    
    
    69.1Total Spread portfolio
    
    
    2,288,186
    
    
    
    70.3
    
    
    
    2,132,923
    
    
    
    72.8Weighted-average credit rating
    
    
    AAA
    
    
    
    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    3,253,369
    
    
    
    100.0
    %
    
    $
    2,930,938
    
    
    
    100.0
    %Weighted-average credit rating
    
    
    AA
    
    
    
    
    
    
    
    AA
 
 (1)
    
    Weighted-average credit rating excludes non-rated mortgage-backed
securities of $10.7 million and $11.2 million at March 31, 2007 and December
31, 2006, respectively. Loans held-for-investment
  35




---



##### Table of Contents



Weighted-AverageMonths toReset ofLoans After
    
    
    
    
    
    
    Principal
    
    
    Loans
    
    
    
    
    
    
    Number ofWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Delinquent
    
    
    
    
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Loans
    
    
    > 90 days as a
    
    
    Number of
    
    
    Loans as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Percentage of
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Rate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    > 90 days
    
    
    Total Principal
    
    
    Loans
    
    
    Total LoansFloating rate
mortgage
    
    
    8.19
    %
    
    
    2037
    
    
    
    1
    
    
    
    1
    
    
    $
    3,886,428
    
    
    $
    33,604
    
    
    
    0.62
    %
    
    
    76
    
    
    
    0.53
    %Hybrid mortgage
    
    
    6.57
    
    
    
    2036
    
    
    
    56
    
    
    
    24
    
    
    
    1,566,163
    
    
    
    18,240
    
    
    
    0.33
    
    
    
    47
    
    
    
    0.34Total
    
    
    7.72
    %
    
    
    2037
    
    
    
    17
    
    
    
    8
    
    
    $
    5,452,591
    
    
    $
    51,844
    
    
    
    0.95
    %
    
    
    123
    
    
    
    0.87
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by economically 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, the financing
for $0.2 billion of our hybrid residential mortgage loans 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 at March 31, 2007.  Weighted-AverageMonths toReset ofLoans After
    
    
    
    
    
    
    Principal
    
    
    Loans
    
    
    
    
    
    
    Number ofWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Delinquent
    
    
    
    
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Loans
    
    
    > 90 days as a
    
    
    Number of
    
    
    Loans as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Percentage of
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Rate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    > 90 days
    
    
    Total Principal
    
    
    Loans
    
    
    Total LoansFloating rate
mortgage
    
    
    8.02
    %
    
    
    2037
    
    
    
    1
    
    
    
    1
    
    
    $
    4,089,015
    
    
    $
    20,830
    
    
    
    0.38
    %
    
    
    45
    
    
    
    0.33
    %Hybrid mortgage
    
    
    6.57
    %
    
    
    2036
    
    
    
    54
    
    
    
    33
    
    
    
    1,383,310
    
    
    
    13,053
    
    
    
    0.24
    
    
    
    30
    
    
    
    0.21
    %Total
    
    
    7.65
    %
    
    
    2037
    
    
    
    14
    
    
    
    9
    
    
    $
    5,472,325
    
    
    $
    33,883
    
    
    
    0.62
    %
    
    
    75
    
    
    
    0.54
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of
liabilities related to our hybrid residential mortgage loans. Amounts
reflect the effect of these hedges on the months to reset of our
residential mortgage loans. In addition, the financing for $0.3
billion of our 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 December 31, 2006. 36




---



##### Table of Contents



Unpaid principal balance
    
    $
    5,452,591Number of loans
    
    
    14,208Average loan balance
    
    $
    384Weighted-average coupon rate
    
    
    7.72
    %Weighted-average lifetime cap
    
    
    10.73
    %Weighted-average original term, in months
    
    
    375Weighted-average remaining term, in months
    
    
    364Weighted-average loan-to-value ratio (LTV)(1)
    
    
    72.8
    %Weighted-average FICO score
    
    
    714Number of loans with FICO scores below 620
    
    
    11Percentage of loans with FICO scores above 700
    
    
    59.4
    %Percentage of loans with LTV greater than 80%
    
    
    8.2
    %Percentage of loans with LTV greater than 90%
    
    
    2.7
    %Percentage of loans with LTV greater than 80% net of
mortgage insurance
    
    
    0
    %Percentage of no documentation loans
    
    
    2.3
    %Percentage of loans originated for refinancing purposes
    
    
    57.6
    %Top five geographic concentrations (% exposure):California
    
    
    54.5
    %Florida
    
    
    11.3
    %Arizona
    
    
    4.0
    %Virginia
    
    
    3.5
    %Nevada
    
    
    3.3
    %Occupancy status:Owner occupied
    
    
    86.4
    %Investor
    
    
    13.6
    %Property type:Single-family
    
    
    83.5
    %Condominium
    
    
    10.1
    %Other residential
    
    
    6.4
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
 
 (1)
    
    Including the effect of mortgage insurance 37




---



##### Table of Contents



Unpaid principal balance
    
    $
    5,472,325Number of loans
    
    
    13,942Average loan balance
    
    $
    393Weighted-average coupon rate
    
    
    7.65
    %Weighted-average lifetime cap
    
    
    10.64
    %Weighted-average original term, in months
    
    
    375Weighted-average remaining term, in months
    
    
    366Weighted-average loan-to-value ratio (LTV)(1)
    
    
    72.6
    %Weighted-average FICO score
    
    
    713Number of loans with FICO scores below 620
    
    
    11Percentage of loans with FICO scores above 700
    
    
    58.5
    %Percentage of loans with LTV greater than 80%
    
    
    6.8
    %Percentage of loans with LTV greater than 90%
    
    
    1.3
    %Percentage of loans with LTV greater than 80%
net of mortgage insurance
    
    
    0
    %Percentage of no documentation loans
    
    
    2.5
    %Percentage of loans originated for refinancing purposes
    
    
    58.0
    %Top five geographic concentrations (% exposure):California
    
    
    57.4
    %Florida
    
    
    8.6
    %Arizona
    
    
    4.1
    %Virginia
    
    
    3.7
    %Nevada
    
    
    3.4
    %Occupancy status:Owner occupied
    
    
    86.5
    %Investor
    
    
    13.5
    %Property type:Single-family
    
    
    83.6
    %Condominium
    
    
    9.7
    %Other residential
    
    
    6.7
    %Collateral type:Alt A  first lien
    
    
    100.0
    %
 
 (1)
    
    Including the effect of mortgage insurance 38




---



##### Table of Contents



FICO Scores<620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:<60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    1.1
    %60.01  70%
    
    
    0.0
    
    
    
    1.0
    
    
    
    1.9
    
    
    
    2.1
    
    
    
    2.8
    
    
    
    7.870.01  80%
    
    
    0.0
    
    
    
    1.4
    
    
    
    2.5
    
    
    
    2.0
    
    
    
    2.4
    
    
    
    8.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.0
    %
    
    
    2.6
    %
    
    
    4.6
    %
    
    
    4.3
    %
    
    
    5.7
    %
    
    
    17.2
    %Reduced Documentation:(2)LTV:<60%
    
    
    0.0
    %
    
    
    0.5
    %
    
    
    1.3
    %
    
    
    1.4
    %
    
    
    2.4
    %
    
    
    5.6
    %60.01  70%
    
    
    0.0
    
    
    
    2.1
    
    
    
    10.2
    
    
    
    9.5
    
    
    
    8.8
    
    
    
    30.670.01  80%
    
    
    0.1
    
    
    
    3.2
    
    
    
    15.3
    
    
    
    13.9
    
    
    
    11.8
    
    
    
    44.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.1
    %
    
    
    5.8
    %
    
    
    26.8
    %
    
    
    24.8
    %
    
    
    23.0
    %
    
    
    80.5
    %No Documentation:(3)LTV:<60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.3
    %
    
    
    0.7
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    1.470.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    0.9
    %
    
    
    2.3
    %Total Portfolio:LTV:<60%
    
    
    0.0
    %
    
    
    0.7
    %
    
    
    1.7
    %
    
    
    1.8
    %
    
    
    3.2
    %
    
    
    7.4
    %60.01  70%
    
    
    0.0
    
    
    
    3.2
    
    
    
    12.5
    
    
    
    12.0
    
    
    
    12.1
    
    
    
    39.870.01  80%
    
    
    0.1
    
    
    
    4.6
    
    
    
    17.8
    
    
    
    16.0
    
    
    
    14.3
    
    
    
    52.8> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    8.5
    %
    
    
    32.0
    %
    
    
    29.8
    %
    
    
    29.6
    %
    
    
    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. 39




---



##### Table of Contents







FICO Scores<620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:<60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    1.1
    %60.01  70%
    
    
    0.0
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.5
    
    
    
    4.770.01  80%
    
    
    0.0
    
    
    
    1.6
    
    
    
    3.1
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    10.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.0
    %
    
    
    2.6
    %
    
    
    4.5
    %
    
    
    3.9
    %
    
    
    5.1
    %
    
    
    16.1
    %Reduced Documentation:(2)LTV:<60%
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    1.3
    %
    
    
    1.5
    %
    
    
    2.4
    %
    
    
    5.8
    %60.01  70%
    
    
    0.0
    
    
    
    2.0
    
    
    
    7.9
    
    
    
    7.3
    
    
    
    6.7
    
    
    
    23.970.01  80%
    
    
    0.1
    
    
    
    3.7
    
    
    
    18.1
    
    
    
    16.0
    
    
    
    13.8
    
    
    
    51.7> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.1
    %
    
    
    6.3
    %
    
    
    27.3
    %
    
    
    24.8
    %
    
    
    22.9
    %
    
    
    81.4
    %No Documentation:(3)LTV:<60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.4
    %
    
    
    0.8
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    1.170.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.8
    %
    
    
    1.0
    %
    
    
    2.5
    %Total Portfolio:LTV:<60%
    
    
    0.0
    %
    
    
    0.8
    %
    
    
    1.7
    %
    
    
    1.9
    %
    
    
    3.3
    %
    
    
    7.7
    %60.01  70%
    
    
    0.0
    
    
    
    2.9
    
    
    
    9.4
    
    
    
    8.8
    
    
    
    8.6
    
    
    
    29.770.01  80%
    
    
    0.1
    
    
    
    5.3
    
    
    
    21.3
    
    
    
    18.8
    
    
    
    17.1
    
    
    
    62.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    9.0
    %
    
    
    32.4
    %
    
    
    29.5
    %
    
    
    29.0
    %
    
    
    100.0
    %





|    |  |                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Full documentation includes verification of the borrowers income, employment,
assets and liabilities.                                                                                                                                                                                                                           
|   
|(2) |  | Reduced documentation, sometimes referred to as Alt-A, includes mortgages that
comply with most, but not all, of the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation criteria for a conforming mortgage. Alt-A
mortgages are generally high quality, with less than full documentation verified.
|   
|(3) |  | No documentation excludes verification of borrowers income, employment or assets.                                                                                                                                                                                                                                               





40




---



##### Table of Contents











Securitizations


Mortgage-Backed Notes




41




---



##### Table of Contents











42



---



##### Table of Contents



LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    LUM
    
    Total2005-1
    
    2006-1
    
    2006-2
    
    2006-3
    
    2006-4
    
    2006-5
    
    2006-6
    
    2006-7
    
    2007-1
    
    PortfolioTransaction execution date
    
    
    11/2/05
    
    
    
    1/26/06
    
    
    
    2/23/06
    
    
    
    4/28/06
    
    
    
    5/28/06
    
    
    
    6/29/06
    
    
    
    9/28/06
    
    
    
    12/27/06
    
    
    
    1/25/07Loans, unpaid principal balance
    
    $
    520,568
    
    
    $
    576,122
    
    
    $
    801,474
    
    
    $
    682,535
    
    
    $
    497,220
    
    
    $
    508,789
    
    
    $
    772,732
    
    
    $
    799,655
    
    
    $
    706,841
    
    
    $
    5,865,936Mortgage-backed notes issued
to third parties
    
    
    500,267
    
    
    
    536,657
    
    
    
    746,973
    
    
    
    654,270
    
    
    
    376,148
    
    
    
    
    
    
    
    753,415
    
    
    
    756,450
    
    
    
    691,383
    
    
    
    5,015,563Debt retained
    
    
    20,301
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    28,265
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    19,317
    
    
    
    43,205
    
    
    
    15,458
    
    
    
    850,373Retained investment grade %(1)
    
    
    3.1
    %
    
    
    3.9
    %
    
    
    3.7
    %
    
    
    2.9
    %
    
    
    21.1
    %
    
    
    97.2
    %
    
    
    1.0
    %
    
    
    4.6
    %
    
    
    1.50
    %
    
    
    12.2
    %Retained non-investment grade
%(1)
    
    
    0.8
    %
    
    
    3.0
    %
    
    
    3.1
    %
    
    
    1.3
    %
    
    
    3.2
    %
    
    
    2.8
    %
    
    
    1.5
    %
    
    
    0.8
    %
    
    
    0.7
    %
    
    
    1.8
    %Cost of debt on AAA-rated
mortgage-backed notes  spread
to LIBOR(2)
    
    
    0.27
    %
    
    
    0.28
    %
    
    
    0.22
    %
    
    
    0.23
    %
    
    
    0.21
    %
    
    
    0.21
    %
    
    
    0.22
    %
    
    
    0.19
    %
    
    
    0.16
    %
    
    
    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 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. 43




---



##### Table of Contents



LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    LUM
    
    
    Total2005-1
    
    
    2006-1
    
    
    2006-2
    
    
    2006-3
    
    
    2006-4
    
    
    2006-5
    
    
    2006-6
    
    
    2006-7
    
    
    2007-1
    
    
    PortfolioTransaction
execution date
    
    
    11/2/05
    
    
    
    1/26/06
    
    
    
    2/23/06
    
    
    
    4/28/06
    
    
    
    5/28/06
    
    
    
    6/29/06
    
    
    
    9/28/06
    
    
    
    12/27/06
    
    
    
    1/25/07Mortgage-backed
notes issued to
third-party
investorsAAA/Aaa rating
    
    $
    482,307
    
    
    $
    517,069
    
    
    $
    717,320
    
    
    $
    597,700
    
    
    $
    376,148
    
    
    $
    
    
    
    $
    712,846
    
    
    $
    725,289
    
    
    $
    668,844
    
    
    $
    4,797,523AA/Aa rating
    
    
    17,960
    
    
    
    19,588
    
    
    
    29,653
    
    
    
    56,570
    
    
    
    
    
    
    
    
    
    
    
    29,364
    
    
    
    20,597
    
    
    
    19,926
    
    
    
    193,658A/A rating
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,205
    
    
    
    7,923
    
    
    
    2,613
    
    
    
    21,741BBB/Baa rating
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,641
    
    
    
    
    
    
    
    2,641Total
mortgage-backed
notes issued to
third-party
investors
    
    $
    500,267
    
    
    $
    536,657
    
    
    $
    746,973
    
    
    $
    654,270
    
    
    $
    376,148
    
    
    $
    
    
    
    $
    753,415
    
    
    $
    756,450
    
    
    $
    691,383
    
    
    $
    5,015,563Percentage of total
collateral
    
    
    96.1
    %
    
    
    93.1
    %
    
    
    93.2
    %
    
    
    95.9
    %
    
    
    75.7
    %
    
    
    
    
    
    
    97.5
    %
    
    
    94.6
    %
    
    
    97.8
    %
    
    
    85.5
    %Debt retainedAAA/Aaa rating
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    66,378
    
    
    $
    457,910
    
    
    $
    
    
    
    $
    27,153
    
    
    $
    
    
    
    $
    551,441AA/Aa rating
    
    
    6,767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,397
    
    
    
    21,369
    
    
    
    
    
    
    
    2,580
    
    
    
    7,935
    
    
    
    57,048A/A rating
    
    
    4,165
    
    
    
    13,251
    
    
    
    18,434
    
    
    
    9,852
    
    
    
    12,430
    
    
    
    9,667
    
    
    
    3,864
    
    
    
    1,358
    
    
    
    1,513
    
    
    
    74,534BBB/Bbb rating
    
    
    5,206
    
    
    
    8,930
    
    
    
    11,221
    
    
    
    9,649
    
    
    
    7,707
    
    
    
    5,851
    
    
    
    3,864
    
    
    
    5,357
    
    
    
    1,375
    
    
    
    59,160BB/Ba rating
    
    
    1,301
    
    
    
    7,202
    
    
    
    10,419
    
    
    
    1,879
    
    
    
    6,215
    
    
    
    6,614
    
    
    
    6,954
    
    
    
    
    
    
    
    
    
    
    
    40,584B/B rating
    
    
    
    
    
    
    5,761
    
    
    
    8,015
    
    
    
    1,569
    
    
    
    5,469
    
    
    
    3,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,630Not rated
    
    
    
    
    
    
    4,321
    
    
    
    6,412
    
    
    
    1,257
    
    
    
    4,476
    
    
    
    3,562
    
    
    
    4,635
    
    
    
    6,757
    
    
    
    4,635
    
    
    
    36,055Total mortgage-
backed notes
retained
    
    
    17,439
    
    
    
    39,465
    
    
    
    54,501
    
    
    
    24,206
    
    
    
    121,072
    
    
    
    508,789
    
    
    
    19,317
    
    
    
    43,205
    
    
    
    15,458
    
    
    
    843,452Overcollateralization
    
    
    2,862
    
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,921Total debt retained
    
    $
    20,301
    
    
    $
    39,465
    
    
    $
    54,501
    
    
    $
    28,265
    
    
    $
    121,072
    
    
    $
    508,789
    
    
    $
    19,317
    
    
    $
    43,205
    
    
    $
    15,458
    
    
    $
    850,373Percentage of total
collateral
    
    
    3.9
    %
    
    
    6.9
    %
    
    
    6.8
    %
    
    
    4.1
    %
    
    
    24.3
    %
    
    
    100.0
    %
    
    
    2.5
    %
    
    
    5.4
    %
    
    
    2.2
    %
    
    
    14.5
    %
 44




---



##### Table of Contents



Collateralized Debt Obligations
  Asset Repricing Characteristics
  March 31, 2007
    
    
    December 31, 2006Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    3,886,428
    
    
    
    44.0
    %
    
    $
    4,089,015
    
    
    
    48.0
    %Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    nmReset >12 months but < 60 months
    
    
    1,216,485
    
    
    
    13.8
    
    
    
    1,180,727
    
    
    
    13.9Reset > 60 months
    
    
    349,678
    
    
    
    4.0
    
    
    
    202,299
    
    
    
    2.4Unamortized premium
    
    
    124,840
    
    
    
    1.4
    
    
    
    124,412
    
    
    
    1.5Allowance for loan losses
    
    
    (8,262
    )
    
    
    (0.1
    )
    
    
    (5,020
    )
    
    
    (0.1
    )Sub-total
    
    
    5,569,169
    
    
    
    63.1
    
    
    
    5,591,717
    
    
    
    65.7ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    868,895
    
    
    
    9.9
    
    
    
    796,539
    
    
    
    9.3Reset >1 month but < 12 months
    
    
    10,895
    
    
    
    0.1
    
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    879,790
    
    
    
    10.0
    
    
    
    796,539
    
    
    
    9.3Fixed-rate residential mortgage-backed securities:
    
    
    85,393
    
    
    
    1.0
    
    
    
    1,476
    
    
    
    nmSpread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    2,192,657
    
    
    
    24.8
    
    
    
    2,024,275
    
    
    
    23.7Reset >1 month but < 12 months
    
    
    95,529
    
    
    
    1.1
    
    
    
    108,648
    
    
    
    1.3Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    2,288,186
    
    
    
    25.9
    
    
    
    2,132,923
    
    
    
    25.0Total mortgage assets
    
    $
    8,822,538
    
    
    
    100.0
    %
    
    $
    8,522,655
    
    
    
    100.0
    %
 
 nm = not meaningful  45




---



##### Table of Contents



LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    98
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    34
    
    
    
    
    
    
    
    66
    
    
    
    nm
  LIBOR
    
    Treasury
    
    MTA
    
    COFIMortgage-backed
securities
    
    
    98
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    26
    
    
    
    
    
    
    
    74
    
    
    nm
 
 nm = not meaningful  Liquidity and Capital Resources
   46




---



##### Table of Contents



Principal payments received on residential mortgage loans
    
    $
    404,531Principal distributed to mortgage-backed note holders(1)
    
    
    (364,740
    )Principal receipts used for interest payments on mortgage-backed notes
    
    
    39,791Interest cash receipts on residential mortgage loans for interest and other
fee income, net of servicing and other reimbursements
    
    
    47,825Interest payments to mortgage-backed note holders(1)
    
    
    (87,616
    )Interest payments on mortgage-backed notes in excess of interest cash receipts
    
    
    (39,791
    )Net cash flow
    
    $
    
 
 (1)
    
    Amount includes principal and interest distributed on bonds we retained.   47




---



##### Table of Contents



LUM2007-1Transaction execution date
    
    
    1/25/07Loans, unpaid principal balance
    
    $
    706,841Mortgage-backed notes issued to third parties
    
    
    691,383Debt retained
    
    $
    15,458
     48




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##### Table of Contents



49




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##### Table of Contents



Inflation
  Contractual Obligations and Commitments
  Payments Due by PeriodLess than 1
    
    
    
    
    
    
    3  5
    
    
    More than(in millions)
    
    Total
    
    
    year
    
    
    1  3 years
    
    
    years
    
    
    5 yearsMortgage-backed notes (1)
    
    $
    4,270.9
    
    
    $
    992.7
    
    
    $
    1,975.1
    
    
    $
    1,205.8
    
    
    $
    97.3Repurchase agreements
    
    
    2,880.7
    
    
    
    2,572.9
    
    
    
    307.8
    
    
    
    
    
    
    
    Warehouse lending
facilities
    
    
    403.2
    
    
    
    403.2
    
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    621.8
    
    
    
    621.8
    
    
    
    
    
    
    
    
    
    
    
    CDOs (1)
    
    
    271.0
    
    
    
    0.5
    
    
    
    48.5
    
    
    
    128.3
    
    
    
    93.7Junior subordinated notes
    
    
    92.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92.8Facilities leases
    
    
    1.0
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.1Total
    
    $
    8,541.4
    
    
    $
    4,591.3
    
    
    $
    2,331.8
    
    
    $
    1,334.4
    
    
    $
    283.9
 
 (1)
    
    The mortgage-backed notes and CDOs have stated maturities through 2047; however, the expected maturity is subject to
change based on the prepayments and loan losses of the underlying mortgage loans or mortgage-backed securities. In addition,
we may exercise a redemption option and thereby effect termination and early retirement of the debt. The payments represented
reflect our assumptions for prepayment and credit losses at March 31, 2007 and assume we will exercise our redemption option. Off-Balance Sheet Arrangements
  50




---



##### Table of Contents



Credit Risk
     Concentration Risk
  Interest Rate Risk
  Effect on Net Interest Income
  51




---



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Extension Risk
   52




---



##### Table of Contents



Interest Rate Cap Risk
     Prepayment Risk
  53




---



##### Table of Contents



Risk Management
  
    
    monitoring and adjusting, if necessary, the reset index and interest rate related to our
mortgage-backed securities and our borrowings;
    
    attempting to structure our borrowing agreements to have a range of different maturities,
terms, amortizations and interest rate adjustment periods;
    
    using derivatives, financial futures, swaps, options, caps, floors and forward sales to
adjust the interest rate sensitivity of our mortgage-backed securities and our borrowings;
and
    
    actively managing, on an aggregate basis, the interest rate indices, interest rate
adjustment periods and gross reset margins of our mortgage-backed securities and the interest
rate indices and adjustment periods of our borrowings.
  
  Conclusion Regarding Disclosure Controls and Procedures
  54




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting
  55




---



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56




---



##### Table of Contents



SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.By:
    
    /s/ S. TREZEVANT MOORES. Trezevant MooreChief Executive Officer(Principal Executive Officer)Date:
    
    May 10, 2007By:
    
    /s/ CHRISTOPHER J. ZYDAChristopher J. ZydaChief Financial Officer(Principal Financial and Accounting Officer)Date:
    
    May 10, 2007
 57




---



##### Table of Contents



EXHIBIT INDEX
   ExhibitNumber
    
    Description10.1*
    
    Amended and Restated Employment Agreement effective as of May 10, 2007
between the Registrant and Gail P. Seneca.31.1*
    
    Certification of S. Trezevant
Moore, Chief Executive Officer of the Registrant, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Christopher J.
Zyda, Chief Financial Officer of the Registrant, pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of S. Trezevant
Moore, 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 2002.32.2*
    
    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 2002.
  58