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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2007
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period fromto.
 Commission file number 001-31828
 LUMINENT MORTGAGE CAPITAL, INC.
  Maryland
(State or other jurisdiction of incorporation or organization)
    
    06-1694835
(I.R.S. Employer Identification No.)One Commerce Square, 21stFloor, 2005 Market Street, Philadelphia, PA
(Address of principal executive offices)

    19103
(Zip Code)
 (215) 564-5900
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $0.001 per share
    
    New York Stock Exchange
  o þ
 o þ
 þ o
 o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



INDEX
 PAGEPREFACE
    
    
    3PART IITEM 1.
    
    BUSINESS
    
    
    6ITEM 1A.
    
    RISK FACTORS
    
    
    17ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    27ITEM 2.
    
    PROPERTIES
    
    
    27ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    28ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    28PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    29ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    33ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    34ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    58ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    62ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    95ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    95ITEM 9B.
    
    OTHER INFORMATION
    
    
    97PART IIIITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT
    
    
    97ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    99ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    110ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
    
    
    111ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    114PART IVITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    116SIGNATURESEXHIBIT INDEXConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmCertification of S. Trezevant Moore, Jr.Certification of Karen ChangCertification of S. Trezevant Moore, Jr., pursuant to Section 906Certification of Karen Chang, pursuant to Section 906
  2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our ability to obtain the financing we will need to support our liquidity position
and to remain in business;
    
    our inability to meet 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 1940 Act;
    
    the possible impact of our failure to maintain our qualification as a REIT;
    
    the effect of the delisting of our common stock by the 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 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;
    
    volatility in the timing and amount of our cash distributions; and
    
    the other important factors described in this Form 10-K including those under the
captions Managements Discussion and Analysis of Financial Condition and Results of
Operations, Risk Factors and Quantitative and Qualitative Disclosures about Market
Risk.
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5




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Our Company
 Overview
   Assets
    Borrowings
   6




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Hedging
     Business Strategy
 Investment Strategy
  Management Services
  Credit Risk Management
  7




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Asset Management
    8




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Non-domestic Activities
    Portfolio Activities
     9




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Financing Strategy
   10




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Our Operating Policies and Programs
  
    
    asset acquisition policies;
    
    capital/liquidity and leverage policies;
    
    credit risk management policy;
    
    asset/liability management policy; and
    
    prepayment risk management.
 Asset Acquisition Policy
  
    
    Category IAt least 75% of our total assets will be RMBS, residential real estate
loans and short-term investments. Residential real estate loans will be prime credit
quality loans, for example have FICO scores not less than 600, have a combined
loan-to-value ratio not greater than 105% and be either in first or second lien
position.
    
    Category IIAt least 90% of our total assets will consist of Category I investments
plus residential real estate loans not meeting one or more of the criteria in Category
I.
    
    Category IIINo more than 10% of our total assets will be of a type not meeting any
of the above criteria. Among the types of assets generally assigned to this category
are residuals, leveraged mortgage derivative securities, shares of REITs or other
investments.
  
    
    the underwriter and servicer of the underlying loans;
    
    the coupon, price and yield of the assets;
    
    the amount and timing of the anticipated cash flow from the assets;
    
    our ability to pledge the assets to secure collateralized borrowings;
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
    
    the potential increase in our capital requirements determined by our capital and
leverage policy resulting from the purchase and financing of the assets;
    
    the amount of the borrowings provided;
    
    the cost of financing, managing, reserving and hedging the assets, if applicable; and
    
    our other investment policies, as amended from time to time.
 Capital/Liquidity and Leverage Policies
    Credit Risk Management Policy
   Asset/Liability Management Policy
 Interest Rate Risk Management.
 
    
    monitoring and adjusting, if necessary, the reset index and interest rates of our
mortgage-related assets and our borrowings;
    
    attempting to structure our borrowing agreements to have a range of different
maturities, terms, amortizations and interest rate adjustment periods;
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
    
    using derivatives, financial futures, swaps, options, caps, floors and forward sales
to adjust the interest rate sensitivity of our mortgage-related assets 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-related assets and the
interest rate indices and adjustment periods of our borrowings.
  Prepayment Risk Management.
 Growth Strategy
  Description of Mortgage-Related Assets
 Mortgage Loans
   Mortgage-Backed Securities
   13




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Other Investments
   Industry Trends
  Competition
  Federal Income Tax Considerations
 General
    14




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Requirements for Qualification as a REIT
  Stock Ownership Tests
  Income Tests
  
    
    under the 75% gross income test, we must derive at least 75% of our gross
income, excluding gross income from prohibited transactions, from specified real estate
sources, including rental income, interest on obligations secured by mortgages on real
property or on interests in real property, gain from the disposition of qualified real
estate assets, i.e., interests in real property, mortgages secured by real property or
interests in real property and some other assets, and income from certain types of
temporary investments; and
    
    under the 95% gross income test, we must derive at least 95% of our gross
income, excluding gross income from prohibited transactions and certain qualified
hedging transactions, from (1) the sources of income that satisfy the 75% gross income
test, (2) dividends, interest and gain from the sale or disposition of stock or
securities or (3) any combination of the foregoing.
  Asset Tests
   Annual Distribution Requirements
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Taxation of Stockholders
    
    
    A stockholders share of the excess inclusion income is not allowed to be offset
by any net operating losses otherwise available to the stockholder;
    
    A tax-exempt stockholders share of excess inclusion income generally is subject
to tax as unrelated business taxable income; and
    
    A non-U.S. stockholders share of excess inclusion income is subject to
U.S. withholding tax at the maximum rate (30%), without reduction for any otherwise
applicable income tax treaty.
 Employees
  Website Access to Our Periodic SEC Reports
 www.luminentcapital.com.
 www.sec.gov
  CEO/CFO Certifications
  16




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The following risk factors describe many potential occurrences that could adversely impact our
results of operations and financial condition. We employ a number of strategies designed to
counteract these potential occurrences which we describe under Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K.
 General Risks Related to Our Business
 We may not be able to implement our new business strategy profitably.
  Even if we are able to stabilize our business and to resume purchasing new investments, we
might not be able to purchase residential mortgage loans, mortgage-backed securities and other
investments that meet our investment criteria or at favorable spreads over our borrowing costs.
  The current dislocations in the sub-prime mortgage sector and the current weakness in the
broader mortgage market have adversely affected our business and could result in further increases
in our borrowing costs, reductions in our liquidity and reductions in the value of our investment
portfolio.
  Our investment strategies employ a significant amount of leverage.
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Interest rate mismatches between residential mortgage loans and mortgage-backed securities we
own and borrowings we have used to acquire these assets may adversely affect our results of
operations.
  Our use of certain types of financing may give our lenders greater rights in the event that
either we or any of our lenders file for bankruptcy.
  The residential mortgage loans and mortgage-backed securities we hold are subject to
illiquidity, which might prevent us from selling them at reasonable prices should we find it
necessary or believe it is advisable to sell them.
  Many of our investments are illiquid, and we may not be able to vary our portfolio in response
to changes in economic and other conditions.
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Performance of our residential mortgage loans and mortgage-backed securities are subject to
the overall health of the U.S. economy, and a national or regional economic slowdown could
adversely impact our results of operations or financial condition.
  Our stockholders equity, or book value, is volatile.
    Our residential mortgage loans, mortgage-backed securities and other investments are subject
to the risks of delinquency, foreclosure and credit loss.
    We own subordinated mortgage-backed securities that are structured to absorb a
disproportionate amount of any credit losses on the underlying residential mortgage loans.
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We own some mortgage-backed securities that are backed by mid-prime or sub-prime residential
mortgage loans which are subject to higher delinquency, foreclosure and credit loss rates than the
prime residential mortgage loans we typically purchase.
  Our residential mortgage loans and mortgage-backed securities have material geographic
concentrations.
  We face the risk of greater than projected prepayment rates of the residential mortgage loans
and mortgage-backed securities we own.
   Our residential mortgage loans and mortgage-backed securities are subject to interest rate
caps and payment caps with resets.
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A significant portion of the mortgages we hold permit negative amortization. Negative
amortization can increase our overall risk.
     The representations and warranties that we have made as part of our securitizations may
subject us to liability.
  The use of residential mortgage loan and mortgage-backed securities securitizations with
overcollateralization requirements could restrict our cash flow.
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We rely on assumptions and estimates when we calculate the fair values and projected cash
flows for the residential mortgage loans, mortgage-backed securities and hedging instruments that
we hold. As a result, these fair values and projected cash flows could be subject to subsequent
adjustment.
  We are subject to the risks associated with inadequate or untimely services from third-party
service providers.
  Our hedging activities might be unsuccessful.
    Arco and its affiliates compete with us, and conflicts may arise from Arcos allocation of
investment opportunities.
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The NYSE may not elect to list our common shares.
  Litigation pending against us may adversely affect us.
  
    
    predict its outcome;
    
    estimate damages that might result from the case; or
    
    predict the effect that final resolution of any litigation might have on our
business, financial condition or results of operations, although such effect could be
materially adverse.
 Our operations are significantly dependent on our information technology platform.
  Regulatory risks
 Due to recent market disruptions that resulted in our need to sell assets to satisfy margin
calls on our financing agreements, we are relying on a safe harbor exemption from the 1940 Act, in
order to not become regulated as an investment company. Failure to maintain an exemption from the
1940 Act would harm our results of operations.
  
    
    it neither is, nor holds itself out as being, engaged primarily, nor proposes to
engage primarily, in the business of investing, reinvesting or trading in securities;
and
    
    it neither is engaged nor proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities and does not own or propose to
acquire investment securities having a value exceeding 40% of the value of its total
assets on an unconsolidated basis. This test is known as the 40% Test.
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Legal and Tax Risks
 If we fail to qualify as a REIT, we will be subject to tax as a regular corporation and face
substantial tax liability.
  
    
    we would be taxed as a regular domestic corporation, which, among other things, means
that we would be unable to deduct distributions to our stockholders in computing taxable
income and would be subject to U.S. federal income tax on our taxable income at regular
corporate rates;
    
    any resulting tax liability could be substantial, would reduce the amount of cash
available for distribution to our stockholders and could force us to liquidate assets at
inopportune times, causing lower income or higher losses than would result if these assets
were not liquidated; and
    
    unless we were entitled to relief under applicable statutory provisions, we would be
disqualified from treatment as a REIT for the subsequent four taxable years following the
year during which we lost our qualification, and, thus, our cash available for distribution
to our stockholders would be reduced for each of the years during which we did not qualify
as a REIT.
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Complying with REIT requirements might cause us to forego otherwise attractive opportunities.
   Complying with REIT requirements may limit our ability to hedge effectively.
  Complying with REIT requirements may force us to liquidate otherwise attractive investments.
  In order to comply with REIT requirements we may be required to borrow to make distributions
to our stockholders.
  If we do not make required distributions, we would be subject to tax, which would reduce the
cash available for distribution to our stockholders.
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
    
    85% of our REIT ordinary income for that year;
    
    95% of our REIT capital gain net income for that year; and
    
    100% of our undistributed taxable income from prior years.
  Our taxable income may substantially exceed our GAAP income and cash flow, which may require
us to use cash reserves, incur debt or liquidate non-cash assets at unfavorable rates or times in
order to satisfy the distribution requirement and to avoid corporate income and excise taxes.
  We may lose our REIT qualification if the IRS successfully challenges our characterization of
our income from our future investments in CLO and CDO issuers.
  To the extent any of our taxable REIT subsidiaries that are CLO and CDO issuers and are
subject to U.S. federal income tax at the entity level, the amounts those entities could
distribute to us and pay their creditors would be reduced.
  Our recognition of excess inclusion income could have adverse tax consequences to us and our
stockholders.
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Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities
could adversely impact our results of operations or financial condition or result in our failure
to comply with REIT income or assets tests.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
 Shareholder Lawsuit
   
    
    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. We believe these allegations to be without merit. We intend
to seek dismissal of the lawsuit for failure to state a valid legal claim, and if
the case is not dismissed on motion, to vigorously defend ourselves against these
allegations. We maintain directors and officers liability
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insurance which we believe should provide coverage to us and our officers and
directors for most or all of any costs, settlements or judgments resulting from the
lawsuit.
  Repurchase Agreement Litigation
       
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  28




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
    2007
    
    High
    
    LowFirst Quarter
    
    $
    10.46
    
    
    $
    8.10Second Quarter
    
    
    10.25
    
    
    
    7.31Third Quarter
    
    
    10.78
    
    
    
    0.36Fourth Quarter
    
    
    3.34
    
    
    
    0.64
 2006
    
    High
    
    LowFirst Quarter
    
    $
    8.70
    
    
    $
    7.18Second Quarter
    
    
    9.26
    
    
    
    7.58Third Quarter
    
    
    10.50
    
    
    
    8.98Fourth Quarter
    
    
    10.84
    
    
    
    9.60
 Holders
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Distributions and Distribution Policy
  Cash Distributions
    
    Declaration2007
    
    Declared Per Share
    
    DateFirst Quarter
    
    $
    0.30
    
    
    March 30, 2007Second Quarter (1)
    
    
    0.32
    
    
    June 27, 2007Third Quarter
    
    none
    
    
    n/aFourth Quarter
    
    none
    
    
    n/a2006First Quarter
    
    $
    0.05
    
    
    March 31, 2006Second Quarter
    
    
    0.20
    
    
    June 12, 2006Third Quarter
    
    
    0.30
    
    
    September 28, 2006Special Dividend
    
    
    0.075
    
    
    October 10, 2006Fourth Quarter
    
    
    0.30
    
    
    December 18, 2006
 
 (1)
    
    The payment of the second quarter of 2007 dividend was suspended in August of 2007 due
to liquidity concernsn/a = not applicable      
    
    90% of our REIT taxable net income, plus
    
    90% of our after-tax net income, if any, from foreclosure property, minus
    
    the excess of the sum of specified items of our non-cash income items over 5% of REIT
taxable net income.
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Equity Compensation Plan
   (a)
    
    
    
    
    
    
    (c)Number of
    
    
    (b)
    
    
    Number ofsecurities to be
    
    
    Weighted-
    
    
    securities remainingissued upon
    
    
    average
    
    
    available for futureexercise of
    
    
    exercise price
    
    
    issuance under equityoutstanding
    
    
    of outstanding
    
    
    compensation plans -options, warrants
    
    
    options, warrants
    
    
    excluding securitiesPlan Category
    
    and rights
    
    
    and rights
    
    
    reflected in column (a)Incentive plans approved by stockholders
    
    
    55,000
    
    
    $
    14.82
    
    
    
    949,740Incentive plans not approved by stockholders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    55,000
    
    
    $
    14.82
    
    
    
    949,740
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Purchases of Equity Securities
  (c)
    
    (d)(a)
    
    
    
    
    
    Total
    
    MaximumTotal
    
    (b)
    
    Number of Shares
    
    Number of SharesNumber of
    
    Average
    
    Purchased as Part of
    
    that May Yet BeShares
    
    Price Paid
    
    Publicly Announced
    
    Purchased UnderPeriod
    
    Purchased
    
    per Share
    
    Program
    
    the ProgramJanuary 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,405,715February 1  28, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,405,715March 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,405,715April 1  31, 2007
    
    
    1,234,600
    
    
    $
    8.18
    
    
    
    1,234,600
    
    
    
    1,171,115May 1  31, 2007 (1)
    
    
    3,540,000
    
    
    
    8.72
    
    
    
    3,540,000
    
    
    
    2,500,950June 1  30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500,950July 1  July 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500,950August 1  August 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500,950September 1  30, 2007
    
    
    130,165
    
    
    
    1.32
    
    
    
    130,165
    
    
    
    2,370,785October 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,370,785November 1  30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,370,785December 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,370,785
 
 (1)
    
    An additional 5,000,000 shares were authorized in May 2007. Share Price Performance Graph
  
 12/19/2003
    
    
    12/31/2003
    
    
    12/31/2004
    
    
    12/31/2005
    
    
    12/31/2006
    
    
    12/31/2007Luminent Mortgage
Capital Inc.
    
    
    
    100
    
    
    
    
    104
    
    
    
    
    100
    
    
    
    
    69
    
    
    
    
    98
    
    
    
    
    8S & P500
    
    
    
    100
    
    
    
    
    105
    
    
    
    
    117
    
    
    
    
    122
    
    
    
    
    142
    
    
    
    
    150BBG REIT Mortgage Index
    
    
    
    100
    
    
    
    
    102
    
    
    
    
    102
    
    
    
    
    115
    
    
    
    
    137
    
    
    
    
    76
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ITEM 6. SELECTED FINANCIAL DATA
  For the PeriodFor the Year
    
    For the Year
    
    For the Year
    
    For the Year
    
    from April 26,Ended
    
    Ended
    
    Ended
    
    Ended
    
    2003 throughDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(Dollars in thousands, except share and per share amounts)Statement of Operations Data:Interest income
    
    $
    520,878
    
    
    $
    357,137
    
    
    $
    181,421
    
    
    $
    123,754
    
    
    $
    22,654Interest expense
    
    
    428,732
    
    
    
    268,618
    
    
    
    137,501
    
    
    
    55,116
    
    
    
    9,009Net interest income
    
    
    92,146
    
    
    
    88,519
    
    
    
    43,920
    
    
    
    68,638
    
    
    
    13,645Other income (expense)
    
    
    (696,424
    )
    
    
    (829
    )
    
    
    
    
    
    
    1,070
    
    
    
    Expenses
    
    
    94,478
    
    
    
    42,443
    
    
    
    14,026
    
    
    
    12,596
    
    
    
    3,053Net income (loss)
    
    
    (720,997
    )
    
    
    46,797
    
    
    
    (82,991
    )
    
    
    57,112
    
    
    
    2,761Per Common Share Data:Net income (loss)  basic
    
    $
    (16.21
    )
    
    $
    1.15
    
    
    $
    (2.13
    )
    
    $
    1.68
    
    
    $
    0.27Net income (loss)  diluted
    
    
    (16.21
    )
    
    
    1.14
    
    
    
    (2.13
    )
    
    
    1.68
    
    
    
    0.27Cash distributions declared(1)
    
    
    0.62
    
    
    
    0.925
    
    
    
    0.77
    
    
    
    1.71
    
    
    
    0.95Book value (end of period)(2)
    
    
    (7.18
    )
    
    
    9.86
    
    
    
    9.76
    
    
    
    10.93
    
    
    
    11.38Common shares outstanding (end of period)
    
    
    43,172,839
    
    
    
    47,808,510
    
    
    
    40,587,245
    
    
    
    37,113,011
    
    
    
    24,814,000Weighted-average shares outstanding  basic
    
    
    44,481,292
    
    
    
    40,788,778
    
    
    
    39,007,953
    
    
    
    33,895,967
    
    
    
    10,139,280Weighted-average shares outstanding  diluted
    
    
    44,481,292
    
    
    
    41,003,620
    
    
    
    39,007,953
    
    
    
    33,947,414
    
    
    
    10,139,811Balance Sheet Data (end of period):Total mortgage-backed securities, at fair value
    
    
    435,885
    
    
    
    2,930,938
    
    
    
    4,359,603
    
    
    
    4,827,955
    
    
    
    2,161,945Loans held-for-investment, net
    
    
    4,191,343
    
    
    
    5,591,717
    
    
    
    507,177
    
    
    
    
    
    
    
    Total assets
    
    
    4,721,918
    
    
    
    8,613,795
    
    
    
    4,933,471
    
    
    
    4,879,828
    
    
    
    2,179,340Repurchase agreements
    
    
    526,634
    
    
    
    2,707,915
    
    
    
    3,928,505
    
    
    
    4,436,456
    
    
    
    1,728,973Mortgage-backed notes
    
    
    3,914,643
    
    
    
    3,917,677
    
    
    
    486,302
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    92,788
    
    
    
    92,788
    
    
    
    
    
    
    
    Warehouse lending facilities
    
    
    
    
    
    
    752,777
    
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    
    
    
    
    637,677
    
    
    
    
    
    
    
    
    
    
    
    Collateralized debt obligations
    
    
    294,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible senior notes
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Revolving line of credit
    
    
    15,833
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Margin debt
    
    
    
    
    
    
    
    
    
    
    3,548
    
    
    
    
    
    
    
    Total liabilities
    
    
    5,031,943
    
    
    
    8,142,240
    
    
    
    4,537,150
    
    
    
    4,474,325
    
    
    
    1,896,844Total stockholders equity (deficit)
    
    
    (310,025
    )
    
    
    471,555
    
    
    
    396,321
    
    
    
    405,503
    
    
    
    282,496Financial Ratios:Leverage ratio (period end)(3) (5)


    (15.9
    )
    
    
    17.2
    
    
    
    11.4
    
    
    
    10.9
    
    
    
    6.1Recourse leverage ratio (period end)(4) (5)
    
    
    (5.7
    )
    
    
    7.4
    
    
    
    8.2
    
    
    
    10.9
    
    
    
    6.1
 
 (1)
    
    Cash distributions declared during the period from April 26, 2003 through December 31, 2003 were payable to
stockholders of the 11,704,000 shares outstanding on each of the record dates prior to the completion of our initial
public offering. Cash distributions of $0.42 per share declared on March 9, 2004 were payable to stockholders of the
24,841,146 shares outstanding on the record date, which was prior to the completion of our follow-on public
offering. Payment of the $0.32 dividend declared in June 2007 was suspended by our board of directors on August 6,
2007.(2)
    
    Book value is calculated as total stockholders equity divided by the number of shares issued and outstanding at
December 31, 2007, 2006, 2005, 2004 and 2003.(3)
    
    Leverage is defined as total liabilities less uncollateralized long-term debt divided by total stockholders equity.
At December 31, 2003, substantially all of the net offering proceeds from our initial public offering had been used
to purchase mortgage-backed securities. However, at December 31, 2003, we had not fully levered our Spread portfolio
to within our target range of eight to 12 times the amount of our equity.(4)
    
    Recourse leverage is defined as total recourse liabilities divided by stockholders equity plus long-term debt.(5)
    
    The leverage and recourse leverage ratios as of December 31, 2007 are negative due to an equity deficit at that date. 33




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion of our financial condition and results of operations should be read
in conjunction with the consolidated financial statements and notes to those statements included in
Item 8 of this Form 10-K. 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 on Form 10-K and elsewhere in this
Form 10-K, our actual results may differ materially from those anticipated in such forward-looking
statements.
 Overview
 Business Conditions and Going Concern
  Progress in the Stabilization of Our Business
  
    
    We obtained new financing arranged by Arco in the form of repurchase agreement
financing and a revolving line of credit with a maximum amount of $190 million, which
expires on September 26, 2012. See Note 5 and Note 14 to the December 31, 2007
consolidated financial statements included elsewhere in this Form 10-K for additional
information about our borrowings from Arco and its affiliates and our relationship with
Arco.
    
    As of December 31, 2007, we had completed the sale of approximately $2.4 billion of
mortgage-backed securities to repay lenders and meet required margin calls at a net loss
of approximately $181.1 million.
    
    We completed the sale or refinancing of assets financed by our asset-backed
commercial program, and we no longer have any outstanding commercial paper liabilities
under our asset-backed commercial paper program.
    
    We sold approximately $1.0 billion of loans and repaid all of our warehouse lines of
credit that were used to finance whole loan purchases. One warehouse line for $1.0
billion was terminated prior to September 30, 2007, and an additional warehouse line for
$500.0 million expired in October 2007. No balances are currently outstanding on the
remaining warehouse line totaling $1.0 billion. See Note 5 to our December 31, 2007
consolidated financial statements included elsewhere in this Form 10-K for additional
information on our warehouse facilities.
    
    As of December 31, 2007, we had stabilized $538.4 million of repurchase agreement
financing with five repurchase agreement lenders by meeting all required margin calls.
We are working to further stabilize our repurchase agreement financing by moving our
repurchase agreement financing to Arco and its affiliates.
    
    We are working with an additional repurchase agreement lender to resolve a dispute on
the fair value of the underlying collateral for that agreement to settle an additional
$8.0 million of repurchase agreement financing.
 34




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##### Table of Contents




    
    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 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 to us to
develop these new services, which would be closely aligned with our current expertise.
However, we can provide no assurance that further market disruption will not occur or
that we will be able to successfully execute our business or liquidity plans discussed
herein.
  Investment Activities
   35




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##### Table of Contents



Exposure to Subprime Mortgage Loans
   Critical Accounting Policies
  Interest Income Recognition
  36




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##### Table of Contents



Classifications of Investment Securities
  Accounting for
Certain Hybrid Financial Instruments  an Amendment of FASB Statements No. 133 and 140
 Valuations of Mortgage-Backed Securities
     37




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Allowance and Provision for Loan Losses
     Accounting for Derivative Financial Instruments and Hedging Activities
  38




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Accounting for Warrant
 ,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,
  Results of Operations
 Year ended December 31, 2007 compared to the year ended December 31, 2006
      39




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##### Table of Contents



Components of Interest Expense
 Percentage
    
    
    
    
    
    
    PercentageYear Ended
    
    
    of Average
    
    
    Year Ended
    
    
    of AverageDecember 31,
    
    
    Financing
    
    
    December 31,
    
    
    Financing2007
    
    
    Liabilities
    
    
    2006
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    245,131
    
    
    
    3.35
    %
    
    $
    132,107
    
    
    
    2.53
    %Interest expense on repurchase agreement liabilities
    
    
    109,744
    
    
    
    1.50
    
    
    
    116,465
    
    
    
    2.23Interest expense on commercial paper facility
    
    
    29,998
    
    
    
    0.41
    
    
    
    4,786
    
    
    
    0.09Interest expense on warehouse lending facilities
    
    
    15,161
    
    
    
    0.21
    
    
    
    16,459
    
    
    
    0.31Interest expense on junior subordinated notes
    
    
    7,911
    
    
    
    0.11
    
    
    
    7,768
    
    
    
    0.15Interest expense on CDOs
    
    
    15,882
    
    
    
    0.22
    
    
    
    
    
    
    
    Interest expense on convertible senior notes
    
    
    4,496
    
    
    
    0.06
    
    
    
    
    
    
    
    Interest expense on revolving line of credit
    
    
    1,145
    
    
    
    0.02
    
    
    
    
    
    
    
    Amortization
of net realized gains on futures and interest rate swap contracts


    (1,474
    )
    
    
    (0.02
    )
    
    
    (7,468
    )
    
    
    (0.14
    )Net interest income on interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    (1,676
    )
    
    
    (0.04
    )Other
    
    
    738
    
    
    
    0.01
    
    
    
    177
    
    
    nmTotal interest expense
    
    $
    428,732
    
    
    
    5.87
    %
    
    $
    268,618
    
    
    
    5.13
    %
 
 nm -
    
    not meaningful  Components of Other Income
 Year EndedDecember 31,2007
    
    
    2006Realized gains on derivative instruments, net
    
    $
    47,044
    
    
    $
    6,372Unrealized gains (losses) on derivative
instruments, net
    
    
    (14,939
    )
    
    
    1,364Net interest income on interest rate swaps
    
    
    3,175
    
    
    
    Other derivative-related expenses
    
    
    (992
    )
    
    
    Gains (losses) on derivatives, net
    
    
    34,288
    
    
    
    7,736Impairment losses on mortgage-backed securities
    
    
    (481,654
    )
    
    
    (7,010
    )Sales of mortgage-backed securities:Gains
    
    
    1,573
    
    
    
    993Losses
    
    
    (182,722
    )
    
    
    Sub-total
    
    
    (181,149
    )
    
    
    993Loss on sale of loans held-for-investment
    
    
    (45,065
    )
    
    
    Mortgage-backed securities, trading change in
fair value
    
    
    (22,177
    )
    
    
    Warrant, change in fair value
    
    
    (526
    )
    
    
    Other expense
    
    
    (141
    )
    
    
    (829
    )Total
    
    $
    (696,424
    )
    
    $
    890
  40




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##### Table of Contents



Components of Operating Expenses
 Year EndedDecember 31,2007
    
    
    2006Servicing expense
    
    $
    23,133
    
    
    $
    11,951Provision for loan losses
    
    
    39,293
    
    
    
    5,176Salaries and benefits
    
    
    17,354
    
    
    
    9,470Professional services
    
    
    6,302
    
    
    
    3,133Management compensation expense to
related party
    
    
    
    
    
    
    7,712Other general and administrative
expenses
    
    
    8,396
    
    
    
    5,001Total expenses
    
    $
    94,478
    
    
    $
    42,443
        Year ended December 31, 2006 compared to the year ended December 31, 2005
  41




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##### Table of Contents



For the Year EndedDecember 31,2006
    
    2005Weighted-average yield on average earning assets, net of premium amortization or discount accretion
    
    
    6.57
    %
    
    
    3.79
    %Weighted-average cost of financing liabilities
    
    
    5.13
    
    
    
    3.07Net interest spread
    
    
    1.44
    %
    
    
    0.72
    %
    For the Year
    
    
    Percentage
    
    
    For the Year
    
    
    PercentageEnded
    
    
    of Average
    
    
    Ended
    
    
    of AverageDecember 31,
    
    
    Financing
    
    
    December 31,
    
    
    Financing2006
    
    
    Liabilities
    
    
    2005
    
    
    LiabilitiesInterest expense on mortgage-backed notes
    
    $
    132,107
    
    
    
    2.53
    %
    
    $
    3,719
    
    
    
    0.08
    %Interest expense on repurchase agreement liabilities
    
    
    116,465
    
    
    
    2.23
    
    
    
    138,076
    
    
    
    3.08Interest expense on commercial paper facility
    
    
    4,786
    
    
    
    0.09
    
    
    
    
    
    
    
    Interest expense on warehouse lending facilities
    
    
    16,459
    
    
    
    0.31
    
    
    
    1,507
    
    
    
    0.03Interest expense on junior subordinated notes
    
    
    7,768
    
    
    
    0.15
    
    
    
    3,411
    
    
    
    0.08Amortization of net realized gains on futures and interest rate swap contracts
    
    
    (7,468
    )
    
    
    (0.14
    )
    
    
    (1,415
    )
    
    
    (0.03
    )Net interest (income)/expense on interest rate swap contracts
    
    
    (1,676
    )
    
    
    (0.04
    )
    
    
    (8,093
    )
    
    
    (0.18
    )Net hedge ineffectiveness (gains)/losses on futures and interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    0.01Other
    
    
    177
    
    
    nm

    
    
    38
    
    
   nmTotal interest expense
    
    $
    268,618
    
    
    
    5.13
    %
    
    $
    137,501
    
    
    
    3.07
    %
 
 nm =
    
    not meaningful   42




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##### Table of Contents



For the Years EndedDecember 31,2006
    
    
    2005Realized gains (losses) on derivative instruments, net(1):Sales of derivative contracts
    
    $
    2.6
    
    
    $
    1.0Purchase commitment derivatives
    
    
    3.7
    
    
    
    (1.4
    )Unrealized gains (losses) on derivative instruments, net(1):Change in fair value of derivative contracts
    
    
    1.4
    
    
    
    (0.4
    )Sub-total
    
    
    7.7
    
    
    
    (0.8
    )Other-than-temporary impairment losses
    
    
    (7.0
    )
    
    
    (112.0
    )Sales of mortgage-backed securities:Gains
    
    
    10.0
    
    
    
    Losses
    
    
    (9.0
    )
    
    
    (0.1
    )Sub-total
    
    
    1.0
    
    
    
    (0.1
    )Other expense
    
    
    (0.8
    )
    
    
    Total
    
    $
    0.9
    
    
    $
    (112.9
    )
 
 (1)
    
    Prior to January 1, 2006, certain derivative instruments were
accounted for in accordance with SFAS No. 133 and the related gains
and losses were recognized in interest expense.       43




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##### Table of Contents



REIT taxable income
   Reconciliation of GAAP Net Income to REIT Taxable Income
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005GAAP net income (loss)
    
    $
    (720,997
    )
    
    $
    46,797
    
    
    $
    (82,991
    )Adjustments to GAAP net income (loss):Interest income and expenses, net
    
    
    (20,344
    )
    
    
    (26,676
    )
    
    
    1,142Impairment losses on mortgage-backed securities
    
    
    481,654
    
    
    
    7,010
    
    
    
    112,008Provision for loan losses
    
    
    39,191
    
    
    
    5,193
    
    
    
    Servicing expense
    
    
    21,857
    
    
    
    10,263
    
    
    
    Warrant expense
    
    
    526
    
    
    
    
    
    
    
    Losses (gains) on sales of mortgage-backed securities, net
    
    
    248,391
    
    
    
    (993
    )
    
    
    69Gains on derivative instruments
    
    
    (32,105
    )
    
    
    
    
    
    
    Other, net
    
    
    31,314
    
    
    
    (695
    )
    
    
    1,086Net adjustments to GAAP net income (loss)
    
    
    770,484
    
    
    
    (5,898
    )
    
    
    114,305REIT taxable net income
    
    $
    49,487
    
    
    $
    40,899
    
    
    $
    31,314REIT taxable net income per share
    
    $
    1.10
    
    
    $
    0.97
    
    
    $
    0.77Average shares outstanding on dividend record dates during the year
    
    
    44,992,807
    
    
    
    42,163,918
    
    
    
    40,667,532
 Estimated Undistributed REIT Taxable Income
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005Undistributed REIT taxable net income, beginning of period
    
    $
    4,429
    
    
    $
    3,154
    
    
    $
    1,794REIT taxable net income during period
    
    
    49,487
    
    
    
    40,899
    
    
    
    31,314Distributions declared during period, net of dividend equivalent rights on restricted common stock
    
    
    (27,858
    )
    
    
    (39,410
    )
    
    
    (29,954
    )Other adjustments
    
    
    5,157
    
    
    
    (214
    )
    
    
    Undistributed REIT taxable net income, end of period
    
    $
    31,215
    
    
    $
    4,429
    
    
    $
    3,154Cash distributions per share declared during period
    
    $
    0.62
    
    
    $
    0.925
    
    
    $
    0.77
  44




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##### Table of Contents



45




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##### Table of Contents



Financial Condition
 Mortgage-backed securities
   Asset Quality
 December 31, 2007
    
    
    December 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofTotal
    
    
    
    
    
    
    TotalMortgage-
    
    
    
    
    
    
    Mortgage-backed
    
    
    
    
    
    
    backedFair Value
    
    
    Securities
    
    
    Fair Value
    
    
    SecuritiesResidential Mortgage Credit PortfolioInvestment-grade MBS:AA/Aa rating
    
    $
    27,747
    
    
    
    6.4
    %
    
    $
    129,096
    
    
    
    4.4
    %A/A rating
    
    
    70,802
    
    
    
    16.1
    
    
    
    238,623
    
    
    
    8.1BBB/Baa rating
    
    
    40,904
    
    
    
    9.4
    
    
    
    273,359
    
    
    
    9.3Total Investment-grade MBS
    
    
    139,453
    
    
    
    31.9
    
    
    
    641,078
    
    
    
    21.8Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    
    A-Non-investment-grade MBS:BB/Ba rating
    
    
    44,101
    
    
    
    10.1
    
    
    
    145,741
    
    
    
    5.0B/B2 rating
    
    
    7,621
    
    
    
    1.8
    
    
    
    
    
    
    
    CCC/Caa and below
    
    
    35,986
    
    
    
    8.3
    
    
    
    
    
    
    
    Not rated
    
    
    4,177
    
    
    
    1.0
    
    
    
    11,196
    
    
    
    0.4Total non-investment-grade MBS
    
    
    91,885
    
    
    
    21.2
    
    
    
    156,937
    
    
    
    5.4Weighted-average credit rating (1)
    
    
    B
    
    
    
    
    
    
    BBTotal residential mortgage credit portfolio
    
    
    231,338
    
    
    
    53.1
    
    
    
    798,015
    
    
    
    27.2Weighted-average credit rating (1)
    
    BBB
    
    
    
    
    
    BBB+Spread PortfolioAgency MBS
    
    
    
    
    
    
    
    
    
    
    106,648
    
    
    
    3.7AAA/Aaa rating
    
    
    204,547
    
    
    
    46.9
    
    
    
    2,026,275
    
    
    
    69.1Total spread portfolio
    
    
    204,547
    
    
    
    46.9
    
    
    
    2,132,923
    
    
    
    72.8Weighted-average credit rating
    
    AAA
    

    
    
    
    
    AAATotal mortgage-backed securities
    
    $
    435,885
    
    
    
    100.0
    %
    
    $
    2,930,938
    
    
    
    100.0
    %Weighted-average credit rating
    
    
    A
    
    
    
    
    
    
    AA
 
 (1)
    
    Weighted-average credit rating excludes non-rated mortgage-backed securities of $4.2 million and $11.2 million at
December 31, 2007 and 2006, respectively, and includes the effect of credit-related derivative instruments that are a
direct economic hedge of a specific security. 46




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##### Table of Contents



Loans held-for-investment
 Residential Loans Held-For Investment Product Data
 Weighted-AverageMonths toReset of
    
    
    
    
    
    
    
    
    
    
    Seriously
    
    
    
    
    
    
    Number ofLoans After
    
    
    
    
    
    
    Principal
    
    
    Delinquent
    
    
    
    
    
    
    SeriouslyWeighted-
    
    
    Weighted-
    
    
    Weighted-
    
    
    Effect of
    
    
    
    
    
    
    Amount of
    
    
    Loans as a
    
    
    Number of
    
    
    DelinquentAverage
    
    
    Average
    
    
    Average
    
    
    Cost of
    
    
    
    
    
    
    Seriously
    
    
    Percentage of
    
    
    Seriously
    
    
    Loans as aInterest
    
    
    Maturity
    
    
    Months to
    
    
    Funds
    
    
    Principal
    
    
    Delinquent
    
    
    Total
    
    
    Delinquent
    
    
    Percentage ofRate
    
    
    Date
    
    
    Reset
    
    
    Hedging (1)
    
    
    Balance
    
    
    Loans (2)
    
    
    Principal
    
    
    Loans (2)
    
    
    Total LoansDecember 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
    %December 31, 2006Floating rate
mortgage
    
    
    8.02
    %
    
    
    2037
    
    
    
    1
    
    
    
    1
    
    
    $
    4,089,015
    
    
    $
    20,830
    
    
    
    0.38
    %
    
    
    45
    
    
    
    0.33
    %Hybrid mortgage
    
    
    6.57
    %
    
    
    2036
    
    
    
    54
    
    
    
    33
    
    
    
    1,383,310
    
    
    
    13,053
    
    
    
    0.24
    
    
    
    30
    
    
    
    0.21Total
    
    
    7.65
    %
    
    
    2037
    
    
    
    14
    
    
    
    9
    
    
    $
    5,472,325
    
    
    $
    33,883
    
    
    
    0.62
    %
    
    
    75
    
    
    
    0.54
    %
 
 (1)
    
    We attempt to mitigate our interest rate risk by hedging the cost of liabilities related to our hybrid residential mortgage loans. Amounts reflect the effect of these hedges on the
months to reset of our residential mortgage loans. In addition at December 31, 2007 and December 31, 2006, the financing for $0.2 billion and $0.3 billion of our hybrid residential
mortgage loans, respectively is, like the underlying collateral, fixed for a period of three to five years and then becomes variable based upon the average rates of the underlying loans
which will adjust based on LIBOR. The weighted-average period to reset of the debt we use to acquire residential mortgage loans was match funded approximately five months and nine
months at December 31, 2007 and December 31, 2006, respectively.(2)
    
    Seriously delinquent loans are loans 90 or more days past due and loans in foreclosure.  47




---



##### Table of Contents



Residential Mortgage Loans Key Metrics
 December 31, 2007
    
    December 31, 2006Unpaid principal balance
    
    $
    4,133,820
    
    
    $
    5,472,325Number of loans
    
    
    10,491
    
    
    
    13,942Average loan balance
    
    $
    394
    
    
    $
    393Weighted-average coupon rate
    
    
    7.71
    %
    
    
    7.65
    %Weighted-average lifetime cap
    
    
    10.66
    %
    
    
    10.64
    %Weighted-average original term, in months
    
    
    376
    
    
    
    375Weighted-average remaining term, in months
    
    
    356
    
    
    
    366Weighted-average effective loan-to-value ratio (LTV)(1)
    
    
    71.8
    %
    
    
    72.6
    %Weighted-average FICO score
    
    
    711
    
    
    
    713Number of loans with FICO scores below 620
    
    
    8
    
    
    
    11Percentage of loans with FICO scores above 700
    
    
    55.6
    %
    
    
    58.5
    %Percentage of loans with LTV greater than 80%
    
    
    7.2
    %
    
    
    6.8
    %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
    
    
    2.2
    %
    
    
    2.5
    %Percentage of loans originated for refinancing purposes
    
    
    58.3
    %
    
    
    58.0
    %Top five geographic concentrations (% exposure):California
    
    
    56.5
    %
    
    
    57.4
    %Florida
    
    
    9.7
    %
    
    
    8.6
    %Arizona
    
    
    4.3
    %
    
    
    4.1
    %Virginia
    
    
    3.9
    %
    
    
    3.7
    %Nevada
    
    
    3.7
    %
    
    
    3.4
    %Occupancy status:Owner-occupied
    
    
    85.8
    %
    
    
    86.5
    %Investor
    
    
    14.2
    %
    
    
    13.5
    %Property type:Single-family
    
    
    83.1
    %
    
    
    83.6
    %Condominium
    
    
    10.2
    %
    
    
    9.7
    %Other residential
    
    
    6.7
    %
    
    
    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
December 31, 2007. 48




---



##### Table of Contents



Residential Mortgage Loan Quality
 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
    %
 49




---



##### Table of Contents



FICO ScoresDecember 31, 2006
    
    <620
    
    620-659
    
    660-699
    
    700-739
    
    740+
    
    TotalFull Documentation:(1)LTV:<60%
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.5
    %
    
    
    1.1
    %60.01  70%
    
    
    0.0
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.5
    
    
    
    4.770.01  80%
    
    
    0.0
    
    
    
    1.6
    
    
    
    3.1
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    10.3> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Full Documentation
    
    
    0.0
    %
    
    
    2.6
    %
    
    
    4.5
    %
    
    
    3.9
    %
    
    
    5.1
    %
    
    
    16.1
    %Reduced Documentation:(2)LTV:<60%
    
    
    0.0
    %
    
    
    0.6
    %
    
    
    1.3
    %
    
    
    1.5
    %
    
    
    2.4
    %
    
    
    5.8
    %60.01  70%
    
    
    0.0
    
    
    
    2.0
    
    
    
    7.9
    
    
    
    7.3
    
    
    
    6.7
    
    
    
    23.970.01  80%
    
    
    0.1
    
    
    
    3.7
    
    
    
    18.1
    
    
    
    16.0
    
    
    
    13.8
    
    
    
    51.7> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Reduced Documentation
    
    
    0.1
    %
    
    
    6.3
    %
    
    
    27.3
    %
    
    
    24.8
    %
    
    
    22.9
    %
    
    
    81.4
    %No Documentation:(3)LTV:<60%
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.2
    %
    
    
    0.4
    %
    
    
    0.8
    %60.01  70%
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    1.170.01  80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total No Documentation
    
    
    0.0
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.8
    %
    
    
    1.0
    %
    
    
    2.5
    %Total Portfolio:LTV:<60%
    
    
    0.0
    %
    
    
    0.8
    %
    
    
    1.7
    %
    
    
    1.9
    %
    
    
    3.3
    %
    
    
    7.7
    %60.01  70%
    
    
    0.0
    
    
    
    2.9
    
    
    
    9.4
    
    
    
    8.8
    
    
    
    8.6
    
    
    
    29.770.01  80%
    
    
    0.1
    
    
    
    5.3
    
    
    
    21.3
    
    
    
    18.8
    
    
    
    17.1
    
    
    
    62.6> 80%
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total Portfolio
    
    
    0.1
    %
    
    
    9.0
    %
    
    
    32.4
    %
    
    
    29.5
    %
    
    
    29.0
    %
    
    
    100.0
    %
 
 (1)
    
    Full documentation includes verification of the borrowers income, employment, assets and liabilities.(2)
    
    Reduced documentation, sometimes referred to as Alt-A, includes mortgages that comply with most, but
not all, of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation
criteria for a conforming mortgage. Alt-A mortgages are generally high quality, with less than full
documentation verified.(3)
    
    No documentation loans include loans where there has been no verification of borrowers income,
employment or assets. Delinquencies and Allowance for Loan Losses
 Residential Mortgage Loan Delinquency Status
 December 31, 2007
    
    
    December 31, 2006Number of
    
    
    Principal
    
    
    Number of
    
    
    PrincipalLoans
    
    
    Amount
    
    
    Loans
    
    
    AmountDelinquency status:30 to 59 days
    
    
    475
    
    
    $
    184,814
    
    
    
    285
    
    
    $
    112,37260 to 90 days
    
    
    230
    
    
    
    98,735
    
    
    
    46
    
    
    
    16,39090 days or more
    
    
    299
    
    
    
    123,959
    
    
    
    47
    
    
    
    18,495Total
    
    
    1,004
    
    
    
    407,508
    
    
    
    378
    
    
    
    147,257Foreclosures
    
    
    302
    
    
    
    130,088
    
    
    
    28
    
    
    
    15,388Total Delinquencies
    
    
    1,306
    
    
    $
    537,596
    
    
    
    406
    
    
    $
    162,645
  50




---



##### Table of Contents



Asset Repricing Characteristics
 Asset Repricing Characteristics
 December 31, 2007
    
    
    December 31, 2006Carrying
    
    
    Portfolio
    
    
    Carrying
    
    
    PortfolioValue
    
    
    Mix
    
    
    Value
    
    
    MixResidential Mortgage Credit PortfolioARM residential loans:Reset 1 month or less
    
    $
    3,042,491
    
    
    
    65.7
    %
    
    $
    4,089,015
    
    
    
    48.0
    %Reset >1 month but < 12 months
    
    
    24,803
    
    
    
    0.5
    
    
    
    284
    
    
    nmReset >12 months but < 60 months
    
    
    909,440
    
    
    
    19.7
    
    
    
    1,180,727
    
    
    
    13.9Reset > 60 months
    
    
    157,085
    
    
    
    3.4
    
    
    
    202,299
    
    
    
    2.4Unamortized premium
    
    
    95,669
    
    
    
    2.1
    
    
    
    124,412
    
    
    
    1.5Allowance for loan losses
    
    
    (38,145
    )
    
    
    (0.8
    )
    
    
    (5,020
    )
    
    
    (0.1
    )Sub-total
    
    
    4,191,343
    
    
    
    90.6
    
    
    
    5,591,717
    
    
    
    65.7ARM residential mortgage-backed securities:Reset 1 month or less
    
    
    225,436
    
    
    
    4.9
    
    
    
    796,539
    
    
    
    9.3Reset >1 month but < 12 months
    
    
    900
    
    
    nm
    
    
    
    
    
    
    Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    248,507
    
    
    
    4.9
    
    
    
    796,539
    
    
    
    9.3Fixed-rate residential mortgage-backed securities:
    
    
    5,002
    
    
    
    0.1
    
    
    
    1,476
    
    
    nmSpread PortfolioResidential mortgage-backed securities:Reset 1 month or less
    
    
    204,547
    
    
    
    4.4
    
    
    
    2,024,275
    
    
    
    23.7Reset >1 month but < 12 months
    
    
    
    
    
    
    
    
    
    
    108,648
    
    
    
    1.3Reset >12 months but < 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reset > 60 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sub-total
    
    
    204,547
    
    
    
    4.4
    
    
    
    2,132,923
    
    
    
    25.0Total mortgage assets
    
    $
    4,627,228
    
    
    
    100.0
    %
    
    $
    8,522,655
    
    
    
    100.0
    %
 
 nm
    
    = not meaningful  51




---



##### Table of Contents



Index rates
 FixedRate orLIBOR
    
    Treasury
    
    MTA
    
    COFI
    
    OtherDecember 31, 2007Mortgage-backed securities
    
    
    99
    %
    
    nm        %
    
    
    
    %
    
    
    
    %
    
    
    1
    %Loans held-for-investment
    
    
    28
    
    
    
    
    
    
    
    72
    
    
    nm
    
    
    December 31, 2006Mortgage-backed securities
    
    
    98
    %
    
    
    2
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Loans held-for-investment
    
    
    26
    
    
    
    
    
    
    
    74
    
    
    nm
    
    
    
 
 nm
    
    = not meaningful  Securitizations
  Mortgage-Backed Notes
  52




---



##### Table of Contents



Loan Securitization Highlights
 AtSecuritization
    
    At DecemberDate
    
    31, 2007Number of securitizations
    
    
    10
    
    
    
    10Loans, unpaid principal balance
    
    $
    6,528,104
    
    
    $
    4,796,520Mortgage-backed notes issued to third parties
    
    
    5,656,654
    
    
    
    4,493,850Debt retained
    
    
    871,450
    
    
    
    302,670Retained investment grade %(1)
    
    
    11.3
    %
    
    
    3.1
    %Retained non-investment grade %(1)
    
    
    1.6
    %
    
    
    3.2
    %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. 53




---



##### Table of Contents



Loan Securitizations Mortgage-Backed Notes Ratings
 AtSecuritization
    
    
    At DecemberDate
    
    
    31, 2007Mortgage-backed notes issued to
third-party investorsAAA/Aaa rating
    
    $
    5,423,405
    
    
    $
    4,236,268AA/Aa rating
    
    
    208,867
    
    
    
    225,918A/A rating
    
    
    21,741
    
    
    
    21,741BBB/Baa rating
    
    
    2,641
    
    
    
    4,800Not rated
    
    
    
    
    
    
    5,122Total mortgage-backed notes issued to
third-party investors
    
    $
    5,656,654
    
    
    $
    4,493,849Percentage of total collateral
    
    
    86.7
    %
    
    
    93.7
    %Debt retainedAAA/Aaa rating
    
    $
    551,441
    
    
    $
    18,454AA/Aa rating
    
    
    57,631
    
    
    
    28,324A/A rating
    
    
    80,396
    
    
    
    46,491BBB/Bbb rating
    
    
    68,670
    
    
    
    61,467BB/Ba rating
    
    
    40,584
    
    
    
    37,182B/B rating
    
    
    24,630
    
    
    
    56,024CCC rating
    
    
    
    
    
    
    13,690Not rated
    
    
    36,055
    
    
    
    33,927Total mortgage- backed notes retained
    
    
    859,407
    
    
    
    295,559Overcollateralization
    
    
    12,043
    
    
    
    7,112Total debt retained
    
    $
    871,450
    
    
    $
    302,671Percentage of total collateral
    
    
    13.3
    %
    
    
    6.3
    %
 Collateralized Debt Obligations
   Exemption from the Investment Company Act of 1940
  54




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
 
    Liquidity and Capital Resources
   
    
    We obtained new financing arranged by Arco in the form of repurchase agreement
financing and a revolving line of credit with a maximum amount of $190 million, which
expires on September 26, 2012. See Note 5 and Note 14 to the December 31, 2007
consolidated financial statements included elsewhere in this Form 10-K for additional
information about our borrowings from Arco and its affiliates and our relationship with
Arco.
    
    As of December 31, 2007, we had completed the sale of approximately $2.4 billion of
mortgage-backed securities to repay lenders and meet required margin calls at a net loss
of approximately $181.1 million.
    
    We completed the sale or refinancing of assets financed by our asset-backed
commercial program, and we no longer have any outstanding commercial paper liabilities
under our asset-backed commercial paper program.
    
    We sold approximately $1.0 billion of loans and repaid all of our warehouse lines of
credit that were used to finance whole loan purchases. One warehouse line for $1.0
billion was terminated prior to September 30, 2007, and an additional warehouse line for
$500.0 million expired in October 2007. No balances are currently outstanding on the
remaining warehouse line totaling $1.0 billion. See Note 5 to our December 31, 2007
consolidated financial statements included elsewhere in this Form 10-K for additional
information on our warehouse facilities.
 55




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##### Table of Contents




    
    As of December 31, 2007, we stabilized $538.4 million of repurchase agreement
financing with five repurchase agreement lenders by meeting all required margin calls.
We are working to further stabilize our repurchase agreement financing by moving our
repurchase agreement financing to Arco and its affiliates.
    
    We are working with an additional repurchase agreement lender to resolve a dispute on
the fair value of the underlying collateral for that agreement to settle an additional
$8.0 million of repurchase agreement financing.
    .
   56




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Contractual Obligations and Commitments
  Contractual Obligations
 Payments Due by PeriodLess than 1
    
    
    
    
    
    
    3  5
    
    
    More thanTotal
    
    
    year
    
    
    1  3 years
    
    
    years
    
    
    5 yearsDecember 31, 2007Mortgage-backed notes (1)
    
    $
    3,890.2
    
    
    $
    1,077.7
    
    
    $
    1,774.3
    
    
    $
    912.5
    
    
    $
    125.7Repurchase agreements
    
    
    546.4
    
    
    
    546.4
    
    
    
    
    
    
    
    
    
    
    
    CDOs (1)
    
    
    295.1
    
    
    
    4.7
    
    
    
    19.4
    
    
    
    19.4
    
    
    
    251.6Junior subordinated notes
    
    
    105.4
    
    
    
    4.2
    
    
    
    8.4
    
    
    
    
    
    
    
    92.8Convertible senior notes
    
    
    240.7
    
    
    
    7.8
    
    
    
    15.5
    
    
    
    15.5
    
    
    
    201.9Revolving credit facility (2)
    
    
    15.8
    
    
    
    
    
    
    
    
    
    
    
    15.8
    
    
    
    Facilities leases
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,093.7
    
    
    $
    1,640.9
    
    
    $
    1,817.6
    
    
    $
    963.2
    
    
    $
    672.0
 
 (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 December 31, 2007 and assume we will
exercise our redemption option.(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. Off-Balance Sheet Arrangements
 Consolidation of Variable Interest Entities
 
    
    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.
  57




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Recent Accounting and Reporting Developments
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Short-Term Financing Risks
  Credit Risk
   58




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Concentration Risk
  Interest Rate Risk
  Effect on Net Interest Income
   59




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Interest Rate Sensitivity
(dollars in millions)
 Interest Rates
    
    
    
    
    
    Interest Rates
    
    Interest RatesFall 100
    
    
    
    
    
    Rise 100
    
    Rise 200Basis Points
    
    Unchanged
    
    Basis Points
    
    Basis PointsDecember 31, 2007:Mortgage-Backed SecuritiesFair value
    
    $
    436.2
    
    
    $
    435.9
    
    
    $
    435.5
    
    
    $
    435.2Change in fair value
    
    
    0.4
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.7
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.1
    )%
    
    
    (0.2
    )%Hedge InstrumentsFair value
    
    $
    (18.8
    )
    
    $
    (10.5
    )
    
    $
    1.7
    
    
    $
    20.9Change in fair value
    
    
    (8.3
    )
    
    
    
    
    
    
    12.2
    
    
    
    31.4Change as a percent of fair value
    
    
    (79.0
    )%
    
    
    
    
    
    
    116.2
    %
    
    
    299.0
    %Mortgage Loans Held-for-Investment(1)Fair value
    
    $
    3,705.7
    
    
    $
    3,668.8
    
    
    $
    3,631.8
    
    
    $
    3,594.8Change in fair value
    
    
    37.0
    
    
    
    
    
    
    
    (37.0
    )
    
    
    (74.0
    )Change as a percent of fair value
    
    
    1.0
    %
    
    
    
    
    
    
    (1.0
    )%
    
    
    (2.0
    )%Mortgage-backed notes (1)Fair value
    
    $
    3,692.9
    
    
    $
    3,688.7
    
    
    $
    3,683.0
    
    
    $
    3,678.3Change in fair value
    
    
    4.2
    
    
    
    
    
    
    
    (5.7
    )
    
    
    (10.3
    )Change as a percent of fair value
    
    
    0.1
    %
    
    
    
    
    
    
    (0.2
    )%
    
    
    (0.3
    )%Senior convertible notes (1)Fair value
    
    $
    68.4
    
    
    $
    66.2
    
    
    $
    63.7
    
    
    $
    61.5Change in fair value
    
    
    2.2
    
    
    
    
    
    
    
    (2.5
    )
    
    
    (4.7
    )Change as a percent of fair value
    
    
    3.3
    %
    
    
    
    
    
    
    (3.8
    )%
    
    
    (7.1
    )%Junior Subordinated notes(1)Fair value
    
    $
    52.8
    
    
    $
    49.5
    
    
    $
    46.6
    
    
    $
    44.0Change in fair value
    
    
    3.3
    
    
    
    
    
    
    
    (2.9
    )
    
    
    (5.5
    )Change as a percent of fair value
    
    
    6.7
    %
    
    
    
    
    
    
    (5.9
    )%
    
    
    (11.1
    )%
 
 (1)
    
    This asset or liability is carried on our consolidated balance sheet
at amortized cost, and, therefore, a change in interest rates would
not affect the carrying value of the asset or liability. See Note 2 to
the consolidated financials statements contained elsewhere in this
Form 10-K for information about the adoption of FAS 159 on January 1,
2008 and the effect on the changes in the carrying balance of our
assets and liabilities.   
    
    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
  60




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Interest Rate Cap Risk
   Prepayment Risk
  Inflation
  61




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 INDEX TO FINANCIAL STATEMENTS
 Consolidated Financial Statements of Luminent Mortgage Capital, Inc.Reports of Independent Registered Public Accounting Firms
    
    
    63Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    65Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005
    
    
    66Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    
    67Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    68Notes to Consolidated Financial Statements
    
    
    70
 62




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Luminent Mortgage Capital, Inc.
    Accounting for Uncertainty in Income Taxes
   /s/ GRANT THORNTON LLP
 
 63




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 64




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LUMINENT
MORTGAGE CAPITAL, INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    December 31,(in thousands, except share and per share amounts)
    
    2007
    
    
    2006Assets:Cash and cash equivalents
    
    $
    3,522
    
    
    $
    5,902Restricted cash
    
    
    7,550
    
    
    
    7,498Loans held-for-investment and pledged as collateral, net of allowance for loan losses
of $38,145 at December 31, 2007 and $5,020 at December 31, 2006
    
    
    4,191,343
    
    
    
    5,591,717Mortgage-backed securities, at fair value
    
    
    
    
    
    
    141,556Mortgage-backed securities pledged as collateral, at fair value
    
    
    435,885
    
    
    
    2,789,382Equity securities, at fair value
    
    
    373
    
    
    
    1,098Interest receivable
    
    
    16,129
    
    
    
    36,736Principal receivable
    
    
    96
    
    
    
    1,029Derivatives, at fair value
    
    
    101
    
    
    
    13,021Other assets
    
    
    66,919
    
    
    
    25,856Total assets
    
    $
    4,721,918
    
    
    $
    8,613,795Liabilities:Mortgage-backed notes
    
    $
    3,914,643
    
    
    $
    3,917,677Repurchase agreements
    
    
    526,634
    
    
    
    2,707,915Warehouse lending facilities
    
    
    
    
    
    
    752,777Commercial paper
    
    
    
    
    
    
    637,677Collateralized debt obligations
    
    
    294,416
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    92,788Convertible senior notes
    
    
    90,000
    
    
    
    Derivatives, at fair value
    
    
    10,605
    
    
    
    Revolving line of credit
    
    
    15,833
    
    
    
    Cash distributions payable
    
    
    13,857
    
    
    
    14,343Accrued interest expense
    
    
    10,511
    
    
    
    12,094Warrant liability, at fair value
    
    
    22,868
    
    
    
    Accounts payable and accrued expenses
    
    
    39,788
    
    
    
    6,969Total liabilities
    
    
    5,031,943
    
    
    
    8,142,240Stockholders Equity:Preferred stock, par value $0.001:10,000,000 shares authorized; no shares issued and outstanding at December 31,
2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, par value $0.001:100,000,000 shares authorized; 43,172,839 and 47,808,510 shares issued and
outstanding at December 31, 2007 and December 31, 2006, respectively
    
    
    43
    
    
    
    48Additional paid-in capital
    
    
    548,474
    
    
    
    583,492Accumulated other comprehensive income
    
    
    6,556
    
    
    
    3,842Accumulated distributions in excess of accumulated earnings
    
    
    (865,098
    )
    
    
    (115,827
    )Total stockholders equity (deficit)
    
    
    (310,025
    )
    
    
    471,555Total liabilities and stockholders equity (deficit)
    
    $
    4,721,918
    
    
    $
    8,613,795
  65




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LUMINENT
MORTGAGE CAPITAL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Year ended December 31,2007
    
    
    2006
    
    
    2005(in thousands, except share and per share amounts)Revenues:Interest income:Mortgage loan and securitization portfolio
    
    $
    348,674
    
    
    $
    220,990
    
    
    $
    6,740Spread portfolio
    
    
    88,474
    
    
    
    94,738
    
    
    
    167,073Credit sensitive bond portfolio
    
    
    83,730
    
    
    
    41,409
    
    
    
    7,608Total interest income
    
    
    520,878
    
    
    
    357,137
    
    
    
    181,421Interest expense
    
    
    428,732
    
    
    
    268,618
    
    
    
    137,501Net interest income
    
    
    92,146
    
    
    
    88,519
    
    
    
    43,920Other Income (Expense):Gains (losses) on derivative instruments, net
    
    
    34,288
    
    
    
    7,736
    
    
    
    (808
    )Gains (losses) on sales of mortgage-backed securities, net
    
    
    (181,149
    )
    
    
    993
    
    
    
    (69
    )Losses on sales of loans held-for-investment
    
    
    (45,065
    )
    
    
    
    
    
    
    Impairment losses on securities
    
    
    (481,654
    )
    
    
    (7,010
    )
    
    
    (112,008
    )Mortgage-backed securities, trading change in fair value
    
    
    (22,177
    )
    
    
    
    
    
    
    Warrant, change in fair value
    
    
    (526
    )
    
    
    
    
    
    
    Other expense
    
    
    (141
    )
    
    
    (829
    )
    
    
    Total other income (expense)
    
    
    (696,424
    )
    
    
    890
    
    
    
    (112,885
    )Expenses:Servicing expense
    
    
    23,133
    
    
    
    11,951
    
    
    
    434Provision for loan losses
    
    
    39,293
    
    
    
    5,176
    
    
    
    Salaries and benefits
    
    
    17,354
    
    
    
    9,470
    
    
    
    2,998Professional services
    
    
    6,302
    
    
    
    3,133
    
    
    
    2,225Management compensation expense to related party
    
    
    
    
    
    
    6,921
    
    
    
    4,193Other general and administrative expenses
    
    
    8,396
    
    
    
    5,792
    
    
    
    4,514Total expenses
    
    
    94,478
    
    
    
    42,443
    
    
    
    13,930Income (loss) before income taxes
    
    
    (698,756
    )
    
    
    46,966
    
    
    
    (82,895
    )Income tax expense
    
    
    22,241
    
    
    
    169
    
    
    
    96Net income (loss)
    
    $
    (720,997
    )
    
    $
    46,797
    
    
    $
    (82,991
    )Net income (loss) per share  basic
    
    $
    (16.21
    )
    
    $
    1.15
    
    
    $
    (2.13
    )Net income (loss) per share  diluted
    
    $
    (16.21
    )
    
    $
    1.14
    
    
    $
    (2.13
    )Weighted-average number of shares outstanding  basic
    
    
    44,481,292
    
    
    
    40,788,778
    
    
    
    39,007,953Weighted-average number of shares outstanding  diluted
    
    
    44,481,292
    
    
    
    41,003,620
    
    
    
    39,007,953Dividends declared per common share
    
    $
    0.62
    
    
    $
    0.925
    
    
    $
    0.77
  66




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedAccumulated
    
    
    DistributionsCommon Stock
    
    
    Additional
    
    
    Other
    
    
    in Excess ofPar
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Value
    
    
    Capital
    
    
    Income/(Loss)
    
    
    Earnings
    
    
    Income/(Loss)
    
    
    Total(in thousands)Balance, December 31, 2004
    
    
    37,113
    
    
    $
    37
    
    
    $
    476,250
    
    
    $
    (61,368
    )
    
    $
    (9,416
    )
    
    
    
    
    
    $
    405,503Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,991
    )
    
    $
    (82,991
    )
    
    
    (82,991
    )Mortgage-backed securities available-for-sale, fair
value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,977
    
    
    
    
    
    
    
    64,977
    
    
    
    64,977Derivative contracts, fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,402
    
    
    
    
    
    
    
    2,402
    
    
    
    2,402Futures contracts, net realized gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,065
    
    
    
    
    
    
    
    1,065
    
    
    
    1,065Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (14,547
    )Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,330
    )
    
    
    
    
    
    
    (30,330
    )Issuances of common stock
    
    
    4,149
    
    
    
    4
    
    
    
    39,095
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,099Repurchases of common stock
    
    
    (675
    )
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Amortization of stock options
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    1,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,594Balance, December 31, 2005
    
    
    40,587
    
    
    
    41
    
    
    
    511,941
    
    
    
    7,076
    
    
    
    (122,737
    )
    
    
    
    
    
    
    396,321Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,797
    
    
    $
    46,797
    
    
    
    46,797Securities available-for-sale, fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,380
    
    
    
    
    
    
    
    4,380
    
    
    
    4,380Amortization of derivative gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,614
    )
    
    
    
    
    
    
    (7,614
    )
    
    
    (7,614
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    43,563Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,887
    )
    
    
    
    
    
    
    (39,887
    )Issuances of common stock
    
    
    9,141
    
    
    
    9
    
    
    
    84,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,414Repurchases of common stock
    
    
    (1,919
    )
    
    
    (2
    )
    
    
    (15,830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,832
    )Amortization of restricted common stock
    
    
    
    
    
    
    
    
    
    
    2,976
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,976Balance, December 31, 2006
    
    
    47,809
    
    
    
    48
    
    
    
    583,492
    
    
    
    3,842
    
    
    
    (115,827
    )
    
    
    
    
    
    
    471,555Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (720,997
    )
    
    $
    (720,997
    )
    
    
    (720,997
    )Securities available-for-sale, fair value adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,188
    
    
    
    
    
    
    
    4,188
    
    
    
    4,188Amortization of derivative gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,474
    )
    
    
    
    
    
    
    (1,474
    )
    
    
    (1,474
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (718,283
    )Distributions to stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,274
    )
    
    
    
    
    
    
    (28,274
    )Repurchases and retirement of common stock
    
    
    (4,905
    )
    
    
    (5
    )
    
    
    (41,290
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,295
    )Issuance and amortization of restricted common stock
    
    
    269
    
    
    
    
    
    
    
    6,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,272Balance, December 31, 2007
    
    
    43,173
    
    
    $
    43
    
    
    $
    548,474
    
    
    $
    6,556
    
    
    $
    (865,098
    )
    
    
    
    
    
    $
    (310,025
    )
  67




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LUMINENT MORTGAGE CAPITAL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005(in thousands)Cash flows from operating activitiesNet income (loss)
    
    $
    (720,997
    )
    
    $
    46,797
    
    
    $
    (82,991
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Amortization of premium/discount and depreciation
    
    
    30,123
    
    
    
    671
    
    
    
    27,066Impairment losses on mortgage-backed securities
    
    
    481,654
    
    
    
    7,010
    
    
    
    112,008Provision for loan losses
    
    
    39,293
    
    
    
    5,176
    
    
    
    Net realized loss on real estate owned
    
    
    2,550
    
    
    
    
    
    
    
    Negative amortization of loans held-for-investment
    
    
    (50,199
    )
    
    
    (71,236
    )
    
    
    Share-based compensation
    
    
    6,272
    
    
    
    2,976
    
    
    
    2Net realized and unrealized (gains) losses on derivative instruments
    
    
    14,941
    
    
    
    (9,664
    )
    
    
    1,906Net unrealized losses on securities classified as trading
    
    
    22,177
    
    
    
    
    
    
    
    Net change in the fair value of warrant
    
    
    526
    
    
    
    
    
    
    
    Net (gains) loss on sales of assets
    
    
    181,149
    
    
    
    (993
    )
    
    
    69Net losses on the sales of loans held-for-investment
    
    
    45,065
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Decrease (increase) in interest receivable, net of purchased interest
    
    
    (17,622
    )
    
    
    (25,735
    )
    
    
    4,448Decrease (increase) in other assets
    
    
    6,662
    
    
    
    (3,418
    )
    
    
    (3,079
    )Increase in accounts payable and accrued expenses
    
    
    25,222
    
    
    
    3,688
    
    
    
    1,001Increase (decrease) in accrued interest expense
    
    
    448
    
    
    
    (9,029
    )
    
    
    3,790Increase (decrease) in management compensation payable, incentive compensation payable and other
related party liabilities
    
    
    
    
    
    
    (939
    )
    
    
    214Net cash provided by (used in) operating activities
    
    
    67,264
    
    
    
    (54,696
    )
    
    
    64,434Cash flows from investing activitiesPurchases of mortgage-backed securities
    
    
    (825,845
    )
    
    
    (2,735,103
    )
    
    
    (1,310,133
    )Proceeds from sales of mortgage-backed securities
    
    
    1,739,380
    
    
    
    3,755,557
    
    
    
    136,549Principal payments of mortgage-backed securities
    
    
    396,217
    
    
    
    434,321
    
    
    
    1,560,480Purchases of loans held-for-investment
    
    
    (1,678,193
    )
    
    
    (5,543,538
    )
    
    
    (532,508
    )Proceeds from sale of loans held-for-investment
    
    
    958,562
    
    
    
    
    
    
    
    Principal payments of loans held-for-investment
    
    
    1,381,814
    
    
    
    519,247
    
    
    
    23,854Purchase of derivative instruments
    
    
    (32,979
    )
    
    
    (9,560
    )
    
    
    (1,975
    )Proceeds from derivative instruments
    
    
    40,184
    
    
    
    5,536
    
    
    
    Purchase of debt security
    
    
    (1,271
    )
    
    
    
    
    
    
    Net change in restricted cash
    
    
    (7,592
    )
    
    
    (6,704
    )
    
    
    (794
    )Other
    
    
    (409
    )
    
    
    
    
    
    
    Net cash (provided by) used in investing activities
    
    
    1,969,868
    
    
    
    (3,580,244
    )
    
    
    (124,527
    )Cash flows from financing activitiesBorrowings under repurchase agreements
    
    
    34,843,176
    
    
    
    39,099,107
    
    
    
    19,419,024Principal payments on repurchase agreements
    
    
    (36,120,259
    )
    
    
    (40,319,697
    )
    
    
    (19,926,975
    )Net borrowings (repayments) of warehouse lending facilities
    
    
    (752,594
    )
    
    
    752,777
    
    
    
    Net borrowings (repayments) of commercial paper facility
    
    
    (637,677
    )
    
    
    637,677
    
    
    
    Proceeds from issuance of mortgage-backed notes
    
    
    1,457,657
    
    
    
    3,827,489
    
    
    
    498,589Principal payments on mortgage-backed notes
    
    
    (1,155,346
    )
    
    
    (395,283
    )
    
    
    (13,965
    )Proceeds from issuance of collateralized debt obligations
    
    
    291,027
    
    
    
    
    
    
    
    Principal payments on collateralized debt obligations
    
    
    (878
    )
    
    
    
    
    
    
    Proceeds from issuance of convertible senior notes
    
    
    90,000
    
    
    
    
    
    
    
    Net proceeds from revolving line of credit
    
    
    15,833
    
    
    
    
    
    
    
    Proceeds from issuance of junior subordinated notes
    
    
    
    
    
    
    
    
    
    
    89,968Net borrowings (repayments) of margin debt
    
    
    
    
    
    
    (3,548
    )
    
    
    3,548Capitalized financing costs
    
    
    (396
    )
    
    
    (10,966
    )
    
    
    Net proceeds from issuance of common stock
    
    
    
    
    
    
    84,414
    
    
    
    38,909Repurchases of common stock
    
    
    (41,295
    )
    
    
    (15,832
    )
    
    
    (4,114
    )Distributions to stockholders
    
    
    (28,760
    )
    
    
    (26,762
    )
    
    
    (45,071
    )Net realized gains on Eurodollar futures contracts
    
    
    
    
    
    
    
    
    
    
    1,065Net cash provided by (used in) financing activities
    
    
    (2,039,512
    )
    
    
    3,629,376
    
    
    
    60,978Net increase (decrease) in cash and cash equivalents
    
    
    (2,380
    )
    
    
    (5,564
    )
    
    
    885Cash and cash equivalents, beginning of the period
    
    
    5,902
    
    
    
    11,466
    
    
    
    10,581Cash and cash equivalents, end of the period
    
    $
    3,522
    
    
    $
    5,902
    
    
    $
    11,466
  68




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LUMINENT MORTGAGE CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005(in thousands)Supplemental disclosure of cash flow informationInterest paid
    
    $
    422,763
    
    
    $
    276,216
    
    
    $
    142,825Taxes paid
    
    
    4,557
    
    
    
    1,036
    
    
    
    Non-cash investing and financing activities(Increase) decrease in principal receivable
    
    $
    933
    
    
    $
    12,616
    
    
    $
    (219
    )Increase (decrease) in cash distributions payable to stockholders
    
    
    (486
    )
    
    
    13,125
    
    
    
    (14,741
    )Transfer of loans held-for-investment to real estate owned
    
    
    42,847
    
    
    
    3,602
    
    
    
    De-recognition of mortgage-backed securities
    
    
    (70,990
    )
    
    
    
    
    
    
    De-recognition of repurchase agreements
    
    
    70,990
    
    
    
    
    
    
    
    Collateralized debt obligations
    
    
    (3,986
    )
    
    
    
    
    
    
    Principal payments on mortgage-backed securities
    
    
    183
    
    
    
    
    
    
    
    Repayment of warehouse lending facilities
    
    
    (183
    )
    
    
    
    
    
    
    Incentive compensation payable settled through issuance of restricted common stock
    
    
    
    
    
    
    
    
    
    
    1,884Deferred compensation reclassified to stockholders equity upon issuance of restricted
common stock
    
    
    
    
    
    
    
    
    
    
    (159
    )Accounts payable and accrued expenses settled through issuance of restricted common stock
    
    
    
    
    
    
    
    
    
    
    55Unsettled repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (886
    )
  69




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##### Table of Contents



LUMINENT MORTGAGE CAPITAL, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1ORGANIZATION
   Disclosures about segments of an Enterprise and Related Information.
 Business Conditions and Going Concern
  Progress in the Stabilization of the Business
  
    
    The Company obtained new financing arranged by Arco Capital Corporation Ltd., or
Arco, in the form of repurchase agreement financing and a revolving line of credit with
a maximum amount of $190 million, which expires on September 26, 2012. See Note 5 and
Note 14 for additional information about the Companys borrowings from Arco and its
affiliates and the Companys relationship with Arco.
    
    As of December 31, 2007, the Company had completed the sale of approximately $2.4
billion of mortgage-backed securities to repay lenders and meet required margin calls.
    
    The Company completed the sale or refinancing of assets financed by its asset-backed
commercial program, and it no longer has any outstanding commercial paper liabilities
under its asset-backed commercial paper program.
 70




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##### Table of Contents




    
    The Company sold approximately $1.0 billion of loans and has repaid all of its
warehouse lines of credit that were used to finance whole loan purchases. See Note 5 to
the Companys consolidated financial statements as of December 31, 2007 for additional
information on its warehouse facilities.
    
    As of December 31, 2007, the Company stabilized $538.4 million of repurchase
agreement financing with five repurchase agreement lenders by meeting all required
margin calls. The Company is working to further stabilize its repurchase agreement
financing by moving its repurchase agreement financing to Arco and its affiliates.
    
    The Company is working with one additional repurchase agreement lender to resolve a
dispute on the fair value of the underlying collateral for that agreement to settle an
additional $8.0 million of repurchase agreement financing.
  NOTE 2ACCOUNTING POLICIES
 Basis of Presentation
  Consolidation of Variable Interest Entities.
 Cash and Cash Equivalents
  Restricted Cash
  Investment Securities
  Accounting for Certain
Hybrid Financial Instruments  an Amendment to FASB Statements No., 133 and 140,
  71




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##### Table of Contents



Loans Held-for-Investment
   Allowance and Provision for Loan Losses
  72




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##### Table of Contents



Securitizations
 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities
 Investment in Subsidiary Trust and Junior Subordinated Notes
    Share-Based Compensation
 Share-Based Payment.
 73




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##### Table of Contents



Derivative Financial Instruments
 Accounting for Derivative
Instruments and Hedging Activities
 Real Estate Owned
  Premiums and Discounts on Mortgage-Backed Notes Issued
  Income Taxes
  Accounting for Uncertainty in
Income Taxes. Accounting for Income Taxes.
 Incentive Compensation
  Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
  74




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##### Table of Contents



Net Income (Loss) Per Share
  Use of Estimates
  Recent Accounting Pronouncements
  Business Combinations
 Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research
Bulletin No. 51
 75




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##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities.
  Carrying Value
    
    
    Net Gain (loss)Prior to
    
    
    upon
    
    
    Carrying ValueAdoption
    
    
    Adoption
    
    
    After AdoptionLoans held-for-investment
    
    $
    4,191,343
    
    
    $
    (522,588
    )
    
    $
    3,668,755Mortgage-backed securities
    
    
    435,885
    
    
    
    
    
    
    
    435,885Debt issuance costs, a component of other assets
    
    
    17,238
    
    
    
    (17,238
    )
    
    
    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
    
    
    
    66,150Pretax cumulative effect of adoption
    
    
    
    
    
    
    (41,239
    )Effect on deferred tax asset
    
    
    
    
    
    
    Cumulative effect on stockholders equity
    
    
    
    
    
    
    (41,239
    )Reclassification from accumulated other comprehensive income (loss)
    
    
    
    
    
    
    4,188Cumulative effect on retained earnings
    
    
    
    
    
    
    (37,051
    )
 Fair Value Measurements.
 NOTE 3 INVESTMENT SECURITIES
   76




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##### Table of Contents



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
    
    
    $
    
    
    
    $
    429,399December 31, 2006Mortgage-backed securities,
availablefor-sale
    
    $
    2,930,878
    
    
    $
    7,549
    
    
    $
    (7,489
    )
    
    $
    2,930,938Equity securities
    
    
    1,050
    
    
    
    48
    
    
    
    
    
    
    
    1,098Total
    
    $
    2,931,928
    
    
    $
    7,597
    
    
    $
    (7,489
    )
    
    $
    2,932,036
    Holding Period of Gross Unrealized Losses on Available-for-Sale Securities
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2006Agency-backed 
Mortgage-backed securities
    
    $
    8,850
    
    
    $
    (66
    )
    
    $
    
    
    
    $
    
    
    
    $
    8,850
    
    
    $
    (66
    )Non-agency-backed 
Mortgage-backed securities
    
    
    971,034
    
    
    
    (3,058
    )
    
    
    138,210
    
    
    
    (4,365
    )
    
    
    1,109,244
    
    
    
    (7,423
    )Total temporarily impaired 
Mortgage-backed securities
    
    $
    979,884
    
    
    $
    (3,124
    )
    
    $
    138,210
    
    
    $
    (4,365
    )
    
    $
    1,118,094
    
    
    $
    (7,489
    )
   77




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##### Table of Contents



, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets
   Weighted-Average Life of Mortgage-Backed Securities
 Weighted-AverageWeighted-Average Life
    
    Fair Value
    
    
    Amortized Cost
    
    
    CouponLess than one year
    
    $
    5,397
    
    
    $
    5,397
    
    
    
    7.97
    %Greater than one year to five years
    
    
    347,349
    
    
    
    344,043
    
    
    
    5.58Greater than five years
    
    
    83,139
    
    
    
    100,844
    
    
    
    6.30Total
    
    $
    435,885
    
    
    $
    450,284
    
    
    
    5.88
    %
  78




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##### Table of Contents



NOTE 4LOANS HELD-FOR-INVESTMENT
  Components of Residential Mortgage Loans Held-for-Investment
 December 31,



December 31,2007
    
    
    2006Principal
    
    $
    4,133,820
    
    
    $
    5,472,325Unamortized premium
    
    
    95,668
    
    
    
    124,412Amortized cost
    
    
    4,229,488
    
    
    
    5,596,737Allowance for loan losses
    
    
    (38,145
    )
    
    
    (5,020
    )Total residential
mortgage loans, net of
allowance for loan
losses
    
    $
    4,191,343
    
    
    $
    5,591,717
  Reconciliation of the Carrying Amounts of Loans Held-for-Investment
 For the Year Ended December 31,2007
    
    
    2006Balance, beginning of period
    
    $
    5,596,737
    
    
    $
    507,177Additions during the period:Loan purchases, net of repurchases
    
    
    1,675,375
    
    
    
    5,545,103Negative amortization
    
    
    50,199
    
    
    
    71,2361,725,573
    
    
    
    5,616,339Deductions during the period:Collections of principal
    
    
    1,389,069
    
    
    
    519,247Loan sales
    
    
    989,299
    
    
    
    Deconsolidation of securitization trust
    
    
    642,500
    
    
    
    Transfers to real estate owned
    
    
    42,847
    
    
    
    3,602Amortization of premium
    
    
    26,557
    
    
    
    3,930Charge-offs
    
    
    2,550
    
    
    
    3,092,822
    
    
    
    526,779Balance, end of period
    
    $
    4,229,488
    
    
    $
    5,596,737
 79




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##### Table of Contents



Detail of Carrying Amount of Loans Held-for-Investment
 Principal
    
    
    Delinquent
    
    
    
    
    
    
    Number ofWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Amount of
    
    
    Loans as a
    
    
    Number of
    
    
    DelinquentAverage
    
    
    Average
    
    
    Carrying
    
    
    Loans
    
    
    Percentage
    
    
    Loans
    
    
    Loans as aNumber
    
    
    Interest
    
    
    Maturity
    
    
    Amount of
    
    
    Delinquent
    
    
    of Total
    
    
    Delinquent
    
    
    Percentage ofDescription
    
    Loan Balance
    
    
    of Loans
    
    
    Rate
    
    
    Date
    
    
    Mortgages
    
    
    > 90 Days
    
    
    Principal
    
    
    > 90 Days
    
    
    Total LoansDecember 31, 2007:Floating Rate
    
    $
    0    250
    
    
    
    1,989
    
    
    
    8.23
    %
    
    
    2040
    
    
    $
    351,743
    
    
    $
    14,226
    
    
    
    0.34
    %
    
    
    81
    
    
    
    0.77
    %251    500
    
    
    
    3,384
    
    
    
    8.20
    
    
    
    2040
    
    
    
    1,255,786
    
    
    
    87,060
    
    
    
    2.06
    
    
    
    233
    
    
    
    2.22501    750
    
    
    
    1,608
    
    
    
    8.15
    
    
    
    2041
    
    
    
    954,042
    
    
    
    58,054
    
    
    
    1.37
    
    
    
    99
    
    
    
    0.94751  1,000
    
    
    
    272
    
    
    
    8.02
    
    
    
    2040
    
    
    
    229,904
    
    
    
    17,488
    
    
    
    0.41
    
    
    
    21
    
    
    
    0.20over  1,000
    
    
    196
    
    
    
    7.96
    
    
    
    2041
    
    
    
    252,838
    
    
    
    23,157
    
    
    
    0.55
    
    
    
    17
    
    
    
    0.167,449
    
    
    
    
    
    
    
    
    
    
    
    3,044,313
    
    
    
    199,986
    
    
    
    4.73
    
    
    
    451
    
    
    
    4.30Hybrid
    
    $
    0    250
    
    
    
    1,178
    
    
    
    6.68
    
    
    
    2036
    
    
    
    197,278
    
    
    
    8,936
    
    
    
    0.21
    
    
    
    50
    
    
    
    0.48251    500
    
    
    
    1,253
    
    
    
    6.59
    
    
    
    2036
    
    
    
    464,800
    
    
    
    27,573
    
    
    
    0.65
    
    
    
    74
    
    
    
    0.71501    750
    
    
    
    467
    
    
    
    6.53
    
    
    
    2036
    
    
    
    277,379
    
    
    
    13,241
    
    
    
    0.31
    
    
    
    22
    
    
    
    0.21751  1,000
    
    
    
    107
    
    
    
    6.58
    
    
    
    2036
    
    
    
    95,838
    
    
    
    2,812
    
    
    
    0.07
    
    
    
    3
    
    
    
    0.03over  1,000
    
    
    37
    
    
    
    6.90
    
    
    
    2036
    
    
    
    54,212
    
    
    
    1,500
    
    
    
    0.04
    
    
    
    1
    
    
    
    0.013,042
    
    
    
    
    
    
    
    
    
    
    
    1,089,507
    
    
    
    54,062
    
    
    
    1.28
    
    
    
    150
    
    
    
    1.43Allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,145
    )Unamortized Premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,66810,491
    
    
    
    7.72
    %
    
    
    
    
    
    $
    4,191,343
    
    
    $
    254,047
    
    
    
    6.01
    %
    
    
    601
    
    
    
    5.73
    %December 31, 2006:Floating Rate
    
    $
    0    250
    
    
    
    2,802
    
    
    
    8.12
    %
    
    
    2046
    
    
    $
    498,180
    
    
    $
    1,976
    
    
    
    0.04
    %
    
    
    10
    
    
    
    0.07
    %251    500
    
    
    
    4,752
    
    
    
    8.07
    
    
    
    2046
    
    
    
    1,775,980
    
    
    
    7,825
    
    
    
    0.14
    
    
    
    22
    
    
    
    0.16501    750
    
    
    
    1,990
    
    
    
    7.98
    
    
    
    2046
    
    
    
    1,177,712
    
    
    
    4,520
    
    
    
    0.08
    
    
    
    8
    
    
    
    0.06751  1,000
    
    
    
    355
    
    
    
    7.86
    
    
    
    2046
    
    
    
    302,649
    
    
    
    995
    
    
    
    0.02
    
    
    
    1
    
    
    
    0.01over  1,000
    
    
    265
    
    
    
    7.83
    
    
    
    2046
    
    
    
    334,494
    
    
    
    5,514
    
    
    
    0.10
    
    
    
    4
    
    
    
    0.0310,164
    
    
    
    
    
    
    
    
    
    
    
    4,089,015
    
    
    
    20,830
    
    
    
    0.38
    
    
    
    45
    
    
    
    0.33Hybrid
    
    $
    0    250
    
    
    
    1,452
    
    
    
    6.68
    
    
    
    2036
    
    
    
    242,512
    
    
    
    605
    
    
    
    0.01
    
    
    
    5
    
    
    
    0.04251    500
    
    
    
    1,570
    
    
    
    6.49
    
    
    
    2036
    
    
    
    591,917
    
    
    
    7,114
    
    
    
    0.13
    
    
    
    18
    
    
    
    0.13501    750
    
    
    
    548
    
    
    
    6.51
    
    
    
    2036
    
    
    
    328,982
    
    
    
    1,670
    
    
    
    0.03
    
    
    
    4
    
    
    
    0.03751  1,000
    
    
    
    152
    
    
    
    6.67
    
    
    
    2036
    
    
    
    135,481
    
    
    
    2,657
    
    
    
    0.05
    
    
    
    2
    
    
    
    0.01over  1,000
    
    
    56
    
    
    
    6.75
    
    
    
    2036
    
    
    
    84,418
    
    
    
    1,007
    
    
    
    0.02
    
    
    
    1
    
    
    nm3,778
    
    
    
    
    
    
    
    
    
    
    
    1,383,310
    
    
    
    13,053
    
    
    
    0.24
    
    
    
    30
    
    
    
    0.21Allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,020
    )Unamortized Premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,41213,942
    
    
    
    7.65
    %
    
    
    
    
    
    $
    5,591,717
    
    
    $
    33,883
    
    
    
    0.62
    %
    
    
    75
    
    
    
    0.54
    %
 
 nm = not meaningful Geographic Concentrations of Loans Held-for-Investment
 Top five geographic concentrations (% exposure):
    
    December 31, 2007
    
    December 31, 2006California
    
    
    56.5
    %
    
    
    57.4
    %Florida
    
    
    9.7
    %
    
    
    8.6
    %Arizona
    
    
    4.3
    %
    
    
    4.1
    %Virginia
    
    
    3.9
    %
    
    
    3.7
    %Nevada
    
    
    3.7
    %
    
    
    3.4
    %
 80




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##### Table of Contents



Allowance for Loan Losses
 Year ended December 31,2007
    
    
    2006Balance, beginning of period
    
    $
    5,020
    
    
    $
    Provision for loan losses
    
    
    39,293
    
    
    
    5,176Charge-offs
    
    
    (6,168
    )
    
    
    (156
    )Balance, end of period
    
    $
    38,145
    
    
    $
    5,020
    81




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##### Table of Contents



NOTE 5BORROWINGS
  Borrowings
 Borrowings
    
    
    Weighted-
 Average
    
    
    Fair Value of
    
    
    Final StatedOutstanding
    
    
    Interest Rate
    
    
    Collateral(5)
    
    
    Maturities (7)December 31, 2007Mortgage-backed notes (1)
    
    $
    3,890,224
    
    
    
    3.95
    %
    
    $
    3,711,875
    
    
    
    2046Repurchase agreements (2)
    
    
    546,429
    
    
    
    7.23
    
    
    
    396,657
    
    
    
    2008Collateralized debt obligations (3)
    
    
    295,122
    
    
    
    5.55
    
    
    
    117,789
    
    
    
    2047Junior subordinated notes
    
    
    92,788
    
    
    
    8.42
    
    
    none
    

    
    2035Convertible senior notes
    
    
    90,000
    
    
    
    8.63
    
    
    none

    
    
    2027Revolving line of credit
    
    
    15,833
    
    
    
    9.10
    
    
    none

    
    
    2012Total
    
    $
    4,930,396
    
    
    
    4.57
    %
    
    $
    4,226,321December 31, 2006Mortgage-backed notes (1) (2)
    
    $
    3,914,932
    
    
    
    3.95
    %
    
    $
    3,919,354
    
    
    
    2046Repurchase agreements
    
    
    2,707,915
    
    
    
    5.45
    
    
    
    2,909,895
    
    
    
    2008Commercial paper facility (4)
    
    
    639,871
    
    
    
    5.36
    
    
    
    643,823
    
    
    
    2007Warehouse lending facilities
    
    
    752,777
    
    
    
    5.80
    
    
    
    794,420
    
    
    
    
    (6)Junior subordinated notes
    
    
    92,788
    
    
    
    8.58
    
    
    none

    
    
    2035Total
    
    $
    8,108,283
    
    
    
    5.58
    %
    
    $
    8,267,492
 
 (1)
    
    Outstanding balances for mortgage-backed notes exclude $24.4 million in unamortized premium at December 31, 2007
and $2.7 million at December 31, 2006. The carrying amount of loans pledged as collateral is $4.2 billion and
$3.9 billion at December 31, 2007 and 2006, respectively.(2)
    
    Outstanding balances for repurchase agreements 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.(3)
    
    Outstanding balance for collateralized debt obligations excludes $0.7 million of unamortized discounts at
December 31, 2007.(4)
    
    The outstanding balance for commercial paper excludes $2.2 million of unamortized premiums at December 31, 2006
for commercial paper.(5)
    
    Collateral for borrowings consists of mortgage-backed securities and loans held-for-investment. Values listed as
none are unsecured borrowings.(6)
    
    Borrowing has no stated maturity.(7)
    
    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
  82




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##### Table of Contents



Repurchase Agreements
  Repurchase Agreement Maturities
 December 31, 2007
    
    
    December 31, 2006Overnight 1 day or less
    
    $
    4,199
    
    
    $
    Between 2 and 30 days
    
    
    542,230
    
    
    
    2,070,939Between 31 and 90 days
    
    
    
    
    
    
    201,976Between 91 and 636 days
    
    
    
    
    
    
    435,000Total (1)
    
    $
    546,429
    
    
    $
    2,707,915
 
 (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.  Repurchase Agreement Amount at Risk
 Weighted-AverageDays toMaturity ofAmount at
    
    
    RepurchaseRepurchase
Agreement Counterparties
    
    Risk(1)
    
    
    AgreementsDecember 31, 2007:Bear Stearns & Co.
    
    $
    20,176
    
    
    
    2Greenwich Capital Markets Inc.
    
    
    3,843
    
    
    
    19Total amount at risk
    
    
    24,019
    
    
    
    5
 
 (1)
    
    Equal to the sum of fair value of securities sold plus accrued
interest income and the fair market value of loans pledged as
collateral minus the sum of repurchase agreement liabilities plus
accrued interest expense. .
   83




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##### Table of Contents



Warehouse Lending Facilities
 Mortgage Loan Financing.
 Asset-Backed Securities Financing.
  Warehouse Lending Facilities
  At December 31, 2006Weighted-Borrowing
    
    
    Borrowings
    
    
    AverageCounterparty
    
    Capacity
    
    
    Outstanding
    
    
    Interest RateMortgage loan financing:Greenwich Capital Financial Products, Inc.
    
    $
    1,000.0
    
    
    $
    455.2
    
    
    
    5.80
    %Barclays Bank plc
    
    
    1,000.0
    
    
    
    290.1
    
    
    
    5.78Bear Stearns Mortgage Capital Corp.
    
    
    500.0
    
    
    
    7.5
    
    
    
    5.77Asset-backed securities financing:Greenwich Capital Financial Products, Inc.
    
    
    500.0
    
    
    
    
    
    
    
    Total
    
    $
    3,000.0
    
    
    $
    752.8
    
    
    
    5.80
    %
  Commercial Paper Facility
  Collateralized Debt Obligations
  84




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##### Table of Contents



Junior Subordinated Notes
    Convertible Senior Notes
    85




---



##### Table of Contents



Revolving Line of Credit
  NOTE 6CAPITAL STOCK AND EARNINGS PER SHARE
   86




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##### Table of Contents



Warrant Pricing Assumptions
 December 31,August 14, 2007
    
    2007Risk-free interest rate
    
    
    4.35
    %
    
    
    3.45
    %Expected life in years
    
    
    5.04
    
    
    
    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 is
not currently expecting 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 Year Ended
    
    
    For the Year Ended
    
    
    For the Year EndedDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005Basic
    
    
    Diluted(1)
    
    
    Basic
    
    
    Diluted
    
    
    Basic
    
    
    Diluted(2)Net income (loss)
    
    $
    (720,997
    )
    
    $
    (720,997
    )
    
    $
    46,797
    
    
    $
    46,797
    
    
    $
    (82,991
    )
    
    $
    (82,991
    )Weighted-average number of
common shares outstanding
    
    
    44,481,292
    
    
    
    44,481,292
    
    
    
    40,788,778
    
    
    
    40,788,778
    
    
    
    39,007,953
    
    
    
    39,007,953Additional shares due to:Assumed conversion of
dilutive common stock
options and vesting of
unvested restricted common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,842
    
    
    
    
    
    
    
    Adjusted weighted-average
number of common shares
outstanding
    
    
    44,481,292
    
    
    
    44,481,292
    
    
    
    40,788,778
    
    
    
    41,003,620
    
    
    
    39,007,953
    
    
    
    39,007,953Net income (loss) per share
    
    $
    (16.21
    )
    
    $
    (16.21
    )
    
    $
    1.15
    
    
    $
    1.14
    
    
    $
    (2.13
    )
    
    $
    (2.13
    )
 
 (1)
    
    The Company has 55,000 shares in stock options and 8,034,212 shares in instruments related to
convertible debt which are not included in the above calculation due to their anti-dilutive effect.
In addition, the Company has a warrant outstanding to redeem 51,000,000 shares related to its
financing agreements with Arco that are unexercised and anti-dilutive at December 31, 2007.(2)
    
    Conversion of common stock options and unvested restricted common stock is considered anti-dilutive. 87




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##### Table of Contents



NOTE 72003 STOCK INCENTIVE PLANS
  Common Stock Available for Grant
 2003 Outside2003 Stock
    
    Advisors StockIncentive Plan
    
    Incentive Plan
    
    TotalDecember 31, 2007Shares reserved for issuance
    
    
    1,850,000
    
    
    
    150,000
    
    
    
    2,000,000Granted
    
    
    (1,029,500
    )
    
    
    (20,760
    )
    
    
    (1,050,260
    )Forfeited
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    Total available for grant
    
    
    820,500
    
    
    
    129,240
    
    
    
    949,740
 Outstanding Stock Options
 December 31, 2007Stock options outstanding (shares)
    
    
    55,000Weighted-average exercise price
    
    $
    14.82Weighted-average remaining life (years)
    
    
    0.75
  Common Stock Awards
 Number of
    
    Weighted-AverageCommon Shares
    
    Issue PriceOutstanding, January 1, 2007
    
    
    721,329
    
    
    $
    9.13Issued
    
    
    269,094
    
    
    
    9.32Forfeited
    
    
    
    
    
    
    Outstanding, December 31, 2007
    
    
    990,423
    
    
    $
    9.18
 Non-vested Common Stock Awards
 Number of Common
    
    Weighted-AverageShares
    
    Grant-Date Fair ValueNonvested, January 1, 2007
    
    
    555,923
    
    
    $
    9.20Granted
    
    
    269,094
    
    
    
    9.32Vested
    
    
    (804,257
    )
    
    
    9.25Forfeited
    
    
    
    
    
    
    Nonvested, December 31, 2007
    
    
    20,760
    
    
    $
    8.67
   88




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##### Table of Contents



NOTE 8FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures About Fair Value of Financial Instruments
  Fair Value of Financial Instruments
 December 31, 2007
    
    December 31, 2006Carrying
    
    
    
    
    
    CarryingValue
    
    Fair Value
    
    Value
    
    Fair ValueLoans held-for-investment
    
    $
    4,191,343
    
    
    $
    3,668,755
    
    
    $
    5,591,717
    
    
    $
    5,586,872Mortgage-backed notes
    
    
    3,914,643
    
    
    
    3,634,636
    
    
    
    3,917,677
    
    
    
    3,919,353Repurchase agreements
    
    
    526,634
    
    
    
    546,429
    
    
    
    2,707,915
    
    
    
    2,707,915CDOs
    
    
    294,416
    
    
    
    123,133
    
    
    
    
    
    
    
    Convertible senior notes
    
    
    90,000
    
    
    
    66,150
    
    
    
    
    
    
    
    Junior subordinated notes
    
    
    92,788
    
    
    
    49,546
    
    
    
    92,788
    
    
    
    91,325
 NOTE 9ACCUMULATED OTHER COMPREHENSIVE INCOME
 Components of Accumulated Other Comprehensive Income
 December 31,2007
    
    
    2006
    
    
    2005Unrealized holding losses on securities available-for-sale
    
    $
    (658,507
    )
    
    $
    (5,957
    )
    
    $
    (116,394
    )Reclassification adjustment for net losses (gains) on sales
of securities available-for-sale included in net income
    
    
    181,149
    
    
    
    (993
    )
    
    
    69Impairment losses on securities included in net income
    
    
    481,654
    
    
    
    7,010
    
    
    
    112,008Net unrealized gain on securities available-for-sale
    
    
    4,296
    
    
    
    60
    
    
    
    (4,320
    )Net deferred realized and unrealized gains on cash flow hedges
    
    
    2,260
    
    
    
    3,734
    
    
    
    11,396Net unrealized losses (gains) on equity securities
available-for-sale
    
    
    
    
    
    
    48
    
    
    
    Accumulated other comprehensive income
    
    $
    6,556
    
    
    $
    3,842
    
    
    $
    7,076
 NOTE 10DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  89




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##### Table of Contents



Derivative Contracts
 Estimated Fair ValueDecember 31,
    
    December 31,2007
    
    2006Eurodollar futures contracts sold short
    
    $
    
    
    
    $
    149Interest rate swap contracts
    
    
    (11,436
    )
    
    
    4,383Interest rate cap contracts
    
    
    932
    
    
    
    1,531Credit default swaps
    
    
    
    
    
    
    6,958
 Realized and Unrealized Gains and Losses on Derivative Contracts
 For the Year Ended December 31,2007
    
    
    2006
    
    
    2005Free standing derivatives:Realized gains
    
    $
    50,212
    
    
    $
    2,647
    
    
    $
    983Unrealized gains (losses)
    
    
    (14,940
    )
    
    
    1,363
    
    
    
    (370
    )Purchase commitment derivatives:Realized gains (losses)
    
    
    (984
    )
    
    
    3,726
    
    
    
    (1,421
    )Unrealized gains (losses)
    
    
    
    
    
    
    
    
    
    
    
  Cash Flow Hedging Strategies
  NOTE 11INCOME TAXES
    90




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##### Table of Contents



Components of Consolidated Provision for Income Taxes
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Current income taxes
    
    $
    22,285
    
    
    $
    151
    
    
    $
    272Deferred income taxes
    
    
    (44
    )
    
    
    18
    
    
    
    (176
    )$
    22,241
    
    
    $
    169
    
    
    $
    96
 Reconciliation to Statutory Tax Rate
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Provision (benefit) for income taxes computed at the
statutory tax rate of 35%
    
    $
    (244,565
    )
    
    $
    16,438
    
    
    $
    (29,013
    )Change in tax provision resulting from:REIT (income) loss not subject to corporate income tax
    
    
    
    
    
    
    (18,708
    )
    
    
    29,034Change in valuation allowance
    
    
    261,157
    
    
    
    2,363
    
    
    
    Non-deductible compensation  IRC 162(m)
    
    
    481
    
    
    
    
    
    
    
    Restricted stock expense
    
    
    1,458
    
    
    
    
    
    
    
    State & local taxes, net of federal benefit
    
    
    3,717
    
    
    
    61
    
    
    
    70Other
    
    
    (7
    )
    
    
    15
    
    
    
    5$
    22,241
    
    
    $
    169
    
    
    $
    96
 91




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##### Table of Contents



Components of Net Deferred Tax Assets and Liabilities
 At December 31,2007
    
    
    2006Deferred tax assets:Impairments and fair value adjustments of mortgage-backed securities
    
    $
    175,835
    
    
    $
    Capital loss carryforward
    
    
    61,191
    
    
    
    Provision for loan losses & servicing expense
    
    
    21,403
    
    
    
    Net operating loss
    
    
    2,110
    
    
    
    2,110Restricted stock
    
    
    
    
    
    
    127Accrued expenses
    
    
    222
    
    
    
    37Other
    
    
    3
    
    
    
    312263,793
    
    
    
    2,586Valuation allowance
    
    
    (266,520
    )
    
    
    (2,363
    )Deferred tax liabilities:Fixed assets
    
    
    (58
    )
    
    
    (41
    )Other
    
    
    (13
    )
    
    
    (24
    )(71
    )
    
    
    (65
    )Net deferred tax asset
    
    $
    202
    
    
    $
    158
     NOTE 12DECONSOLIDATION OF VARIABLE INTEREST ENTITIES
  92




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##### Table of Contents



NOTE 13LEGAL MATTERS
 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 its
business, financial condition or results of operations, although such effect could
be materially adverse. The Company believes these allegations to be without merit.
The Company intends to seek dismissal of the lawsuit for failure to state a valid
legal claim, and if the case is not dismissed on motion, to vigorously defend itself
against these allegations. The Company maintains directors and officers liability
insurance which the Company believes should provide coverage to the Company and its
officers and directors for most or all of any costs, settlements or judgments
resulting from the lawsuit.
  Repurchase Agreement Litigation
    93




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##### Table of Contents



NOTE 14RELATED PARTY TRANSACTIONS
      NOTE 15SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
 Quarterly Financial Data
 For the Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312007:Interest income
    
    $
    145,566
    
    
    $
    146,469
    
    
    $
    133,987
    
    
    $
    94,855Interest expense
    
    
    115,204
    
    
    
    122,222
    
    
    
    112,392
    
    
    
    78,912Net interest income
    
    
    30,362
    
    
    
    24,247
    
    
    
    21,595
    
    
    
    15,943Other income (expenses)
    
    
    (273
    )
    
    
    1,862
    
    
    
    (511,616
    )
    
    
    (186,397
    )Expenses
    
    
    15,242
    
    
    
    17,812
    
    
    
    28,860
    
    
    
    32,563
 94




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For the Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Income tax expense (benefit)
    
    
    460
    
    
    
    (506
    )
    
    
    1,755
    
    
    
    20,533Net income (loss)
    
    $
    14,387
    
    
    $
    8,803
    
    
    $
    (520,636
    )
    
    $
    (223,550
    )Net income (loss) per share  basic
    
    $
    0.30
    
    
    $
    0.20
    
    
    $
    (12.17
    )
    
    $
    (5.19
    )Net income (loss) per share  diluted
    
    $
    0.30
    
    
    $
    0.20
    
    
    $
    (12.17
    )
    
    $
    (5.19
    )Weighted-average shares outstanding  basic
    
    
    47,316,058
    
    
    
    44,774,340
    
    
    
    42,790,740
    
    
    
    43,108,841Weighted-average shares outstanding  diluted
    
    
    47,427,502
    
    
    
    44,898,778
    
    
    
    42,790,740
    
    
    
    43,108,841Dividends declared per common share
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    
    
    
    $
    2006:Interest income
    
    $
    61,592
    
    
    $
    74,910
    
    
    $
    95,098
    
    
    $
    125,537Interest expense
    
    
    45,971
    
    
    
    53,513
    
    
    
    73,149
    
    
    
    95,985Net interest income
    
    
    15,621
    
    
    
    21,397
    
    
    
    21,949
    
    
    
    29,552Other income (expenses)
    
    
    8,462
    
    
    
    5,350
    
    
    
    (11,522
    )
    
    
    (1,400
    )Expenses
    
    
    6,293
    
    
    
    8,542
    
    
    
    16,617
    
    
    
    10,991Income tax expense (benefit)
    
    
    11
    
    
    
    641
    
    
    
    405
    
    
    
    (888
    )Net income (loss)
    
    $
    17,779
    
    
    $
    17,564
    
    
    $
    (6,595
    )
    
    $
    18,049Net income (loss) per share  basic
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    (0.17
    )
    
    $
    0.39Net income (loss) per share  diluted
    
    $
    0.45
    
    
    $
    0.45
    
    
    $
    (0.17
    )
    
    $
    0.39Weighted-average shares outstanding  basic
    
    
    39,491,786
    
    
    
    38,609,963
    
    
    
    38,695,800
    
    
    
    46,282,380Weighted-average shares outstanding  diluted
    
    
    39,718,552
    
    
    
    38,834,435
    
    
    
    38,695,800
    
    
    
    46,519,251Dividends declared per common share
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    0.30
    
    
    $
    0.375
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
   
    MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  .
    95




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Luminent Mortgage Capital, Inc.
 Internal ControlIntegrated Framework
    Internal Control-Integrated Framework
  96




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/s/ GRANT THORNTON LLP
 
 
 ITEM 9B. OTHER INFORMATION
  
  
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
     97




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98




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Name
    
    Age
    
    PositionS. Trezevant Moore, Jr.
    
    54
    
    President and Chief Executive OfficerKaren Chang
    
    33
    
    Senior Vice President and Chief Financial OfficerDimitri Papatheoharis
    
    36
    
    Senior Vice President and Chief Investment Officer
 Business Experience of Our Executive Officers
    Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Business Conduct and Ethics
  
    
    honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships;
    
    full, fair, accurate, timely and understandable disclosure in our SEC reports and
other public communications;
    
    compliance with applicable governmental laws, rules and regulations;
    
    prompt internal reporting of violations of our code of ethics to appropriate
persons identified in our code of ethics; and
    
    accountability for adherence to our code of ethics.
 Public Availability of Corporate Governance Documents
  Audit Committee
  
    
    all members of our audit committee qualify as an audit committee financial
expert, as defined by the SEC;
    
    all members of our audit committee are financially literate, within the meaning
of the NYSE rules; and
    
    independent under the audit committee independence standards under the Exchange
Act.
 
 ITEM 11. EXECUTIVE COMPENSATION
 Introduction
   
    
    attract and retain talented and dedicated executive officers to oversee the
growth, development and profitability of our business;
    
    link the annual and long-term cash and stock incentive compensation of our
executive officers to our financial and operational performance and to the performance
of our stock; and
    
    provide long-term compensation to our executive officers that motivates our
executive officers to create stockholder value.
  99




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Our Compensation Philosophy and Objectives
  
    
    the decision-making process of our compensation committee should include a
review of the compensation recommendations made by our independent compensation
consultants, including their analysis of the compensation of our executive officers
compared to the compensation of other companies that our compensation consultants
considered;
    
    our compensation should enable us to attract, motivate and retain executive
officers with the ability and talent to oversee meaningful growth and long-term
profitability;
    
    our compensation should be fair, competitive and reasonable in light of the
responsibilities of our executive officers, their experience and their performance and
should not exceed the median compensation of similarly positioned executive officers of
the mortgage companies in the peer group we have analyzed for comparative purposes; and
    
    a significant portion of the compensation of our executive officers should be
at risk, i.e., contingent on the achievement by our executive officers of individual
goals and objectives as well as our corporate objectives as established by our board of
directors. These objectives relate to net income after tax, establishment of fee-based
businesses and reduction of leverage.
 The Compensation of Our Named Executive Officers
   Base Salary .
  Annual Cash Bonus .
  Long-Term Equity Incentives .
 100




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 Severance Benefits and Retention Agreements .
        101




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
    
    the executive officers willful and continued failure substantially to perform his or
her material duties with us or a violation of a material law after written notice from
us and a reasonable opportunity to cure such failure or violation;
    
    fraud, breach of fiduciary duty, dishonesty, misappropriation or other action by the
executive officer that causes intentional material damage to our property or business;
    
    repeated absences from work for other than physical or mental impairment or weakness;
    
    admission or conviction of a felony or other crime, that, in the reasonable opinion
of our board of directors, adversely affects the ability of the executive officer to
perform his or her obligations under his or her employment agreement; or
    
    the failure of the executive officer to devote substantially all of his or her
business time and attention to the performance of his or her duties under his or her
employment agreement.
  
    
    the position or scope of the executive officers authority, duties or
responsibilities are materially diminished;
    
    we commit a material breach of the employment agreement that is not cured after
notice; or
    
    the employment of the executive officer is terminated without cause.
   401(k) Plans .
  Employee Benefit Plans .
  Perquisites and Other Benefits .
 The Operation of Our Compensation Process
    102




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##### Table of Contents




    
    the chairman of our compensation committee meets with our chief executive officer in
advance of each compensation committee meeting to review the agenda for the compensation
committee meeting. When appropriate, our independent compensation consultants
participate in these meetings;
    
    documentation relevant to the matters to be considered at each meeting of our
compensation committee is provided several days in advance to each member of our
compensation committee to provide the members of our compensation committee adequate
time for review;
    
    our compensation committee has the authority to request, and has requested, the
participation of our independent compensation consultants and our independent legal
counsel at compensation committee meetings;
    
    our compensation committee holds an executive session as part of each of its meetings
at which none of our executive officers are present;
    
    our compensation committee provides minutes of all of its meetings to our board of
directors and consults with our independent directors as appropriate about significant
compensation matters, including matters affecting the compensation of our chief
executive officer, our chief financial officer and our chief investment officer;
    
    our compensation committee conducts its business in accordance with its charter,
which is available on our website at www.luminentcapital.com, reviews its charter
annually in light of developments affecting the compensation of executive officers of
public corporations and develops an annual schedule for compliance with each of the
mandates of our compensation committees charter; and
    
    our compensation committee conducts an annual self-evaluation of its performance.
 Restatements
  Tax Matters
  103




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Summary Compensation Table
  Name and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    All OtherPrincipal Position
    
    Year
    
    Salary($)
    
    Bonus($)(1)
    
    Awards($)(1)
    
    Compensation($)(2)
    
    Total($)Gail P. Seneca,
    
    
    2007
    
    
    
    356,057
    
    
    
    
    
    
    
    1,504,250
    
    
    
    86,644
    
    
    
    1,946,951Chairman of the Board and

Chief Executive Officer to May 10, 2007

    



    2006
    
    
    
    650,000
    
    
    
    350,000
    
    
    
    1,552,000
    
    
    
    125,000
    
    
    
    2,677,000S. Trezevant Moore, Jr.,
    
    
    2007
    
    
    
    577,180
    
    
    
    750,000
    
    
    
    1,421,937
    
    
    
    91,522
    
    
    
    2,840,639President and Chief
    
    
    2006
    
    
    
    350,000
    
    
    
    500,000
    
    
    
    432,859
    
    
    
    83,303
    
    
    
    1,366,162Operating Officer
to May 10, 2007
Chief Executive Officer
since May 10, 2007Christopher J. Zyda,
    
    
    2007
    
    
    
    429,824
    
    
    
    750,000
    
    
    
    1,227,681
    
    
    
    55,956
    
    
    
    2,463,461Senior Vice President
    
    
    2006
    
    
    
    250,000
    
    
    
    450,000
    
    
    
    138,305
    
    
    
    19,943
    
    
    
    858,248and Chief Financial
Officer to December 31, 2007Eleanor Cornfeld Melton
    
    
    2007
    
    
    
    264,188
    
    
    
    91,623
    
    
    
    184,930
    
    
    
    14,156
    
    
    
    554,898Senior Vice President
    
    
    2006
    
    
    
    234,000
    
    
    
    409,000
    
    
    
    22,903
    
    
    
    6,747
    
    
    
    672,652and Chief Credit Officer
to September 30, 2007Ronald Viera
    
    
    2007
    
    
    
    267,788
    
    
    
    285,000
    
    
    
    244,239
    
    
    
    19,083
    
    
    
    816,110Senior Vice President
    
    
    2006
    
    
    
    202,500
    
    
    
    275,000
    
    
    
    34,961
    
    
    
    11,300
    
    
    
    523,961and Chief Risk Officer to
September 30, 2007
 
 (1)
    
    Amounts determined by our compensation committee. In accordance with SEC rules, this column represents the
dollar amounts we recognized for financial statement reporting purposes for 2007 and 2006 for restricted stock
awards granted during these and prior years in accordance with SFAS 123R. No named executive officer forfeited
any stock awards during 2007 or 2006. For additional information on the valuation assumptions underlying the
value of these awards, see Note 7 to our consolidated financial statements for the year ended December 31, 2007
included elsewhere in this Form 10-K. All unvested restricted stock awards vested in full on August 30, 2007
because the issuance of the warrant to Arco, which constituted a change of control as defined in our restricted
stock agreements.(2)
    
    All other compensation consisted primarily of dividend equivalent rights on shares of our common stock that are
the subject of unvested restricted stock awards and life insurance premiums we pay on behalf of our executive
officers. The perquisites we provided during 2007 to our named executive officers were less than $10,000 in
the aggregate. 104




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Employment Agreements
  S. Trezevant Moore, Jr.
 Base Salary.
 Annual Cash Bonus.
 Restricted Stock Awards.
 Change of Control.
 Employment Term.
 Karen Chang
 Base Salary.
 Annual Cash Bonus.
 Restricted Stock Awards.
 Change of Control.
 Employment Term.
 Tuition Reimbursement.
 105




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##### Table of Contents



Dimitri Papatheoharis
 Base Salary.
 Annual Cash Bonus.
 Restricted Stock Awards.
 Change of Control.
 Employment Term.
 Grants of Plan-Based Awards
  All OtherStock Awards:
    
    Grant DateNumber of Shares
    
    Fair Value of StockName
    
    Grant Date
    
    of Stock or Shares(#)
    
    and Option Awards($)Gail P. Seneca
    
    
    1/2/07
    
    
    
    75,000
    (1)
    
    $
    782,250S. Trezevant Moore, Jr.
    
    
    
    
    
    
    
    
    
    
    Christopher J. Zyda
    
    
    1/2/07
    
    
    
    75,000
    (1)
    
    
    782,250Eleanor Cornfeld Melton
    
    
    
    
    
    
    
    
    
    
    Ronald Viera
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    One-half of this award was scheduled to vest on January 2, 2008 and one-half
was scheduled to vest on January 2, 2009. These awards vested on August 30,
2007 because the issuance of the warrant to Arco constituted a change of
control under our restricted stock award agreements. Stock Incentive Plans
    106




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##### Table of Contents




    
    the authority to determine the persons eligible to be granted options, the number of shares subject to each option, the exercise price of each option, the vesting schedule,
circumstances in which the vesting of options is accelerated and any extension of the
period for exercise; and
    
    full discretionary authority to determine any matters relating to options granted
under our plans.
  Outstanding Equity Awards at Fiscal Year End
  Option Awards
    
    Stock AwardsMarketNumber of
    
    Value ofShares or
    
    Shares orNumber of Securities
    
    
    
    
    
    
    
    
    
    Shares of
    
    Shares ofUnderlying
    
    Option
    
    Option
    
    Stock That
    
    Stock ThatUnexercised Options
    
    Exercise
    
    Expiration
    
    Have Not
    
    Have NotName
    
    Exercisable(#)
    
    Unexercisable(#)
    
    Price($)
    
    Date
    
    Vested(#)
    
    Vested($)Christopher J. Zyda
    
    
    50,000
    
    
    
    
    
    
    $
    15.00
    
    
    
    3/30/08
    
    
    
    
    
    
    
    
 Option Exercises and Stock Vested
  Option Exercises and Stock VestedOption Awards
    
    Stock AwardsNumber ofShares
    
    Value
    
    Number of
    
    ValueAcquired
    
    Realized on
    
    Shares Acquired
    
    Realized onName of Executive Officer
    
    on Exercise (#)
    
    Exercise ($)(1)
    
    on Vesting (#)
    
    Vesting ($)(1)Gail P. Seneca
    
    
    
    
    
    
    
    
    
    
    275,000
    
    
    
    1,236,625S. Trezevant Moore, Jr.
    
    
    
    
    
    
    
    
    
    
    165,083
    
    
    
    491,120Christopher J. Zyda
    
    
    
    
    
    
    
    
    
    
    130,043
    
    
    
    227,523Eleanor Cornfeld Melton
    
    
    
    
    
    
    
    
    
    
    21,500
    
    
    
    62,673Ronald Viera
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    97,919
 
 (1)
    
    Value realized is based upon the average of the high and low trading price of our common stock on
the NYSE on the date of exercise or vesting. 107




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Pension Benefits
  Non-qualified Deferred Compensation
  Director Compensation
  
    
    each of our non-officer director a fee at the annual rate of $40,000;
    
    our lead independent director an additional fee at the annual rate of $20,000;
    
    the chairperson of the audit committee of our board of directors an additional fee at
the annual rate of $20,000;
    
    the chairperson of the compensation committee of our board of directors an additional
fee at the annual rate of $10,000;
    
    the chairperson of the governance and nominating committee of our board of directors
an additional fee at the annual rate of $10,000; and
    
    each member of a committee of our board of directors an attendance fee of $1,500 per
meeting.
   108




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##### Table of Contents



Name
    
    Year
    
    Fees Earned or Paid in Cash($)
    
    Stock Awards
    
    Total($)(1)Leonard Auerbach
    
    
    2007
    
    
    
    30,002
    
    
    
    5,833
    
    
    
    35,835Craig A. Cohen
    
    
    2007
    
    
    
    12,488
    
    
    
    
    
    
    
    12,488Robert B. Goldstein
    
    
    2007
    
    
    
    84,002
    
    
    
    5,833
    
    
    
    89,835Jay A. Johnston
    
    
    2007
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Bruce A. Miller
    
    
    2007
    
    
    
    119,835
    
    
    
    5,833
    
    
    
    125,668Zachary H. Pashel
    
    
    2007
    
    
    
    11,500
    
    
    
    
    
    
    
    11,500Francesco Piovanetti
    
    
    2007
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Donald H. Putnam
    
    
    2007
    
    
    
    36,002
    
    
    
    5,833
    
    
    
    41,835Frank L. Raiter
    
    
    2007
    
    
    
    42,335
    
    
    
    5,833
    
    
    
    48,168Joseph E. Whitters
    
    
    2007
    
    
    
    59,502
    
    
    
    5,833
    
    
    
    65,335
 
 (1)
    
    Excludes expense reimbursement. Equity Compensation
   Compensation Committee Interlocks
  Report of Our Compensation Committee
    January 30, 2008
    MEMBERS OF THE COMPENSATION COMMITTEE
Robert B. Goldstein, Chairman
Bruce A. Miller, CPA
Frank L. Raiter 109




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##### Table of Contents



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Shares of Common StockBeneficially OwnedName of Beneficial Owner
    
    Number of Shares
    
    
    PercentArco Capital Corporation Ltd. (Arco),
Arco LUM Holdings Ltd. (Arco LUM),
Arco Capital Management LLC (ACM),
Western Gailes Capital Management LLC (WGC),
ISTAN LLC (Istan),
Interinvestco LLC (Intervestco),
Dilek Koenigsberger,
Robert Koenigsberger,
Jay A. Johnston,
Ailsa Craig Capital Management LP (Ailsa)
    
    
    38,975,219
    (1)
    
    
    49.0
    %LSV Asset Management(2)
    
    
    2,496,900
    
    
    
    5.8
 Shares of Common StockBeneficially OwnedNumber ofNumber of Shares
    
    SharesName of Individual or Identity of Group:(3)Directors:Craig A. Cohen(4)
    
    
    30,000
    
    
    
      *Robert B. Goldstein
    
    
    71,381
    
    
    
      *Jay A. Johnston
    
    
    37,616,821
    (5)
    
    
    47.3
    (5)Bruce A. Miller, CPA
    
    
    11,360
    
    
    
      *S. Trezevant Moore, Jr.
    
    
    211,000
    
    
    
      *Zachary H. Pashel
    
    
    Francesco Piovanetti
    
    
    36,358,424
    (5)
    
    
    45.7
    (5)Frank L. Raiter
    
    
    11,310
    
    
    
      *Joseph E. Whitters, CPA
    
    
    123,460
    
    
    
      *Executive Officers:Karen Chang(6)
    
    
    37,413
    
    
    
      *Dimitri Papatheoharis
    
    
    108,084
    
    
    
      *All directors and executive officers as a group (11 persons)


    38,224,055
    (5)(6)
    
    
    48.1
    %
 
 *
    
    Owns less than one percent(1)
    
    As reported in the most recently available amendment to the Schedule 13D filed with the
SEC by this group. The business address for WGC and Interinvestco is 20 Dayton Avenue,
Greenwich, CT 06830. The business address for Istan is 1 Devereux Court, Rye, New York
10580. The business address for each other person is c/o ACM, City View Plaza, Suite
800, Road 165 Km. 1.2, Guaynabo, PR 00968. 110




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##### Table of Contents



WGC directly owns 150,000 shares (representing approximately 0.35% of the shares
outstanding). WGC is wholly owned by Ailsa, which therefore may be deemed to share
beneficial ownership of those shares. Jay A. Johnston, as the general partner of Ailsa,
also may be deemed to share beneficial ownership of those shares.Interinvestco owns 2,216,795 shares (representing approximately 5.1% of the shares
outstanding). Interinvestco is owned by two trusts whose settlors are Jay A. Johnston
and Robert Koenigsberger.Istan owns 250,000 shares (representing approximately 0.58% of the shares outstanding).
Istan is wholly owned by Dilek Koenigsberger, who therefore may be deemed to share
beneficial ownership of those shares.ACM directly owns 100,000 shares. In addition, ACM acts as Arcos investment adviser and
it may be deemed to share beneficial ownership of the shares issuable upon exercise of
the warrant.Pursuant to a warrant agreement we entered into with Arco on August 17, 2007, Arco has
the right to purchase, at a price of $0.18 per share, at any time until the fifth
anniversary of the date of the warrant agreement, a combination of shares of our common
stock and shares of a newly-created class of non-voting preferred stock that in the
aggregate represent 51% of our equity. So long as our 8.125% Convertible Senior Notes
due 2027 are outstanding and the holders of the convertible notes have the right to cause
their convertible notes to be redeemed following a change in control of us, the maximum
number of shares that may be issued to Arco upon the exercise of the warrant granted
under the warrant agreement is the number that, together with all other shares
beneficially owned by Arco, would result in Arco owning 49% of the issued and outstanding
shares. Based upon 43,282,839 shares of common stock outstanding, if Arco were deemed to
be the beneficial owner of the 2,716,795 shares reported above as beneficially owned by
the other persons, the maximum number of shares that Arco could acquire upon exercise of
the warrant would be 36,258,424 (representing approximately 45.6% of the shares that
would be outstanding following the exercise). Arco subsequently transferred the warrant
to its wholly owned subsidiary, Arco LUM.Each of the persons disclaims beneficial ownership of any outstanding shares that are not
directly owned by that person or by an entity that is controlled by that person and each
person other than Arco disclaims beneficial ownership of the shares that are issuable
upon exercise of the warrant.(2)
    
    As reported in a Schedule 13G filed with the SEC. The address of LSV Asset Management is
1 N. Wacker Drive, Suite 400, Chicago, IL 60606.(3)
    
    The address of each of our officers and directors is c/o Luminent Mortgage Capital, Inc.,
Commerce Square, 2005 Market Street, 21st Floor, Philadelphia, Pennsylvania
19103. None of the shares beneficially owned by our officers and
directors are pledged as security.(4)
    
    These shares are beneficially owned by Mr. Cohens wife.(5)
    
    We refer you to footnote (1) under Beneficial Owners of 5% or More of Our Common Stock.(6)
    
    Includes currently exercisable stock options to purchase 5,000 shares of our common stock. 
 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   111




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
    
    In August 2007, we entered into a letter of intent with Arco, which contemplated,
subject to the negotiation and execution of definitive agreements, the following:
 
    
    a master reverse repurchase agreement, pursuant to which certain of our
subsidiaries financed mortgage-backed securities for an aggregate amount of
approximately $64.9 million;
    
    the issuance of a warrant to Arco described below; and
    
    additional transactions that would provide us with additional capital with the
intention of addressing margin calls and financing maturities and allow us to
further stabilize our repurchase lines.
 
    
    In August 2007, we entered into a warrant agreement pursuant to which we issued a
warrant to Arco that entitles Arco to purchase up to a 49% voting interest and a 51%
economic interest in us on a fully diluted basis at an exercise price of $0.18 per
common share, exercisable for a five-year period beginning August 30, 2007. As long as
our 8.125% convertible senior notes due 2027 are outstanding and the holders of those
convertible notes have the right to cause their convertible notes to be redeemed
following a change in control, the maximum number of shares of common stock that could
be issued to Arco upon the exercise of the warrant granted under the warrant agreement
is the number that, together with all other shares of our common stock beneficially
owned by Arco, would result in Arco owning no more than 49% of the issued and
outstanding shares of our common stock. We entered into the warrant agreement and
issued the warrant to Arco in consideration of the letter of intent from Arco described
above.
    
    In August 2007, we and certain of our affiliates entered into the interim credit
agreements and instruments with or in favor of Arco. Under those agreements and
instruments, we received a loan of approximately $18.25 million having a maturity of one
month and an annual interest rate equal to one-month LIBOR plus 4.00%. We used the
proceeds of the loan to address margin calls and financing maturities. Repayment of the
loan under the interim agreements was collateralized by a security interest in property
owned by us or certain of our affiliates, and the loan was guaranteed by certain of our
affiliates.
    
    On September 12, 2007, we and certain of our affiliates entered into an amendment to
the interim credit agreement with Arco. The amendment increased the maximum principal
amount of loans outstanding at any one time under the credit agreement from $18.5
million to $23.5 million. We used the proceeds of the loan to address margin calls and
financing maturities.
    
    On September 26, 2007, we entered into a definitive credit agreement with Arco. The
definitive credit agreement provided for a revolving credit facility in the amount of
the lesser of up to $60.0 million or 85% of eligible asset values as defined in the
definitive credit agreement. Existing loans of approximately $33.3 million under the
interim credit agreement were combined with an additional borrowing of $10.0 million on
the closing date for an aggregate principal amount outstanding of $43.3 million. The
maturity date under the definitive credit agreement is September 26, 2012 or such
earlier termination of the commitments as is provided in the definitive credit
agreement. We may make voluntary prepayments and may become obligated to make mandatory
prepayments under certain circumstances. Interest on the loans made under the
definitive credit agreement is payable at a rate equal to the sum of one-month LIBOR
plus 4.00%. We are obligated to pay a commitment fee quarterly at an annual rate of
0.5% of the daily average undrawn portion of the commitment under the definitive credit
agreement. We may reduce or cancel the undrawn portion of the commitment as long as the
reduction is at least $5 million or whole multiples of $500,000 in excess of that
amount.
    
    Under the definitive credit agreement with Arco, Arco may from time-to-time, in its
sole discretion upon our request, provide guarantees or other direct or contingent
credit support in respect of our obligations, which would constitute borrowings under
the definitive credit agreement. We have agreed to indemnify Arco against losses that
Arco may incur under circumstances specified in the definitive credit agreement. The
definitive credit agreement contains certain affirmative covenants and subjects us to
certain negative covenants, including:
 
    
    prohibitions on making certain investments;
    
    incurring liens on any of our assets or revenues, except for pre-existing
liens;
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
    
    creating certain other indebtedness;
    
    entering into any plan of merger, consolidation or liquidation;
    
    amending our charter or bylaws or changing our fiscal year;
    
    making certain restricted payments such as dividends or other distributions on
our capital stock, with certain exceptions;
    
    making changes to the nature of our business;
    
    entering into transactions with affiliates;
    
    entering into certain contractual obligations;
    
    using proceeds of any loan under the definitive credit agreement to purchase
margin stock;
    
    entering into any sale and leaseback transaction; or
    
    permitting our fixed charge coverage ratio, as defined in the definitive
credit agreement for the twelve-month period ending on the last day of any fiscal
quarter to be less than (a) 0.85 : 1.0 at September 30, 2007 and December 31,
2007, (b) 1.0 : 1.0 for any fiscal quarter with an end date from March 31, 2008
through December 31, 2008 and (c) 1.2 : 1.0 for all fiscal quarters thereafter.
    
    Repayment of the loans under the definitive credit agreement is collateralized
by a security interest in property owned by us or certain of our affiliates, and
the loans are guaranteed by certain of our affiliates, pursuant to the terms of
the amended and restated security and pledge agreement and the amended and
restated subsidiary guarantee agreement.
    
    Upon an event of default, as specified in the definitive credit agreement,
Arco may declare the commitment terminated, declare all or any portion of the
unpaid principal amount of outstanding loans due and payable and exercise all
rights and remedies available under the definitive credit agreement and related
documents described below. One specified event of default would occur if we were
to undergo a change of control as defined in the definitive credit agreement.
Repayment of the loans under the definitive credit agreement is collateralized by
a security interest in property owned by us or certain of our affiliates, and the
loans are guaranteed by certain of our affiliates, pursuant to the terms of the
amended and restated security and pledge agreement and the amended and restated
subsidiary guarantee agreement.
 
    
    On September 26, 2007, as contemplated by the letter of intent, our board of
directors increased the number of our directors from eight directors to nine directors
in three classes of three members each and accepted the resignations of three of our
directors and appointed new directors. Our board of directors appointed Jay A. Johnston
as a Class II director, Francesco N. Piovanetti as a Class II director, Zachary H.
Pashel as a Class I director and Craig A. Cohen as a Class III director and accepted the
resignations of Gail P. Seneca as chairman of the board and as a Class II director,
Leonard Auerbach as a Class II director and Donald H. Putnam as a Class III director.
Our board of directors also appointed Craig A. Cohen as chairman of the board.
    
    As of December 7, 2007, we entered into an amendment to our amended and restated
credit agreement with Arco in order to provide for increases in repurchase agreement
financings from a subsidiary of Arco. We used the proceeds of the additional financings
for general corporate purposes, to make interest and other payments on outstanding
obligations and, as required by the credit facility, to repay borrowings under the
credit facility. The amendment to the credit agreement increased to $190.0 million the
cap on total outstanding amounts of such purchase agreements and credit agreement
borrowings and decreased the revolving credit facility commitment to the lesser of up to
$16.0 million or 85% of eligible asset values, subject in all cases to the terms and
conditions of the amended and restated credit agreement. In addition, the interest rate
charged on repurchase agreement financing was increased to LIBOR
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plus 6.00%. In connection with these transactions, we and certain of our subsidiaries
also entered into a collateral security, setoff and netting agreement dated as of
December 7, 2007, or the master netting agreement, with Arco and certain affiliated
entities of Arco, or the Arco Group, pursuant to which we and certain of our
subsidiaries have granted to the Arco Group a continuing security interest in property
owned by us or certain of our affiliates. Under the master netting agreement, the
respective members of the Arco Group have rights to aggregate, setoff and net any
payment obligations arising under the repurchase transactions and the amended and
restated credit agreement.
   
    
    we have publicly bid mortgage-backed securities for sale through an independent
broker/dealer;
    
    we have received at least one reasonably contemporaneous bid for the mortgage-backed
securities from an unaffiliated third party;
    
    our chief executive officer shall have determined that the sale of the
mortgage-backed securities to the related party at the price offered by the related
third party is equal to or higher than the reasonably contemporaneous bid from the
unaffiliated third party; and
    
    either our chief executive officer or our chief investment officer shall have
executed a certificate setting forth the facts demonstrating that sale is at fair market
value.
  Director Independence
   
 ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 AUDIT AND NON-AUDIT FEES
  Audit Fees
  
    
    the audit of our financial statements;
    
    the audit of our internal control over financial reporting;
    
    the review of our quarterly financial statements;
    
    the review of and the required procedures related to our quarterly financial
statements and other financial data included in our filings with the SEC.
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
    
    the audit of our financial statements;
    
    the audit of our internal control over financial reporting;
    
    the review of our quarterly financial statements;
    
    the required procedures related to issuing comfort letters for issuances of common
stock during those periods; and
    
    the review of and the required procedures related to our quarterly financial
statements and other financial data included in our filings with the SEC.
  
    
    the review of our quarterly financial statements;
    
    the audit of our internal control over financial reporting;
    
    the required procedures related to issuing comfort letters for issuances of common
stock and convertible debt during those periods; and
    
    the review of and the required procedures related to our quarterly financial
statements and other financial data included in our filings with the SEC.
 Audit-Related Fees
   Tax Fees
   All Other Fees
   115




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##### Table of Contents



Change in Our Independent Registered Public Accounting Firm
   Audit Committee Pre-Approval Policies and Procedures
     
  
 ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)1. and (a)2. Documents filed as part of this report:
   116




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(a)3. Exhibits
  117




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SIGNATURES
  LUMINENT MORTGAGE CAPITAL, INC.(Registrant)By:
    
    /s/ S. TREZEVANT MOORE. JR.S. Trezevant Moore, Jr.President and Chief Executive Officer(Principal Executive Officer)Date: March 25, 2008By:
    
    /s/ KAREN CHANGKaren ChangSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)Date: March 25, 2008
  Signature
    
    Title
    
    Date/s/ S. TREZEVANT MOORE, JR.

S. Trezevant Moore, Jr.
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 25, 2008/s/ KAREN CHANG

Karen Chang
    
    Chief Financial Officer (Principal Financial and
Accounting Officer)
    
    March 25, 2008/s/ CRAIG A. COHEN

Craig A. Cohen
    
    Chairman of the Board
    
    March 25, 2008/s/ ROBERT B. GOLDSTEIN

Robert B. Goldstein
    
    Director
    
    March 25, 2008/s/ JAY A. JOHNSTON

Jay A. Johnston
    
    Director
    
    March 25, 2008/s/ BRUCE A. MILLER

Bruce A. Miller
    
    Director
    
    March 25, 2008/s/ ZACHARY H. PASHEL

Zachary H. Pashel
    
    Director
    
    March 25, 2008/s/ FRANCESCO PIOVANETTI
    
    Director
    
    March 25, 2008Francesco N. Piovanetti/s/ FRANK L. RAITER

Frank L. Raiter
    
    Director
    
    March 25, 2008/s/ JOSEPH E. WHITTERS

Joseph E. Whitters
    
    Director
    
    March 25, 2008
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##### Table of Contents



EXHIBIT INDEX
   ExhibitNumber
    
    Description3.1
    
    Second Articles of Amendment and Restatement(2)3.2
    
    Third Amended and Restated Bylaws(4)4.1
    
    Form of Common Stock Certificate(1)4.2
    
    Registration Rights Agreement, dated as of June 11, 2003, by and between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (for itself
and for the benefit of the holders from time to time of registrable securities issued in the Registrants June 2003, private offering)(1)10.1
    
    2003 Stock Incentive Plan, as amended(5)10.2
    
    Form of Incentive Stock Option under the 2003 Stock Incentive Plan(1)10.3
    
    Form of Non Qualified Stock Option under the 2003 Stock Incentive Plan(1)10.4
    
    2003 Outside Advisors Stock Incentive Plan, as amended(5)10.5
    
    Form of Non Qualified Stock Option under the 2003 Outside Advisors Stock Incentive Plan(1)10.6
    
    Form of Indemnity Agreement(1)10.7
    
    Employment Agreement dated December 20, 2005, between the Registrant and S. Trezevant Moore, Jr.(7)10.8
    
    Form of Restricted Stock Award Agreement for Executive Officers (1)10.9
    
    Direct Stock Purchase and Dividend Reinvestment Plan dated June 29, 2005(6)10.10
    
    Capital Stock Warrant Agreement dated August 17, 2007 (8)10.11
    
    Letter of Intent between the Registrant and Arco Capital Corporation Ltd., dated
August 16, 2007 (8)10.12
    
    Credit Agreement, dated August 21, 2007 between the Registrant and Arco Capital
Corporation Ltd. (9)10.13
    
    Security and Pledge Agreement, dated August 21, 2007, among the Registrant and
its subsidiaries of the party hereto, as grantors and Arco Capital Corporation
Ltd., as secured party (9)10.14
    
    Subsidiary Guarantee Agreement, dated August 21, 2007 (9)10.15
    
    Retention Agreement between the Registrant and S. Trezevant Moore, Jr., dated
August 31, 2007 (10)10.16
    
    Retention Agreement between the Registrant and Christopher J. Zyda, dated August
31, 2007 (10)10.17
    
    Severance Agreement between Proserpine, LLC and Eleanor Melton, dated August 31,
2007 (10)10.18
    
    Amendment to Credit Agreement, dated September 12, 2007 between the Registrant
and Arco Capital Corporation Ltd. (11)10.19
    
    Amended and Restated Credit Agreement, dated September 26, 2007 between the
Registrant and Arco Capital Corporation Ltd. (12)10.20
    
    Amended and Restated Security and Pledge Agreement, dated September 26, 2007,
among the Registrant and its subsidiaries of the party hereto, as grantors and
Arco Capital Corporation Ltd., as secured party (12)10.21
    
    Amended and Restated Subsidiary Guarantee Agreement, dated September 26, 2007 (12)10.22
    
    Retention and Separation Agreement between Proserpine, LLC and Ron Viera, dated
September 25, 2007 (12)10.23
    
    Separation Agreement between Proserpine, LLC and Eleanor Melton, dated September
28, 2007 (12)10.24
    
    Consulting Agreement between the Registrant and Eleanor Melton, dated September
28, 2007 (12)10.25
    
    Employment Agreement between the Registrant and Karen Chang, dated October 17,
2007 (13)10.26
    
    Amendment No. 1 to Employment Agreement between the Registrant and S. Trezevant
Moore Jr., dated October 22, 2007 (13)10.27
    
    First Amendment to Amended and Restated Credit Agreement, dated December 7, 2007
between the Registrant and Arco Capital Corporation (13)10.28
    
    Collateral Security Setoff and Netting Agreement dated December 7, 2007 among the
Registrant and its subsidiaries of the party hereto, Arco Capital Corporation
Ltd., its parent, subsidiaries and affiliates (14)
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ExhibitNumber
    
    Description10.29
    
    Employment Agreement dated as of January 1, 2008 between the Registrant and
Dimitri Papatheoharis (15)10.30
    
    Amended and Restated Employment Agreement dated as of January 1, 2008 between the
Registrant and S. Trezevant Moore, Jr. (15)14.1
    
    Code of Business Conduct and Ethics(1)14.2
    
    Corporate Governance Guidelines(3)23.1*
    
    Consent of Independent Registered
Public Accounting Firm, dated March 25, 200823.2*
    
    Consent of Independent Registered
Public Accounting Firm, dated March 25, 200831.1*
    
    Certification of S. Trezevant Moore, Jr., 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 S. Trezevant Moore, Jr., 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(1)
    
    Incorporated by reference to our Registration Statement on Form S-11
(Registration No. 333-107984) which became effective under the Securities Act
of 1933, as amended, on December 18, 2003.(2)
    
    Incorporated by reference to our Form 10-Q for the quarter ended June 30, 2004.(3)
    
    Incorporated by reference to our Registration Statement on Form S-11
(Registration No. 333-113493) which became effective under the Securities act
of 1933, as amended, on March 30, 2004.(4)
    
    Incorporated by reference to our Form 8-K filed on August 9, 2005.(5)
    
    Incorporated by reference to our Form 10-Q for the quarter ended June 30, 2005.(6)
    
    Incorporated by reference to our Registration Statement on Form S-3
(Registration No. 333-125479) which became effective under the Securities Act
of 1933, as amended, on June 28, 2005.(7)
    
    Incorporated by reference to our Form 10-K filed on March 9, 2006.(8)
    
    Incorporated by reference to our Form 8-K filed August 22, 2007.(9)
    
    Incorporated by reference to our Form 8-K filed August 27, 2007.(10)
    
    Incorporated by reference to our Form 8-K filed September 7, 2007.(11)
    
    Incorporated by reference to our Form 8-K filed September 18, 2007.(12)
    
    Incorporated by reference to our Form 8-K filed October 1, 2007.(13)
    
    Incorporated by reference to our Form 8-K filed October 22, 2007.(14)
    
    Incorporated by reference to our Form 8-K filed December 13, 2007.(15)
    
    Incorporated by reference to our Form 8-K filed January 9, 2008.
    
    Denotes a management contract or compensatory plan. 120