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SECURITIES AND EXCHANGE COMMISSION  
 FORM 10-Q/A 
 
 (Amendment No. 1) 
 [X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2004 OR [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From ________ to ________ COMMISSION FILE NUMBER 000-50721 Origen Financial, Inc.  Delaware
    
    20-0145649(State of Incorporation)
    
    (I.R.S. Employer Identification No.)27777 Franklin Rd.Suite 1700Southfield, MI
    
    48034(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (248) 746-7000 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ] 
 Indicate by check mark
whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act). [ ] Yes
[ X ] No 
 Number of shares of Common Stock, $.01 par value, outstanding as of November
10, 2004: 25,228,150




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EXPLANATORY NOTE: This
Amendment No. 1 to the Registrants Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2004 (the Quarterly Report) is filed to (a) amend
Part I, Items 1, 2, and 3, to correct an error in applying accounting principles to
a pool of loans acquired at a discount in October 2003, and (b) amend Part I Item 4
to disclose certain steps the Registrant intends to take to remediate deficiencies
in its internal control over
financial reporting. Interest income was recorded on the contractual interest rates of
the loans in the pool instead of the estimated constant effective yield on the pool. The
effect of the correction reduced net interest income by approximately $271,000 and $861,000
and increased other loan origination and servicing expenses by approximately $11,000
and $64,000 for the three and nine months ended September 30, 2004,
respectively. This Amendment also reclassifies the cost to terminate
a forward starting interest rate swap the Registrant had entered into
in August 2004 for the purpose of locking in the benchmark interest
rate on its securitization transaction completed in September 2004.
The effects of this reclassification increased Accumulated
Other Comprehensive Loss and reduced Other Assets by
$1.9 million. Except
as otherwise described above, no other changes have been made to the Quarterly Report. This
Amendment does not otherwise attempt to update the information set forth in the Quarterly Report.




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Origen Financial, Inc. Index PagePart I            Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets  as of September 30, 2004 and
December 31, 2003
    
    
    3Consolidated Statements of Operations for the periods
ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Other Comprehensive Income (Loss) for the periods
ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    41Part II Other InformationItem 2. Changes in Securities and Use of Proceeds
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 6. Exhibits and Reports on Form 8-K
    
    
    43Signatures
    
    
    44Certification of Chief Executive Officer to Section 302Certification of Chief Financial Officer to Section 302Certification of CEO and CFO to Section 906




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Part I 
 Item 1. Financial Statements Origen Financial, Inc. 
 Consolidated Balance Sheet
(In thousands, except share data) September 30, 2004 and December 31, 2003 
 (Unaudited)September 30,
    
    December 31,2004
    
    2003(Restated)ASSETSAssetsCash and equivalents
    
    $
    37,336
    
    
    $
    6,926Restricted cash
    
    
    7,821
    
    
    
    6,017Loans receivable, net of allowance for losses of
$4,693 and $3,614, respectively
    
    
    518,479
    
    
    
    368,040Investments held to maturity
    
    
    37,212
    
    
    
    Furniture, fixtures and equipment, net
    
    
    2,169
    
    
    
    2,476Goodwill
    
    
    32,277
    
    
    
    32,277Other assets
    
    
    28,087
    
    
    
    28,337Total assets
    
    $
    663,381
    
    
    $
    440,073LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesWarehouse financing
    
    $
    62,882
    
    
    $
    273,404Securitization financing
    
    
    342,968
    
    
    
    Repurchase agreements
    
    
    21,552
    
    
    
    Notes payable  servicing advances
    
    
    
    
    
    
    4,037Recourse liability
    
    
    4,750
    
    
    
    8,740Other liabilities
    
    
    16,472
    
    
    
    15,572Total liabilities
    
    
    448,624
    
    
    
    301,753Stockholders EquityPreferred stock, $.01 par value, 10,000,000 shares
authorized; 125 and -0- shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively
    
    
    125
    
    
    
    Common stock, $.01 par value, 125,000,000 shares
authorized; 25,230,150 and 15,060,000 shares issued and
outstanding at September 30, 2004 and December 31, 2003,
respectively
    
    
    252
    
    
    
    152Additional paid-in-capital
    
    
    219,100
    
    
    
    143,289Accumulated other comprehensive loss
    
    
    (1,875
    )
    
    
    (20
    )Unearned stock compensation
    
    
    (3,754
    )
    
    
    (1,114
    )Retained earnings
    
    
    909
    
    
    
    13Total stockholders equity
    
    
    214,757
    
    
    
    143,320Total liabilities and stockholders equity
    
    $
    663,381
    
    
    $
    444,073
 
 The accompanying notes are an integral part of these financial statements. 3




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Origen Financial, Inc. 
 Consolidated Statement of Operations (Unaudited)
(In thousands, except share data) For the periods ended September 30, 2004 and 2003 
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    (Restated)Interest IncomeTotal interest income
    
    $
    11,212
    
    
    $
    5,785
    
    
    $
    30,016
    
    
    $
    15,990Total interest expense
    
    
    3,723
    
    
    
    5,397
    
    
    
    10,037
    
    
    
    12,590Net interest income before loan losses
    
    
    7,489
    
    
    
    388
    
    
    
    19,979
    
    
    
    3,400Provision for credit losses
and recourse liability
    
    
    1,500
    
    
    
    2,910
    
    
    
    4,922
    
    
    
    4,748Net interest income (loss) after loan losses
    
    
    5,989
    
    
    
    (2,522
    )
    
    
    15,057
    
    
    
    (1,348
    )Non-interest income
    
    
    2,976
    
    
    
    1,969
    
    
    
    8,870
    
    
    
    7,088Non-interest ExpensesPersonnel
    
    
    5,206
    
    
    
    7,002
    
    
    
    14,523
    
    
    
    16,026Loan origination and servicing
    
    
    345
    
    
    
    312
    
    
    
    996
    
    
    
    922Write down of residual interest
    
    
    
    
    
    
    3,804
    
    
    
    
    
    
    
    5,084State business taxes
    
    
    13
    
    
    
    14
    
    
    
    176
    
    
    
    18Other operating
    
    
    1,992
    
    
    
    3,156
    
    
    
    5,166
    
    
    
    7,217Total non-interest expense
    
    
    7,556
    
    
    
    14,288
    
    
    
    20,861
    
    
    
    29,267NET INCOME (LOSS)
    
    $
    1,409
    
    
    $
    (14,841
    )
    
    $
    3,066
    
    
    $
    (23,527
    )Weighted average common
shares outstanding
    
    
    24,726,729
    
    
    
    N/A
    
    
    
    20,347,128
    
    
    
    N/AWeighted average common
shares outstanding, diluted
    
    
    25,028,922
    
    
    
    N/A
    
    
    
    20,580,491
    
    
    
    N/AEarnings per common share:Basic
    
    $
    0.06
    
    
    
    N/A
    
    
    $
    0.15
    
    
    
    N/ADiluted
    
    $
    0.06
    
    
    
    N/A
    
    
    $
    0.15
    
    
    
    N/ACommon dividends declared
    
    $
    0.06
    
    
    
    N/A
    
    
    $
    0.10
    
    
    
    N/A
 
 The accompanying notes are an integral part of these financial statements. 4




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Origen Financial, Inc. 
 Consolidated Statement of Other Comprehensive Income (Loss)
(Unaudited)
(In thousands) For the periods ended September 30, 2004 and 2003 
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    (Restated)Net income (loss)
    
    $
    1,409
    
    
    $
    (14,842
    )
    
    $
    3,066
    
    
    $
    (23,527
    )Unrealized gain (loss)
on interest rate swaps
    
    
    (1,875
    )
    
    
    88
    
    
    
    (1,855
    )
    
    
    (321
    )Comprehensive income (loss)
    
    $
    (466
    )
    
    $
    (14,754
    )
    
    $
    1,211
    
    
    $
    (23,848
    )
 
 The accompanying notes are an integral part of these financial statements. 5




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Origen Financial, Inc. 
 Consolidated Statement of Cash Flows (Unaudited)
(In thousands) For the nine months ended September 30 
 2004
    
    2003(Restated)Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    3,066
    
    
    $
    (23,527
    )Adjustments to reconcile net income (loss) to
cash used in operating activities:Provision for credit losses and recourse liability
    
    
    4,922
    
    
    
    4,748Impairment of residual interest
    
    
    
    
    
    
    5,084Depreciation and amortization
    
    
    4,172
    
    
    
    2,852Originations of loans held for sale
    
    
    (202,472
    )
    
    
    (128,156
    )Principal collections on loans
    
    
    46,375
    
    
    
    22,453Increase in other assets
    
    
    (15,131
    )
    
    
    (7,819
    )Increase in accounts payable and other liabilities
    
    
    (2,495
    )
    
    
    5,208Net cash used in operating activities
    
    
    (161,563
    )
    
    
    (119,157
    )Cash Flows From Investing ActivitiesPurchase of investment securities
    
    
    (36,697
    )
    
    
    Capital expenditures
    
    
    (286
    )
    
    
    (867
    )Net cash used in investing activities
    
    
    (36,983
    )
    
    
    (867
    )Cash Flows From Financing ActivitiesNet proceeds from issuance of preferred stock
    
    
    95
    
    
    
    Net proceeds from issuance of common stock
    
    
    73,301Proceeds from minority interest investment
    
    
    
    
    
    
    43,955Proceeds from sale of repossessed homes
    
    
    7,780
    
    
    
    4,196Dividends paid
    
    
    (2,170
    )
    
    
    Proceeds from warehouse and securitization financing
    
    
    687,445
    
    
    
    558,913Repayment of warehouse and securitization financing
    
    
    (533,458
    )
    
    
    (486,593
    )Net change in notes payable  servicing advances
    
    
    (4,037
    )
    
    
    (191
    )Net cash provided by financing activities
    
    
    228,956
    
    
    
    120,280NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    30,410
    
    
    
    256Cash and cash equivalents, beginning of period
    
    
    6,926
    
    
    
    257Cash and cash equivalents, end of period
    
    $
    37,336
    
    
    $
    513Supplemental disclosures of cash flow information:Interest paid
    
    $
    9,779
    
    
    $
    4,007Non cash financing activities:Restricted common stock issued as unearned compensation
    
    $
    3,918
    
    
    $
    
 
 The accompanying notes are an integral part of these financial statements. 6




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Origen Financial, Inc. 
 Notes to Consolidated Financial Statements (Unaudited) Note A  Basis of Presentation 
 These unaudited consolidated financial statements of Origen Financial, Inc., a
Delaware corporation (the Company) at September 30, 2004 and for its
predecessor Origen Financial, L.L.C. for the three and nine months ended
September 30, 2003, have been prepared pursuant to the Securities and Exchange
Commission (SEC) rules and regulations and should be read in conjunction with
the restated consolidated financial statements and notes thereto for the period ended
December 31, 2003, included in Amendment No. 1 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2004. The following notes to consolidated financial
statements present interim disclosures as required by the SEC. The
accompanying consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal recurring nature.
Certain reclassifications have been made to prior periods financial statements
in order to conform to current period presentation. Results for interim
periods are not necessarily indicative of the results that may be expected for
a full year. 
 The results of operations for the three months and nine months ended September
30, 2003 are those of Origen Financial, Inc.s predecessor company, Origen
Financial, L.L.C. Origen Financial L.L.C. relied heavily on high cost
short-term borrowings to fund day-to-day operations due to a lack of
significant permanent capital. This lack of capital combined with losses
incurred from underperforming loans originated prior to year 2002 (referred to
as legacy loans), resulted in significant net operating losses prior to the
commencement of the Companys operations. Note B  Per Share Data Basic earnings per share are computed by dividing net income (loss) available
to common shareholders by the weighted average common shares outstanding.
Diluted earnings per share reflect the potential dilution that would occur if
dilutive securities were exercised or converted into common stock. 7




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Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) The following table presents a reconciliation of the numerator (income
applicable to common shareholders) and denominator (weighted average common
shares outstanding) for the basic earnings per share calculation at September
30, 2004 (in thousands, except earnings per share): 
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income (loss)
    
    $
    1,409
    
    
    $
    (14,841
    )
    
    $
    3,066
    
    
    $
    (23,527
    )Preferred stock dividends
    
    
    (4
    )
    
    
    
    
    
    
    (12
    )
    
    
    Income (loss) available to
common shareholders
    
    $
    1,405
    
    
    $
    (14,841
    )
    
    $
    3,054
    
    
    $
    (23,527
    )Denominator:Weighted average common shares
for basic EPS
    
    
    24,727
    
    
    
    N/A
    
    
    
    20,347
    
    
    
    N/AEffect of dilutive securities:Restricted stock awards
    
    
    302
    
    
    
    N/A
    
    
    
    233
    
    
    
    N/AWeighted average common shares
for diluted EPS
    
    
    25,029
    
    
    
    N/A
    
    
    
    20,580
    
    
    
    N/ABasic EPS
    
    $
    0.06
    
    
    
    N/A
    
    
    $
    0.15
    
    
    
    N/ADiluted EPS
    
    $
    0.06
    
    
    
    N/A
    
    
    $
    0.15
    
    
    
    N/A
 
 8




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Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note C  Stock Options The Company has elected to measure compensation cost using the intrinsic value
method in accordance with APB Opinion No. 25 Accounting for Stock Issued to
Employees. Accordingly, since all options were granted at a fixed price not
less than the fair market value of the Companys common stock on the date of
grant, no compensation cost has been recognized for its stock option plan. Had
stock option costs of the plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the methodology of
Statement of Financial Accounting Standards No. 123 (SFAS 123) Accounting
For Stock Based Compensation, the pro forma effects on the Companys net
income and earnings per share would be as follows for the periods ended
September 30, 2004 (in thousands except income per share): 
 Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2004Net income available to common shareholders
    
    $
    1,405
    
    
    $
    3,066Stock option compensation cost
    
    
    (3
    )
    
    
    (9
    )Pro forma net income available to
common shareholders
    
    $
    1,402
    
    
    $
    3,057Basic income per share as reported
    
    $
    0.06
    
    
    $
    0.15Stock option compensation cost
    
    
    
    
    
    
    Pro forma basic income per share
    
    $
    0.06
    
    
    $
    0.15Diluted income per share as reported
    
    $
    0.06
    
    
    $
    0.15Stock option compensation cost
    
    
    
    
    
    
    Pro forma diluted income per share
    
    $
    0.06
    
    
    $
    0.15
 
 Note D  Investments The Company follows the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS 115), Accounting For Certain Investments in Debt and
Equity Securities, in reporting its investments. At September 30, 2004 the
Companys investments consisted of three asset backed securities with principal
amounts of $32.0 million, $3.1 million and $5.2 million. The securities are
collateralized by manufactured home loans and are classified as
held-to-maturity. They have contractual maturity dates of July 28, 2033,
December 28, 2033 and December 28, 2033, respectively. The securities are
carried on the Companys balance sheet at amortized cost of $37.2 million which
approximates their market value at September 30, 2004. 9




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Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note E  Allowance for Credit Losses and Recourse Liability The allowance for credit losses and related additions and deductions to the
allowance were as follows for the periods ended September 30 (in thousands): Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    4,547
    
    
    $
    2,914
    
    
    $
    3,614
    
    
    $
    2,743Provision for loan losses
    
    
    1,500
    
    
    
    2,909
    
    
    
    4,922
    
    
    
    4,748Transfers from recourse liability
    
    
    928
    
    
    
    727
    
    
    
    3,990
    
    
    
    2,997Gross chargeoffs
    
    
    (4,531
    )
    
    
    (3,635
    )
    
    
    (14,253
    )
    
    
    (10,624
    )Recoveries
    
    
    2,249
    
    
    
    1,600
    
    
    
    6,420
    
    
    
    4,651Balance at end of period
    
    $
    4,693
    
    
    $
    4,515
    
    
    $
    4,693
    
    
    $
    4,515
 The recourse liability and related additions and transfers out of the recourse
liability were as follows for the periods ended September 30 (in thousands): Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    5,678
    
    
    $
    10,426
    
    
    $
    8,740
    
    
    $
    13,320Reimbursements for losses per
recourse agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (624
    )Transfers to allowance for credit losses
    
    
    (928
    )
    
    
    (727
    )
    
    
    (3,990
    )
    
    
    (2,997
    )Balance at end of period
    
    $
    4,750
    
    
    $
    9,699
    
    
    $
    4,750
    
    
    $
    9,699
 Note F  Loan Securitizations Periodically the Company securitizes manufactured home loans. Under the
current legal structure of the securitization program, the Company sells
manufactured home loans it originates and purchases to a trust for cash. The
trust sells asset-backed bonds secured by the loans to investors. The Company
records certain assets and income based upon the difference between all
principal and interest received from the loans sold and the following factors:
(i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all excess contractual servicing fees, (iii)
other recurring fees and (iv) an estimate of losses on loans. 10




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Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note F   Loan Securitizations (Continued) These loan securitizations may be structured as financing transactions as
opposed to sales transactions, typically by structuring the transaction to
allow the Company to participate in the auction process at the scheduled
termination of the existence of the qualified special purpose entity (the
trust). The Company structured all loan securitizations occurring before 2003
as loan sales and all loan securitizations in 2003 and 2004 as financings for
accounting purposes. When securitizations are structured as financings no gain
or loss is recognized, nor is any allocation made to residual interests or
servicing rights. Rather, the loans securitized continue to be carried by the
Company as assets, and the asset backed bonds secured by the loans are carried
as a liability. On February 11, 2004, the Company completed a securitized financing transaction
for approximately $240.0 million of loans, which was funded by issuing bonds in
the approximate amount of $200.0 million, at a duration weighted average
interest cost of 5.13%. The transaction was structured to issue classes of
bonds with different estimated maturity dates and average lives to better meet
investor demands. Approximately $176.7 million of the securitization proceeds
were used to reduce the aggregate balances of the notes outstanding under the
Companys short-term securitization facility. On September 29, 2004, the Company completed a second securitized financing
transaction for approximately $200.0 million of loans, which was funded by
issuing bonds in the approximate amount of $169.0 million, at a duration
weighted average interest cost of 5.41%. The transaction was also structured
to issue classes of bonds with different estimated maturity dates and average
lives to better meet investor demands. Net proceeds from the transaction
totaled approximately $168.2 million, of which approximately $143.6 million was
used to reduce the aggregate balances of the notes outstanding under the
Companys short-term securitization facility. Total principal balance of loans serviced that the Company has securitized and
accounted for as a sale at September 30, 2004 was approximately $183.3 million.
Delinquency statistics (including repossessed inventory) on those loans are as
follows at September 30, 2004 (dollars in thousands): No. of
    
    Principal
    
    % ofDays delinquent
    
    Loans
    
    Balance
    
    Portfolio31-60
    
    
    124
    
    
    $
    5,005
    
    
    
    2.7
    %61-90
    
    
    63
    
    
    
    2,610
    
    
    
    1.4
    %Greater than 90
    
    
    217
    
    
    
    9,830
    
    
    
    5.4
    %
 11




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Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note F   Loan Securitizations (Continued) The Company assesses the carrying value of the residual interests and servicing
assets for impairment on a monthly basis. There can be no assurance that the
Companys estimates used to determine the residual receivable and the servicing
asset valuations will remain appropriate for the life of the securitization.
If actual loan prepayments or defaults exceed the Companys estimates, the
carrying value of the Companys residual receivable and/or servicing asset may
decrease through a charge against earnings in the period management recognizes
the disparity. The Companys residual interest balance was approximately
$749,000 and the servicing asset was approximately $1.5 million at September
30, 2004. Note G   Debt Total debt outstanding was as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Warehouse financing
    
    $
    84,434
    
    
    $
    273,404Securitization financing
    
    
    342,968
    
    
    
    Notes payable  servicing advances
    
    
    
    
    
    
    4,037$
    427,402
    
    
    $
    277,441
 Notes Payable  Citigroup- The Company through its operating subsidiary
Origen Financial L.L.C., currently has a short term securitization facility
with Citigroup Global Markets Realty Corp. (Citigroup) (formerly Salomon
Brothers Realty Corporation). Under terms of the facility, originally entered
into in March 2003 and revised in November 2003, the Company is advanced funds
and in turn pledges as collateral manufactured home loans. On March 30, 2004
the terms of the agreement were modified by segregating the pledged loans into
three separate pools designated 2004-1A, 2004-1B and 2004-1C. The maximum
advance amount on 2004-1A (for new loan production) was set at $170.0 million,
the fixed advance amount on 2004-1B (for loans originated in 2003) was set at
approximately $71.6 million and the maximum amount on 2004-1C (for loans
acquired from third parties) was set at $150.0 million. The modification added
a stratified advance rate for each pool and reduced the stated interest rate on
all three pools. The annual interest rate on the pools is a variable rate
equal to LIBOR plus a spread. Additionally, the maturity date was fixed on
2004-1A at March 29, 2005, on 2004-1B at November 16, 2004 and on 2004-1C at
March 28, 2006. On September 30, 2004, the advance rate was 84.0% of the eligible principal
balance of the manufactured home loans pledged to 2004-1A, 78.5% of the
eligible principal balance of the manufactured home loans pledged to 2004-1B
and 72.6% of the eligible principal balance of the manufactured home loans
pledged to 2004-1C and the outstanding advance amounts were approximately $26.9
million on 2004-1A, $10.6 million on 2004-1B and $25.4 million on 2004-1C, for
a total of $62.9 million. 12




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##### Table of Contents



Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note G  Debt (Continued) Repurchase Agreements The Company has entered into two repurchase
agreements with Citigroup for the purpose of financing the purchase of
investments in two asset backed securities with principal balances of $32.0
million and $3.1 million, respectively. Under the terms of the agreements the
Company sells its interest in the securities with an agreement to repurchase
them at a predetermined future date at the principal amount sold plus an
interest component. The securities are sold at an amount equal to 75% of their
current market value as determined by Citigroup. The sales are accounted for
as financings for accounting purposes. At September 30, 2004 the repurchase
agreements had outstanding principal balances of approximately $19.6 million
and $1.9 million, annual interest rates equal to LIBOR plus a spread and
maturity dates of October 28, 2004 and October 6, 2004, respectively.
Typically the repurchase agreements are rolled over for 30 day periods when
they expire. Notes Payable  2004-A Securitization On February 11, 2004, the Company
completed a securitization of approximately $240.0 million in principal balance
of manufactured home loans. The securitization was accounted for as a
financing. As part of the securitization the Company, through a special
purpose entity, Origen Manufactured Housing Trust 2004-A issued $200.0 million
in notes payable. The notes are stratified into six different classes and pay
interest at a duration weighted average rate of approximately 5.13%. The notes
have a contractual maturity date of October 2013 with respect to the Class A-1
notes; August 2017, with respect to the Class A-2 notes; December 2020, with
respect to the Class A-3 notes; and January 2035, with respect to the Class
A-4, Class M-1 and Class M-2 notes. At September 30, 2004 the outstanding
balance of the notes was approximately $176.1 million. Notes Payable  2004-B Securitization On September 29, 2004, the
Company completed a securitization of approximately $200.0 million in principal
balance of manufactured home loans. The securitization was accounted for as a
financing. As part of the securitization the Company, through a special
purpose entity, Origen Manufactured Housing Trust 2004-B issued $169.0 million
in notes payable. The notes are stratified into seven different classes and
pay interest at a duration weighted average rate of approximately 5.26%. The
notes have a contractual maturity date of June 2013 with respect to the Class
A-1 notes; December 2017, with respect to the Class A-2 notes; August 2021,
with respect to the Class A-3 notes; and November 2035, with respect to the
Class A-4, Class M-1, Class M-2 and class B-1 notes. At September 30, 2004 the
aggregate outstanding balance of the 2004-B securitization notes was
approximately $166.8 million. Notes Payable  Servicing Advances The Company currently has a
revolving credit facility with Bank One, NA. Under the terms of the facility
the Company can borrow up to $7.0 million for the purpose of funding required
principal and interest advances on manufactured home loans that are serviced
for outside investors. Borrowings under the facility are repaid upon the
collection by the Company of monthly payments made by borrowers under such
manufactured home loans. The banks prime interest rate is payable on the
outstanding balance. To secure the loan from Bank One, the Company has granted
Bank One a security interest in substantially all its assets (excluding
securitized assets). The facility has a termination date of December 31, 2004.
At September 30, 2004 there was no outstanding balance on this facility. 13




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##### Table of Contents



Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note G  Debt (Continued) The average balance and average interest rate of outstanding debt was as
follows (dollars in thousands): September 30, 2004
    
    December 31, 2003Average
    
    Average
    
    Average
    
    AverageBalance
    
    Rate
    
    Balance
    
    RateNotes payable  Citigroup
    
    $
    160,698
    
    
    
    3.8
    %
    
    $
    250,935
    
    
    
    4.2
    %Notes payable  2004-A securitization
    
    
    159,764
    
    
    
    4.3
    %
    
    
    
    
    
    
    Notes payable  2004-B securitization
    
    
    1,225
    
    
    
    4.8
    %Repurchase agreements
    
    
    16,483
    
    
    
    2.1
    %
    
    
    2,699
    
    
    
    4.4
    %Note payable  servicing advances
    
    
    739
    
    
    
    6.2
    %
    
    
    
    
    
    
    
 Note H  Equity Incentive Plan The Companys equity incentive plan has approximately 1.8 million shares of
common stock reserved for issuance as either stock options or stock grants.
Under the plan, the exercise price of the options will not be less than the
fair market value of the common stock on the date of grant. The date on which
the options are first exercisable is determined by the Compensation Committee
of the Board of Directors as the administrator of the Companys stock option
plan, and options generally vest over a two-year period. As of September 30,
2004, 276,000 options were outstanding under the plan at an exercise price of $10.00. The Company has adopted the disclosure requirements of SFAS 123. Accordingly,
the fair value of each option granted in 2004 was estimated using the Cox, Ross
& Rubenstein binomial option-pricing model based on the assumptions stated
below: Estimated weighted average fair value per
share of options granted
    
    $
    0.40Assumptions:Annualized dividend yield
    
    
    12.00
    %Common stock price volatility
    
    
    15.00
    %Weighted average risk free rate of return
    
    
    4.00
    %Weighted average expected option term (in years)
    
    
    5.0
 14




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##### Table of Contents



Origen Financial, Inc. Notes to Consolidated Financial Statements (Unaudited) Note I  Stockholders Equity Effective January 1, 2004, the Company sold 125 shares of its Series A
Cumulative Redeemable Preferred Stock directly to 125 investors at a per share
price of $1,000.00.
The transaction resulted in net proceeds to the company of $95,000. These
shares pay dividends semi-annually in June and December at an annual rate of
12.5%. On February 4, 2004, the Company completed a private placement of 1,000,000
shares of its common stock to one institutional investor. The offering price
was $10.00 per share, which provided approximate net proceeds to the Company of
$9.4 million. On January 29, 2004, March 23, 2004 and August 5, 2004 the Company issued
207,000, 113,000 and 111,750 restricted stock awards, respectively, to certain
officers and employees. The stock awards issued on January 29, 2004 and March
23, 2004 were issued at $10.00 per share and the stock awards issued on August
5, 2004 were issued at $7.50 per share. The stock awards are being amortized
over their estimated service period. Compensation cost recognized for the
restricted stock awards was $0.6 million and $1.4 million for the three and
nine months ended September 30, 2004, respectively. On May 6, 2004, the Company completed an initial public offering of 8.0 million
shares of its common stock. In June 2004 the underwriters of the initial
public offering purchased an additional 625,900 shares of the Companys common
stock pursuant to an underwriters over-allotment option. Net proceeds from
these transactions were $62.9 million after discount and expenses, which were
used primarily to pay down the aggregate balances of the notes outstanding
under the Companys loan funding facility with Citigroup and fund new loan
originations. On July 22, 2004, the Company declared a dividend of $0.06 per common share
payable to holders of record as of August 2, 2004. On August 30, 2004 those
dividends were paid and totaled approximately $1.5 million. Note J  Subsequent Events On November 12, 2004 the Company declared a dividend of $0.25 per common share
payable to holders of record as of November 22, 2004. 
 Note K  Restatement of Consolidated Financial Statements
   Consolidated Statement of OperationsThree Months ended
    
    Nine months endedSeptember 30, 2004
    
    September 30, 2004As
    
    
    
    
    
    
    
    
    
    Aspreviously
    
    
    
    
    
    As
    
    previously
    
    
    
    
    
    Asreported
    
    Adjustment
    
    restated
    
    reported
    
    Adjustment
    
    restatedInterest income
    
    $
    11,483
    
    
    $
    (271
    )
    
    $
    11,212
    
    
    $
    30,877
    
    
    $
    (861
    )
    
    $
    30,016Net interest income
    
    $
    7,760
    
    
    $
    (271
    )
    
    $
    7,489
    
    
    $
    20,840
    
    
    $
    (861
    )
    
    $
    19,979Loan origination and servicing
    
    $
    334
    
    
    $
    11
    
    
    $
    345
    
    
    $
    932
    
    
    $
    64
    
    
    $
    996Total non interest expense
    
    $
    7,545
    
    
    $
    11
    
    
    $
    7,556
    
    
    $
    20,797
    
    
    $
    64
    
    
    $
    20,861Net income
    
    $
    1,691
    
    
    $
    (282
    )
    
    $
    1,409
    
    
    $
    3,991
    
    
    $
    (925
    )
    
    $
    3,066Earnings per share  basic
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    (0.05
    )
    
    $
    0.15Earnings per share  diluted
    
    $
    0.07
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    0.19
    
    
    $
    (0.04
    )
    
    $
    0.15
 
 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations This Form 10-Q includes certain forward looking statements. The words
will, may, designed to, believes, should, anticipates, plans,
expects, intends, and estimates, and similar expressions, identify these
forward-looking statements. Although we believe that the expectations
reflected in such
forward-looking statements are based on reasonable assumptions, these
expectations may not be correct. Important factors that could cause our actual
results to differ materially from the forward-looking statements we make in
this document include the following:  
    
    the performance of our manufactured home loans;  
    
    our ability to borrow at favorable rates and terms;  
    
    the supply of manufactured home loans;  
    
    interest rate levels and changes in the yield curve (which is
formed by the differing Treasury rates paid on one, two, three,
five, ten and 30 year term debt);  
    
    our ability to use hedging strategies to insulate our
exposure to changing interest rates;  
    
    changes in, and the costs associated with complying with
federal, state and local regulations, including consumer finance and
housing regulations;  
    
    applicable laws, including federal income tax laws; and  
    
    general economic conditions in the markets in which we operate. All forward-looking statements included in this document are based on
information available to us on the date of this document. We do not intend to
update or revise any forward-looking statements that we make in this document
or other documents, reports, filings or press releases, whether as a result of
new information, future events or otherwise. The following discussion and analysis of the consolidated financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto. Overview On October 8, 2003, we began operations upon the completion of a private
placement of $150 million of our common stock to certain institutional and
accredited investors. On February 4, 2004, we completed another private
placement of $10 million of our common stock to one institutional investor. In
connection with and as a condition to the October 2003 private placement, we
acquired all of the equity interests of Origen Financial L.L.C. We also took
steps to qualify the Company as a REIT. Currently, most of our operations are
conducted through Origen Financial L.L.C., which is our wholly-owned
subsidiary. We conduct the rest of our business operations through our other
wholly-owned subsidiaries, including taxable REIT subsidiaries, to take
advantage of certain business opportunities and ensure that we comply with the
federal income tax rules applicable to REITs. 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations The results of operations for the three months and nine months ended
September 30, 2003 used for comparison purposes in this discussion and analysis
of financial condition and results of operations are those of our predecessor
company Origen Financial, L.L.C. Origen Financial L.L.C. relied heavily on
high cost short-term borrowings to fund day-to-
day operations due to a lack of significant permanent capital. This lack
of capital combined with losses incurred from underperforming loans originated
prior to year 2002 (referred to as legacy loans), resulted in significant net
operating losses prior to the commencement of our operations. 
 On
March 31, 2005 we announced that we would restate our financial
statements for the period ended December 31, 2003 and for the first
three quarters of 2004 to correct an interpretive error in applying
accounting principles to a pool of loans acquired at a discount in
October 2003. The financial statements set forth in Item I and the
following discussion reflects the restatement. 
 Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures. On an on-going
basis, we evaluate these estimates, including those related to reserve for
credit losses, recourse liabilities, servicing rights and retained interests in
loans sold and securitized. Estimates are based on historical experience,
information received from third parties and on various other assumptions that
are believed to be reasonable under the circumstances, which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under conditions different from our assumptions. 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Transfers of Financial Assets:We engage in securitizations and whole
loan sales of our manufactured home loan receivables. Securitizations may take
the form of a loan sale or a financing. We structured all loan securitizations
occurring before 2003 as loan sales and all loan securitizations in 2003 and
2004 as financings for accounting purposes. In
the future, we intend to structure and account for our securitizations as
financings. When a loan securitization is structured as a financing, the
financed asset remains on our books along with the recorded liability that
evidences the financing. Income from both the loan interest spread and the
servicing fees received on the securitized loans are recorded into income as
earned. An appropriate allowance for credit losses is maintained on the loans.
When a loan securitization is structured as a loan sale, any gains and losses
are recognized in the consolidated statements of operations when control of the
transferred financial asset is relinquished by the seller. In accordance with
Statement of Financial Accounting Standards No. 140 Accounting For Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,certain
assets and income are recorded based upon the difference between all principal
and interest received from the loans sold and the following factors (i) all
principal and interest required to be passed through to the asset-backed bond
investors, (ii) all excess contractual servicing fees, (iii) other recurring
fees and (iv) an estimate of losses on loans. At the time of the sale these
amounts are estimated based upon a declining principal balance of the
underlying loans, adjusted by an estimated prepayment and loss rate, and such
amounts are capitalized using a discount rate that market participants would
use for similar financial instruments. These capitalized assets are recorded as
retained interests in loans sold and securitized and capitalized servicing
rights. We assess the carrying value of any retained interests for impairment
on a monthly basis. Any subsequent changes in fair value of the retained
interests are recognized in the consolidated statements of operations. The use
of different pricing models or assumptions could produce different financial
results. There can be no assurance that our estimates used to determine the
value of retained interests and the servicing asset valuations will remain
appropriate for the life of the securitization. Allowance for Credit Losses:Our loan portfolio is comprised of
manufactured home loans with an average loan balance of less than $50,000. The
allowance for credit losses is determined at the portfolio level and computed
by applying loss rate factors to the loan portfolio on a stratified basis using
current portfolio performance and delinquency levels (0-30 days, 31-60 days,
61-90 days and more than 90 days delinquent). Our loss rate factors are based
on historical loan loss experience and are adjusted for economic conditions and
other trends affecting borrowers ability to repay and estimated collateral
value. The allowance for loan losses represents an unallocated allowance; there
are no elements of the allowance allocated to specific individual loans or to
impaired loans. 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Liability for Loans Sold With Recourse:We periodically sell manufactured
home loans on a whole-loan basis. At the time of such loan sales, we recognize
recourse liabilities pursuant to our future obligations, if any, to the
applicable loan purchasers under the provisions of the respective sale
agreements. Under existing recourse
provisions, we are required to repurchase any loan contract that goes into
default, as defined in the respective loan agreement, for the life of each loan
sold, at an amount equal to the outstanding principal balance and accrued
interest, and refund any purchase premiums. The loan purchasers have no
recourse to our other assets for failure of debtors to pay when due. The loan pools subject to recourse provisions are comprised of
manufactured home loans with an average loan balance of less than $50,000. The
estimated recourse liability is calculated based on historical default rates
and loss experience for pools of similar loans we originate and service. These
loss rates are applied to each pool of loans subject to recourse provisions and
the resulting estimated recourse liability represents the present value of the
expected obligations under those recourse provisions. The loss rates are
adjusted for economic conditions, other trends affecting borrowers ability to
repay and estimated collateral value. The recourse liability is calculated at a
portfolio level and there are no elements of the estimated recourse liability
allocated to specific loans. Derivative Financial Instruments:We have periodically used derivative
instruments, including forward sales of U.S. Treasury securities, U.S. Treasury
rate locks and forward interest rate swaps to mitigate interest rate risk
related to our loans receivable and anticipated sales or securitizations. We
follow the provisions of Statement of Financial Accounting Standards No. 133
(SFAS 133),Accounting for Derivative Instruments and Hedging Activities(as
amended by Statement of Financial Accounting Standards No. 149). Under SFAS
133, all derivative instruments are recorded on the balance sheet at fair value
and changes in fair value are recorded in current earnings or other
comprehensive income, depending on whether a derivative instrument qualifies
for hedge accounting and, if so, whether the hedge transaction represents a
fair value or cash flow hedge. Hedges are measured for effectiveness both at inception and on an ongoing
basis, and hedge accounting is terminated if a derivative instrument ceases to
be effective as a hedge or its designation as a hedge is terminated. In the
event of termination of a hedge, any gains or losses during the period that a
derivative instrument qualified as a hedge are recognized as a component of the
hedged item and subsequent gains or losses are recognized in earnings. Derivative financial instruments that do not qualify for hedge accounting
are carried at fair value and changes in fair value are recognized currently in
earnings. 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Stock Options:In connection with our formation, we adopted a stock
option plan. We have elected to measure compensation cost using the intrinsic
value method in accordance with APB Opinion No. 25 Accounting for Stock Issued
to Employees. Goodwill Impairment:The provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets,require that
recorded goodwill be tested for impairment on an annual basis. The initial and
on-going estimate of our fair value is based on our assumptions and
projections. Once determined, the amount is compared to our net book value to
determine if a write-down in the recorded value of the goodwill is necessary. 
 Loans Acquired at a
Discount: In October 2003 we purchased a pool of manufactured
housing loans at a substantial discount to the outstanding principal
balance of the underlying loans. The discount was in recognition of
identified credit impairment associated with a substantial number of
these loans. We account for this purchased loan pool according to
guidance provided by AICPA Practice Bulletin No. 6, Amortization
of Discounts on Certain Acquired Loans (PB 6). In
transactions where the initial investment differs from the related
principal balances of the underlying loans and such difference is due
to credit quality, PB 6 requires a level-yield accounting treatment
over the life of the loan pool. We are required to evaluate the loan
pool, at least quarterly. If upon evaluation, the estimate of
probable collections is increased, the amount of the discount
amortized to achieve a level-yield must be adjusted accordingly and
the adjustment is treated as a change in estimate in accordance with
APB Opinion 20, Accounting Changes, and the amount of the
periodic discount amortization is adjusted over the life of the loan
pool. If, however, at any valuation date, the estimate of collections
is reduced, the loan pool is considered impaired for purposes of
applying the measurement provisions of FASB Statement No. 5,
Accounting for Contingencies, which requires an accrual for a
loss contingency, resulting in a charge against operations. The
required accounting treatment may subject us to substantial
variations in income recognition for this loan pool from period to
period. 
 Results of Operations Comparison of the three months ended September 30, 2004 and 2003. Net Income 
 Net
income increased $16.2 million to $1.4 million for the three months
ended September 30, 2004 compared to a net loss of $14.8 million for the three
months ended September 30, 2003. The increase is the result of an increase of
$8.5 million in net interest income after loan losses, an increase of $0.9
million in non interest income and a decrease in non interest expenses of $6.7
million as described in more detail below. 
 Interest Income 
 Interest
income increased 93.1% to approximately $11.2 million compared to
approximately $5.8 million. This increase resulted primarily from an increase
of $300.2 million or 118.6% in average interest earning assets. The increase
in interest earning assets includes approximately $35.1 million in asset backed
securities of which there were none owned during the quarter ended September
30, 2003. The weighted average net interest rate on the loan receivable
portfolio decreased to 8.6% compared to 9.3% due primarily to a positive change
in the credit quality of the loan portfolio. Generally, higher credit quality
loans will carry a lower interest rate. The weighted average net interest
rate is net of any servicing fee rate resulting from securitization or sale of
the loan but accounted for as a financing. 
 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Interest expense decreased $1.7 million, or 31.5% to $3.7 million compared
to $5.4 million. The majority of our interest expense relates to interest on
our loan funding facilities. Average debt outstanding on our loan funding
facilities increased $86.9 million to $370.3 million compared to $283.4
million, or 30.7%. The increase in average
outstanding debt on our loan funding facilities was partially offset by a
decrease in average interest rate on the total debt outstanding which was 4.0%
compared to 7.6%. The higher average rate for the three months ended September
30, 2003 was due to the fact that prior to the private placement of our common
stock we had to rely partially on a higher-cost fixed rate facility to fund our
new originations. The following table presents information relative to the average balances
and interest rates of our interest earning assets and interest bearing
liabilities for the three months ended September 30 (dollars in thousands): 
 2004
    
    2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest earning assets:Manufactured housing loans
    
    $
    493,402
    
    
    $
    10,359
    
    
    
    8.40
    %
    
    $
    249,080
    
    
    $
    5,770
    
    
    
    9.27
    %Investment securities
    
    
    35,114
    
    
    
    798
    
    
    
    9.09
    %
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    24,842
    
    
    
    55
    
    
    
    .89
    %
    
    
    4,066
    
    
    
    15
    
    
    
    1.48
    %Total
    
    $
    553,358
    
    
    $
    11,212
    
    
    
    8.10
    %
    
    $
    253,146
    
    
    $
    5,785
    
    
    
    9.14
    %Interest bearing liabilities:Loan funding facilities
    
    $
    348,737
    
    
    $
    3,591
    
    
    
    4.12
    %
    
    $
    246,808
    
    
    $
    4,419
    
    
    
    7.16
    %Repurchase agreement -
investment securities
    
    
    21,554
    
    
    
    128
    
    
    
    2.38
    %
    
    
    
    
    
    
    
    
    
    
    Notes payable  servicing
advances
    
    
    
    
    
    
    4
    
    
    
    N/A
    
    
    
    1,230
    
    
    
    16
    
    
    
    5.20
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,390
    
    
    
    962
    
    
    
    10.87
    %Total
    
    $
    370,291
    
    
    $
    3,723
    
    
    
    4.02
    %
    
    $
    283,428
    
    
    $
    5,397
    
    
    
    7.62
    %Net interest income and
interest rate spread
    
    
    
    
    
    $
    7,489
    
    
    
    4.08
    %
    
    
    
    
    
    $
    388
    
    
    
    1.52
    %Net yield on average interest
earning assets
    
    
    
    
    
    
    
    
    
    
    5.41
    %
    
    
    
    
    
    
    
    
    
    
    .61
    %
 
 21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations The following table sets forth the changes in net interest income
attributable to changes in volume (change in average portfolio volume
multiplied by prior period average rate) and changes in rates (change in
weighted average interest rate multiplied by
prior period average portfolio balance) for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003 (in
thousands): 
 Volume
    
    Rate
    
    TotalInterest earning assets:Manufactured housing loans
    
    $
    5,130
    
    
    $
    (541
    )
    
    $
    4,589Investment securities
    
    
    798
    
    
    
    
    
    
    
    798Other
    
    
    46
    
    
    
    (6
    )
    
    
    40Total interest income
    
    $
    5,974
    
    
    $
    (547
    )
    
    $
    5,427Interest bearing liabilities:Loan funding facilities
    
    $
    1,050
    
    
    $
    (1,878
    )
    
    $
    (828
    )Repurchase agreement -
investment securities
    
    
    128
    
    
    
    
    
    
    
    128Notes payable  servicing
advances
    
    
    950
    
    
    
    (962
    )
    
    
    (12
    )Other
    
    
    1,585
    
    
    
    (2,547
    )
    
    
    (962
    )Total interest expense
    
    $
    3,713
    
    
    $
    (5,387
    )
    
    $
    (1,674
    )Increase in net interest income
    
    
    
    
    
    
    
    
    
    $
    7,101
 
 Non-interest Income Non-interest income is primarily made up of loan servicing related revenue
including loan servicing fees, late charges and commissions on force placed
insurance. Such revenue increased $0.9 million, or 42.9% to $3.0 million
compared to $2.1 million. Loan servicing revenue in the quarter ended
September 30, 2003 included a $0.4 million charge to earnings as a result of a
valuation adjustment on our capitalized servicing rights. The average serviced
loan portfolio on which servicing fees are collected increased approximately
$49.4 million, or 3.9%. The increase relates primarily to new loans originated
during the quarter which are financed on our securitization facility with
Citigroup. The weighted average service fee rate increased approximately .12%
as our serviced for others portfolio, which has lower than average servicing
rates, continues to pay down and as we add servicing from securitizations at
higher than our average servicing portfolio rates. 22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Provision for Losses We maintain an allowance for credit losses to cover inherent losses that
can be reasonably estimated for loan receivables held on our balance sheet.
The level of the allowance is based principally on the outstanding balance of
the contracts held on our balance sheet and historical loss trends. We also
maintain a recourse liability to cover inherent losses that can be reasonably
estimated on loans that we have sold in a true sale transaction but the terms
of the sale included recourse provisions. The provision for credit losses and recourse reserves decreased $1.4
million to $1.5 million compared to $2.9 million, or 48.2%. The decrease is a
result of the fact that the current owned portfolio of loans has a larger
concentration of loans originated in the years 2002 through 2004 than was the
case for the owned portfolio in 2003. A change to our underwriting practices
and credit scoring model in 2002 has resulted in higher credit quality of loans
originated since 2002. Total net chargeoffs increased to $2.2 million with
$1.3 million being charged to the allowance for credit losses and $0.9 million
being charged to the recourse liability, compared to total net chargeoffs of
$2.1 million, with $1.4 million being charged to the allowance for credit
losses and $0.8 million being charged to the recourse liability. As a
percentage of average outstanding principal balance (including $57.8 million
and $86.4 million in average principal balance of loans sold with recourse for
the quarters ended September 30, 2004 and 2003, respectively) total net
chargeoffs on an annualized basis decreased to 1.7% compared to 2.5%.
Consistent with this trend, we expect net chargeoffs as a percentage of average
outstanding principal balance to continue to decrease in the future due to the
higher credit quality of loans originated in years 2002 through 2004 versus
that of loans originated in years 2000 and 2001. Non-interest Expenses Personnel expenses decreased approximately $1.8 million, or 25.7%, to $5.2
million compared to $7.0 million. The decrease is primarily related to a
decrease in the amount of performance bonus accrued as it is anticipated that
actual cash bonuses to be paid at year end will be substantially less than the
previous year. The decrease in bonus expense was partially offset by an
increase in salaries as the average number of full time employees increased to
270 compared to 256. During June and July of 2004, we hired 11 former employees
of Chase Home Finance  Manufactured Housing (Chase). In May 2004 Chase
announced it was exiting the manufactured housing lending business. The
impact on non-interest expenses was approximately $0.5 million for the third
quarter.   23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Prior to 2003 we used gain on sale accounting to account for our
securitization transactions. As a result of this accounting treatment we
generated certain residual interests which remain on our balance sheet. We
assess the carrying value of our residual interests for impairment on a monthly
basis and if it is determined there is any permanent impairment the residual
interest is written down to its fair market value through a charge to earnings.
There was no adjustment necessary to the carrying value of the residual
interests for the three months ended September 30, 2004. For the three months
ended September 30, 2003, the performance of the pool of loans that was
securitized in March 2002, had deteriorated to the point that the carrying
value of the residual interest was permanently impaired. Accordingly, we took
a charge to earnings of approximately $3.8 million. 
 Loan
origination and servicing expenses increased approximately 10.6%, to
$345,000 compared to $312,000. The increase is primarily a result of an
increase in custodial bank fees related to the securitizations we have
completed in 2004. 
 Other operating expenses, which consist of occupancy and equipment,
professional fees, travel and entertainment and miscellaneous expenses
decreased approximately $1.2 million to $2.0 million, or approximately 37.5%
compared to $3.2 million, the details of which are discussed below. Occupancy and equipment, office expense and telephone expense decreased a
total of approximately $0.3 million to $1.1 million compared to approximately
$1.4 million, or 21.4%. The decrease is primarily due to the continuing
savings related to the consolidation of some of our servicing and origination
functions in our Fort Worth, Texas and Southfield, Michigan offices. Professional fees decreased $1.2 million to $0.1 million compared to $1.3
million. The primary reason for the decrease related to a reduction in the use
of outside attorneys and other professionals engaged to assist us with
licensing and other activities. We have shifted more of these functions to our
in house counsel. Travel and entertainment expenses decreased approximately $56,000 or 13.5%
to $361,000 compared to $416,000, primarily as a result of a more focused and
defined marketing program. 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Miscellaneous expenses increased approximately $433,000 to $520,000
compared to $87,000. The increase was primarily the result of an increase of
approximately $418,000 in director and officer liability insurance which was
$427,000 compared to $9,000. The increase is a direct result of the additional
costs incurred related to our formation as a REIT in October 2003 and our
status as a publicly traded company. The impact of four large and damaging hurricanes this season throughout
the Southeast has adversely affected us and the rest of the manufactured home
industry. We expect to incur losses on some homes that were damaged or
destroyed by the storms, as some insurance policies may not cover full
replacement value. We currently do not expect such direct losses to be
material, although we have not yet completed our review of all affected homes.
Delinquencies are expected to rise as manufactured home owners must make
unplanned purchases on emergency items and because their employment has been
interrupted by the storms. Our servicing team is working to help these
borrowers, and to limit any increased delinquency from turning into
repossessions. Rises in delinquency will affect loan loss provisions in the
short term, although it is too early to determine the need or amount of any
increased requirement. Finally, home sales have been slowed by the storms;
people have not been buying homes, and deliveries of ordered homes have been
delayed due to the severe flooding in many areas. This has had an adverse
effect on our origination volume which is expected to continue over the next
few months. Comparison of the nine months ended September 30, 2004 and 2003. Net Income 
 Net
income increased $26.6 million to $3.1 million for the nine months
ended September 30, 2004 compared to a net loss of $23.5 million for the nine
months ended September 30, 2003. The increase is the result of an increase of
$16.4 million in net interest income after loan losses, an increase of $1.8
million in non interest income and a decrease in non interest expenses of $8.4
million, as described in more detail below. 
 25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Interest Income 
 Interest
income increased $14.0 million, or 87.5%, to approximately $30.0
million compared to approximately $16.0 million. This increase resulted
primarily from an increase of $215.8 million in average outstanding balance of
the manufactured home loan receivable balance and an increase of $40.3 million
in average balance of other interesting earning assets for a total increase of
approximately 114.5%. The liquidity provided through the $240.0 million
securitization we completed in February 2004 and the initial public offering of
our common stock in March 2004, has allowed us to increase our interest earning
asset portfolio at a much greater rate. The increase in interest income was
lower than the increase in average interest earning assets due primarily to a
positive change in the credit quality of the loan portfolio for the period.
Generally, higher credit quality loans carry a lower interest rate. The
weighted average interest rate (net of any imbedded servicing fee resulting
from securitization transactions accounted for as financings) on the loan
portfolio was 8.7% compared to 9.6%. 
 Interest expense decreased $2.6 million, or 20.8%, to $10.0 million
compared to $12.6 million. The majority of our interest expense relates to
interest on our loan funding facilities. Average debt outstanding on our loan
funding facilities increased $91.4 million, or 39.7%, to $321.7 million
compared to $230.3 million. The increase in average outstanding debt on our
loan funding facilities was partially offset by a decrease in average interest
rate on total debt outstanding which was 3.95% compared to 6.65%. The higher
average rate for the nine months ended September 30, 2003 was due to the fact
that prior to the private placement and initial public offering of our common
stock we had to rely partially on a higher-cost fixed rate facility to fund our
new originations. 26




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations The following table presents information relative to the average balances
and interest rates of our interest earning assets and our interest bearing
liabilities for the nine months ended September 30 (dollars in thousands): 
 2004
    
    2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest earning assets:Manufactured housing loans
    
    $
    436,685
    
    
    $
    28,321
    
    
    
    8.65
    %
    
    $
    220,906
    
    
    $
    15,943
    
    
    
    9.62
    %Investment securities
    
    
    25,217
    
    
    
    1,560
    
    
    
    8.25
    %
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    17,864
    
    
    
    135
    
    
    
    1.01
    %
    
    
    2,763
    
    
    
    47
    
    
    
    2.27
    %Total
    
    $
    479,766
    
    
    $
    30,016
    
    
    
    8.34
    %
    
    $
    223,669
    
    
    $
    15,990
    
    
    
    9.53
    %Interest bearing liabilities:Loan funding facilities
    
    $
    321,687
    
    
    $
    9,749
    
    
    
    4.04
    %
    
    $
    230,337
    
    
    $
    10,925
    
    
    
    6.32
    %Repurchase agreement -
investment securities
    
    
    16,482
    
    
    
    254
    
    
    
    2.05
    %
    
    
    
    
    
    
    
    
    
    
    Notes payable  servicing
advances
    
    
    739
    
    
    
    34
    
    
    
    6.13
    %
    
    
    880
    
    
    
    52
    
    
    
    7.88
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,008
    
    
    
    1,613
    
    
    
    10.23
    %Total
    
    $
    338,908
    
    
    $
    10,037
    
    
    
    3.95
    %
    
    $
    252,225
    
    
    $
    12,590
    
    
    
    6.65
    %Net interest income and
interest rate spread
    
    
    
    
    
    $
    19,979
    
    
    
    4.39
    %
    
    
    
    
    
    $
    3,400
    
    
    
    2.88
    %Net yield on average interest
earning assets
    
    
    
    
    
    
    
    
    
    
    5.55
    %
    
    
    
    
    
    
    
    
    
    
    2.03
    %
 
 27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations The following table sets forth the changes in net interest income
attributable to changes in volume (change in average portfolio volume
multiplied by prior period average rate) and changes in rates (change in
weighted average interest rate multiplied by prior period average portfolio
balance) for the nine months ended September 30, 2004 compared to the nine
months ended September 30, 2003 (in thousands): 
 Volume
    
    Rate
    
    TotalInterest earning assets:Manufactured housing loans
    
    $
    13,994
    
    
    $
    (1,616
    )
    
    $
    12,378Investment securities
    
    
    1,560
    
    
    
    
    
    
    
    1,560Other
    
    
    114
    
    
    
    (26
    )
    
    
    88Total interest income
    
    $
    15,668
    
    
    $
    (1,642
    )
    
    $
    14,026Interest bearing liabilities:Loan funding facilities
    
    $
    2,768
    
    
    $
    (3,944
    )
    
    $
    (1,176
    )Repurchase agreement -
investment securities
    
    
    266
    
    
    
    (12
    )
    
    
    254Notes payable  servicing
advances
    
    
    1,595
    
    
    
    (1,613
    )
    
    
    (18
    )Other
    
    
    3,507
    
    
    
    (5,120
    )
    
    
    (1,613
    )Total interest expense
    
    $
    8,136
    
    
    $
    (10,689
    )
    
    $
    (2,553
    )Increase in net interest income
    
    
    
    
    
    
    
    
    
    $
    16,579
 
 Non-interest Income Non-interest income is primarily made up of loan servicing related revenue
including loan servicing fees, late charges and commissions on force placed
insurance. Such revenue increased $1.8 million, or 25.3%, to $8.9 million
compared to $7.1 million. Loan servicing revenue in the nine months ended
September 30, 2003 included a $0.4 million charge to earnings as a result of a
valuation adjustment on our capitalized servicing rights. The average
serviced loan portfolio on which servicing fees are collected increased
approximately $54.4 million, or 4.3%, to $1.33 billion compared to $1.28
billion. The weighted average service fee rate increased approximately .12% as
our serviced for others portfolio, which has lower than average servicing
rates, continues to pay down and as we add servicing from securitizations at
higher than our average servicing portfolio rates. 28




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Provision for Losses The provision for credit losses and recourse reserves increased $0.2
million, or 4.3%, to $4.9 million compared to $4.7 million. The increase
resulted from both an increase in outstanding principal due to new loan
originations and the amount of loans charged off. Total net chargeoffs
increased to $7.9 million with $3.9 million being charged to the allowance for
credit losses and $4.0 million being charged to the recourse liability,
compared to total net chargeoffs of $6.0 million, with $3.0 million being
charged to the allowance for credit losses and $3.0 million being charged to
the recourse liability. As a percentage of average outstanding principal
balance (including $64.8 million and $88.3 million in average principal balance
of loans sold with recourse for the nine months ended September 30, 2004 and
2003, respectively) total net chargeoffs on an annualized basis decreased to
2.1% compared to 2.6%. Consistent with this trend, we expect net chargeoffs as
a percentage of average outstanding principal balance to continue to decrease
in the future due to the higher credit quality of loans originated in years
2002 through 2004 versus that of loans originated in years 2000 and 2001. In
addition, recovery rates on repossessed homes have continued to increase in
2004 as the industrys backlog of repossessed homes continues to fall. Non-interest Expenses Personnel expenses decreased approximately $1.5 million, or 9.4%, to $14.5
million compared to $16.0 million. The decrease is primarily related to a
decrease in the amount of performance bonus accrued as it is anticipated that
actual cash bonuses to be paid at year end will be substantially less than the
previous year. The decrease in bonus expense was partially offset by an
increase in salaries as the average number of full time employees increased to
263 compared to 248. The increase in the number of full time employees is
partially offset by an approximate $0.3 million decrease in the use of
temporary employees. During June and July of 2004, we hired 11 former
employees of Chase which in May 2004 had announced it was exiting the
manufactured housing lending business. While the impact on non-interest
expenses was minor for the nine months ended September 30 2004, on an
annualized basis, the cost will be approximately $1.5 million. 29




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Prior to 2003 we used gain on sale accounting to account for our
securitization transactions. As a result of this accounting treatment we
generated certain residual interests which remain on our balance sheet. We
assess the carrying value of our residual interests for impairment on a monthly
basis and if it is determined there is any permanent impairment the residual
interest is written down to its fair market value through a charge to
earnings. There was no adjustment necessary to the carrying value of the
residual interests for the nine months ended September 30, 2004. For the nine
months ended September 30, 2003, the performance of the pool of loans that was
securitized in March 2002 had deteriorated to the point that the carrying value
of the residual interest was permanently impaired. Accordingly, we took a
charge to earnings of approximately $5.1 million. 
 Loan
origination and servicing expenses increased slightly from $0.9
million to $1.0 million while loan originations increased $54.3 million, or 41.5%, to
$185.3 million compared to $131.0 million and the servicing portfolio has increased
approximately $60.0 million, or 4.7%, to $1.34 billion compared to $1.28
billion. The ability to control these costs is primarily a result of the
consolidation of the majority of our origination operations in Southfield,
Michigan and the consolidation and streamlining of much of our repossession
operations in our Fort Worth, Texas offices. 
 Other operating expenses, which consist of occupancy and equipment,
professional fees, travel and entertainment and miscellaneous expenses
decreased approximately $2.0 million, or 27.8%, to $5.2 million compared to
$7.2 million, the details of which are discussed below. Occupancy and equipment, office expense and telephone expense decreased a
total of approximately $0.5 million, or 13.9%, to $3.1 million compared to
approximately $3.6 million, primarily as a result of consolidating the
functions performed in our Ohio office and by relocating our corporate offices
and a significant amount of our loan origination functions to Southfield,
Michigan in April 2003. Professional fees decreased $2.2 million, or 83.3%, to $0.3 million,
compared to $2.5 million. The primary reasons for the decrease related to a
reduction in the use of outside professionals and consultants that were used as
we attempted to raise additional capital, undertook certain licensing efforts,
pursued several information technology initiatives and various other legal
expenses. We have made a concerted effort to shift more of these functions,
when feasible, to our in house personnel. Travel
and entertainment expenses decreased approximately $0.2 million, or
16.7%, to $1.0 million compared to $1.2 million. The decrease is primarily due
to a more focused and defined marketing program. 30




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Miscellaneous expenses increased approximately $1.1 million to $1.2
million compared to $0.1 million. The increase was primarily the result of an
increase of approximately $0.8 million in director and officer liability
insurance as a result of our formation as a REIT in October 2003 and an
increase of approximately $0.1 million in state business taxes. Receivable Portfolio and Asset Quality 
 Net
loans receivable outstanding increased 40.9% to $518.5 million at
September 30, 2004 compared to $368.0 million at December 31, 2003. Loans
receivable are comprised of installment contracts and mortgages collateralized
by manufactured homes and in some instances real estate. 
 New loan originations for the quarter ended September 30, 2004 increased
46.9% to $79.9 million compared to $54.4 million for the quarter ended
September 30, 2003. The increase was due primarily to increased market share
resulting from our focus on customer service and the use of technology to
deliver our products and services. However, the impact of the damaging
hurricanes throughout the Southeast has adversely affected us as home sales
have been slowed by the storms; people have not been buying homes, and
deliveries of ordered homes have been delayed due to the severe flooding in
many areas. This has had an adverse effect on our origination volume which is
expected to continue over the next few months. The following table sets forth the average loan balance, weighted average
loan coupon and weighted average initial term of the loan receivable portfolio
(dollars in thousands): September 30, December 31,2004
    
    2003Principal balance loans receivable
    
    $
    527,996
    
    
    $
    380,174Number of loans receivable
    
    
    12,378
    
    
    
    9,154Average loan balance
    
    $
    43
    
    
    $
    42Weighted average loan coupon (a)
    
    
    9.93
    %
    
    
    10.23
    %Weighted average initial term
    
    21 years
    
    22 years
  (a)
    
    The weighted average loan coupon includes an imbedded
servicing fee rate resulting from securitization or sale of the
loan but accounted for as a financing. 31




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Delinquency statistics for the manufactured home loan portfolio are as
follows (dollars in thousands): September 30, 2004
    
    December 31, 2003No. of
    
    Principal
    
    % of
    
    No. of
    
    Principal
    
    % ofDays delinquent
    
    Loans
    
    Balance
    
    Portfolio
    
    Loans
    
    Balance
    
    Portfolio31-60
    
    
    191
    
    
    $
    6,786
    
    
    
    1.3
    %
    
    
    193
    
    
    $
    7,068
    
    
    
    1.9
    %61-90
    
    
    80
    
    
    
    3,197
    
    
    
    0.6
    %
    
    
    83
    
    
    
    2,943
    
    
    
    0.8
    %Greater than 90
    
    
    174
    
    
    
    6,988
    
    
    
    1.3
    %
    
    
    158
    
    
    
    6,575
    
    
    
    1.7
    %
 We define non-performing loans as those loans that are 90 or more days
delinquent in contractual principal payments. For the three and nine months
ended September 30, 2004 the average outstanding principal balance of
non-performing loans was approximately $6.8 million and $6.5 million,
respectively compared to $4.1 million for each of the three and nine months
ended September 30, 2003. Non-performing loans as a percentage of average loan
receivables were 1.4% and 1.5%, respectively for the three and nine months
ended September 30, 2004 compared to 1.6% and 1.9% for the three and nine
months ended September 30, 2003, respectively, primarily as a result of higher
average balances and improved credit quality in the loan portfolio in 2004. The allowance for credit losses was $4.7 million at September 30, 2004
compared to $3.6 million at December 31, 2003. The increase in the allowance
for credit losses is primarily due to a higher loan portfolio balance offset by
chargeoffs. The allowance for credit losses as a percentage of net loans
receivable was approximately .9% at September 30, 2004 compared to
approximately 1.0% and December 31, 2003. Net chargeoffs were $2.2 million and
$7.9 million for the three and nine months ended September 30, 2004,
respectively, compared to $2.0 million and $6.0 million for the three and nine
months ended September 30, 2003, respectively. Based on the analysis we
performed related to the allowance for credit losses as described above under
Critical Accounting Policies, we believe that our allowance for credit losses
is currently adequate to cover inherent losses in our loan portfolio. Our asset quality statistics for the nine months ended September 30, 2004
reflect or continued emphasis on the credit quality of our borrowers and the
improved underwriting and origination practices we put into place. Continued
improvement in delinquency statistics and recovery rates are expected to result
in lower levels of non-performing assets and net chargeoffs. However, in the
short term, chargeoffs and delinquency statistics may increase slightly do to
the effects of the severe hurricanes that have hit the Southeast in recent
months. Long term, lower levels of non-performing assets and net chargeoffs
should have a positive effect on earnings through decreases in the provision
for credit losses and servicing expenses as well as increases in net interest
income. 32




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources We require capital to fund our loan originations, acquire manufactured
home loans originated by third parties and expand our loan servicing
operations. At September 30, 2004, as a result of the $200 million
securitization completed on September 29, 2004, we had approximately $37.3
million in available cash and cash equivalents. As a REIT, we will be required
to distribute at least 90% of our taxable REIT income (as defined in the
Internal Revenue Code) to our stockholders on an annual basis. Therefore, as a
general matter, it is unlikely we will have any substantial cash balances that
could be used to meet our liquidity needs. Instead, these needs must be met
from cash provided from operations and external sources of capital.
Historically, we have satisfied our liquidity needs through cash generated from
operations, sales of our common and preferred stock, borrowings on our credit
facilities and loan sales and securitizations. 
 Cash used in operating activities during the nine months ended September
30, 2004, totaled $161.6 million versus $119.2 million for the nine months
ended September 30, 2003. Cash used to originate loans increased
57.2%, or
$73.7 million, to $202.5 million for the nine months ended September 30, 2004
compared to $128.8 million for the nine months ended September 30, 2003. The
increased origination volume is a result of increased market share resulting
from our focus on customer service and the use of technology to deliver our
products and services and from the exit of several of our competitors from the
manufactured home lending business. Principal collections on loans held for
sale totaled $46.4 million for the nine months ended September 30, 2004 as
compared to $22.5 million for the nine months ended September 30, 2003, an
increase of $23.9 million, or 106.2%. The increase in collections is primarily
related to the increase in the average outstanding loan portfolio balance,
which was $436.7 million for the nine months ended September 30, 2004 compared
to $220.9 million for the nine months ended September 30, 2003, in addition to
improved credit quality and decreased delinquency as a percentage of
outstanding loan receivable balance. 
 Cash used in investing activities was $37.0 million in the nine months
ended September 30, 2004 versus $0.9 million for the nine months ended
September 30, 2003. The primary reason for the increase was the purchase of
approximately $40.3 million in securitization bonds. The bonds are
collateralized by manufactured home loans and are classified as
held-to-maturity. The bonds were purchased at a discount to par, have weighted
average contractual maturity of 28.9 years and a weighted average contractual
yield of 7.68%. The primary sources of cash during the nine months ended September 30,
2004 were approximately $368.8 million in net proceeds from two securitized
financing transactions, one completed in February 2004 and the other completed
in September 2004, and approximately $73.3 million from the issuance of our
common stock. Proceeds from the securitizations and from the issuance of common
stock were used primarily to pay down the aggregate balances of the notes
outstanding under our loan funding facility with Citigroup and to fund new loan
originations. 33




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations On February 11, 2004, we completed a securitized financing transaction for
approximately $240.0 million of loans, which was funded by issuing bonds in the
approximate amount of $200 million, at a duration weighted average interest
cost of 5.31%. We structured the transaction to issue classes of bonds with
different estimated maturity dates and average lives to better meet investor
demands. The outstanding balance of the 2004-A Notes issued was approximately
$176.1 million at September 30, 2004. On September 29, 2004, we completed a
second securitized financing transaction for approximately $200.1 million of
loans, which was funded by issuing bonds in the approximate amount of $169.0
million, at a duration weighted average interest cost of 5.41%. This
transaction was also structured to issue classes of bonds with different
estimated maturity dates and average lives to better meet investor demands. The
outstanding balance of the 2004-B Notes issued was approximately $167.0 million
at September 30, 2004. We currently have a loan funding facility with Citigroup. Under the terms
of the agreement, originally entered into in March 2003 and revised in November
2003 to split the loans into two pools, one under a note due in April 2004 and
one under a note due in November 2004, we pledge loans as collateral and in
turn are advanced funds. On March 30, 2004 the terms of the agreement were
modified by segregating the pledged loans into three separate pools designated
2004-1A, 2004-1B and 2004-1C. The maximum advance amount on 2004-1A (for new
loan production) was set at $170.0 million, the fixed advance amount on 2004-1B
(for loans originated in 2003) was set at approximately $71.6 million and the
maximum amount on 2004-1C (for loans acquired from third parties) was set at
$150.0 million. The modification added a stratified advance rate for each pool
and reduced the stated interest rate on all three pools. Additionally, the
maturity date was fixed on 2004-1A at March 29, 2005, on 2004-1B at November
16, 2004 and on 2004-1C at March 28, 2006. At September 30, 2004 the
outstanding balance on the notes issued under the facility was approximately
$62.9 million. We currently are entered into two separate repurchase agreements with
Citigroup for the purpose of financing the purchase of investments in two asset
backed securities with principal balances of $32.0 million and $3.1 million,
respectively. Under the terms of the agreements we sell our interest in the
securities with an agreement to repurchase the interests at a predetermined
future date at the principal amount sold plus an interest component. The
securities were financed at an amount equal to 75% of the current market value
as determined by Citigroup. At September 30, 2004 the repurchase agreements
had outstanding principal balances of approximately $19.6 million and $1.9
million, respectively, and maturity dates of October 28, 2004 and October 6,
2004, respectively. The annual interest rates on the agreements are equal to
LIBOR plus a spread. Typically the repurchase agreements are rolled over for
30 day periods when they expire. 34




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations We currently have a revolving credit facility with Bank One. Under the
terms of the facility we can borrow up to $7 million for the purpose of funding
required principal and interest advances on manufactured home loans that are
serviced for outside investors. Borrowings under the facility are repaid upon
our collection of monthly payments made by borrowers. The outstanding balance
under the facility accrues interest at the banks prime rate. To secure the
loan, we have granted the bank a security interest in substantially all of our
assets excluding securitized loans. The facility terminates on December 31,
2004. At September 30, 2004 there was no balance outstanding on this facility. In addition to borrowings under our credit facilities, we have fixed
contractual obligations under various lease agreements. Our contractual
obligations were comprised of the following as of September 30, 2004: Less than
    
    1 - 3
    
    4 - 5Total
    
    1 year
    
    years
    
    years
    
    ThereafterNotes payable  Citigroup(1)
    
    $
    62,882
    
    
    $
    31,415
    
    
    $
    31,467
    
    
    $
    
    
    
    $
    Notes payable  2004 A securitization (2)
    
    
    176,120
    
    
    
    3,728
    
    
    
    14,301
    
    
    
    9,534
    
    
    
    148,557Notes payable  2004 B securitization (3)
    
    
    166,848
    
    
    
    3,531
    
    
    
    13,979
    
    
    
    9,319
    
    
    
    140,019Repurchase agreement (4)
    
    
    21,552
    
    
    
    21,552
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    2,417
    
    
    
    763
    
    
    
    1,594
    
    
    
    60
    
    
    
    Total Contractual Obligations
    
    $
    429,819
    
    
    $
    60,989
    
    
    $
    61,341
    
    
    $
    18,913
    
    
    $
    288,576
  (1)
    
    Origen Financial L.L.C. and Origen Securitization Company, LLC, one of
our special purpose entity subsidiaries, are borrowers, under the
short-term securitization facility with Citigroup.(2)
    
    Origen Financial L.L.C. through a special purpose entity, Origen
Manufactured Housing Trust 2004-A, is the issuer of the notes payable
under the 2004  A securitization.(3)
    
    Origen Financial L.L.C. through a special purpose entity, Origen
Manufactured Housing Trust 2004-B, is the issuer of the notes payable
under the 2004  B securitization.(4)
    
    Origen Financial L.L.C. is the borrower under the Citigroup repurchase
agreement. 35




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations In May 2004, we completed an initial public offering of our common stock.
In June 2004, the underwriters for the offering purchased additional shares by
exercising their over-allotment option. Aggregate net proceeds from these
transactions were approximately $62.9 million after the underwriters discount
and expenses. The net proceeds were used primarily to pay down the aggregate
balances of the notes outstanding under our loan funding facility with
Citigroup and to fund new loan originations. The net proceeds from this
offering, cash generated from operations and borrowings under our Citigroup
facility will enable us to meet our liquidity needs for at least 12 months
depending on market conditions which may affect loan origination volume, loan
purchase opportunities and the availability of securitizations. If adverse
market conditions require or if loan purchase opportunities become available,
we may seek additional funds through additional credit facilities or additional
sales of our common or preferred stock sooner than anticipated. Our long-term liquidity and capital requirements consist primarily of
funds necessary to originate and hold manufactured home loans, acquire and hold
manufactured home loans originated by third parties and expand our loan
servicing operations. We expect to meet our long-term liquidity requirements
through cash generated from operations, but we will require external sources of
capital, including sales of shares of our common and preferred stock and
third-party borrowings. We intend to continue to access the asset-backed
securities market for the long-term financing of our loans in order to match
the interest rate risk between our loans and the related long-term funding
source. Our ability to meet our long-term liquidity needs depends on numerous
factors, many of which are outside of our control. These factors include
general market interest rate levels, the shape of the yield curve and spreads
between rates on U.S. Treasury obligations and securitized bonds, all of which
affect investors demand for securitized debt. The risks associated with the manufactured housing business become more
acute in any economic slowdown or recession. Periods of economic slowdown or
recession may be accompanied by decreased demand for consumer credit and
declining asset values. In the manufactured housing business, any material
decline in collateral values increases the loan-to-value ratios of loans
previously made, thereby weakening collateral coverage and increasing the size
of losses in the event of default. Delinquencies, repossessions, foreclosures
and losses generally increase during economic slowdowns or recessions. For our
finance customers, loss of employment, increases in cost-of-living or other
adverse economic conditions would impair their ability to meet their payment
obligations. Higher industry inventory levels of repossessed manufactured homes
may affect recovery rates and result in future impairment charges and provision
for losses. In addition, in an economic slowdown or recession, servicing and
litigation costs generally increase. Any sustained period of increased
delinquencies, repossessions, foreclosures, losses or increased costs would
adversely affect our financial condition and results of operations. 36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk These same risks also affect our ability to securitize loans. Continued
access to the securitization market is very important to our business. Numerous
factors affect our ability to complete a successful securitization, including
factors beyond our control. These include general market interest rate levels,
the shape of the yield curve and spreads between rates on U.S. Treasury
obligations and securitized bonds, all of which affect investors demand for
securitized debt. When these factors are unfavorable our ability to
successfully complete securitization transactions is impeded and our liquidity
and capital resources are affected negatively. There can be no assurance that
current favorable conditions will continue or that unfavorable conditions will
not return. Market risk is the risk of loss arising from adverse changes in market
prices and interest rates. Our market risk arises from interest rate risk
inherent in our financial instruments. We are not currently subject to foreign
currency exchange rate risk or commodity price risk. Our variable rate debt, under which we paid interest at various LIBOR
rates plus a spread totaled $84.4 million and $213.0 million at September 30,
2004 and September 30, 2003, respectively. If LIBOR increased or decreased by
1.0% during the nine months ended September 30, 2004 and 2003, we believe our
interest expense would have increased or decreased by approximately $1.3
million and $0.8 million, respectively based on the $178.2 million and $168.1
million average balance outstanding under our variable rate debt facilities for
the nine months ended September 30, 2004 and September 30, 2003, respectively.
The increase or decrease in interest expense related to an increase or decrease
in LIBOR is mitigated somewhat because our average variable rate debt
outstanding for the nine months ended September 30, 2004 and 2003 was hedged
for portions of the periods through the use of interest rate swap agreements
thus minimizing the effect of changes in the benchmark LIBOR rate. We had no
variable rate interest earning assets outstanding during the nine months ended
September 30, 2004 or 2003. 37




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk The following table shows the contractual maturity dates of our assets and
liabilities at September 30, 2004. For each maturity category in the table the
difference between interest-earning assets and interest-bearing liabilities
reflects an imbalance between repricing opportunities for the two sides of the
balance sheet. The consequences of a negative cumulative gap at the end of one
year suggests that, if interest rates were to rise, liability costs would
increase more quickly than asset yields, placing negative pressure on
earnings (dollars in thousands). 
 Maturity0 to 3
    
    4 to 12
    
    1 to 5
    
    Over 5months
    
    months
    
    years
    
    years
    
    TotalAssetsCash and equivalents
    
    $
    37,336
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    37,336Restricted cash
    
    
    7,821
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,821Loans receivable, net
    
    
    2,279
    
    
    
    7,184
    
    
    
    64,282
    
    
    
    444,734
    
    
    
    518,479Investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,212
    
    
    
    37,212Furniture, fixtures and equipment, net
    
    
    173
    
    
    
    542
    
    
    
    1,454
    
    
    
    
    
    
    
    2,169Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,277
    
    
    
    32,277Other assets
    
    
    11,913
    
    
    
    6,913
    
    
    
    8,613
    
    
    
    648
    
    
    
    28,087Total assets
    
    $
    59,522
    
    
    $
    14,639
    
    
    $
    74,349
    
    
    $
    514,871
    
    
    $
    663,381Liabilities and Stockholders EquityWarehouse financing
    
    $
    11,147
    
    
    $
    26,913
    
    
    $
    24,822
    
    
    $
    
    
    
    $
    62,882Securitization financing
    
    
    3,469
    
    
    
    3,791
    
    
    
    47,134
    
    
    
    288,574
    
    
    
    342,968Repurchase agreements
    
    
    21,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,552Recourse liability
    
    
    486
    
    
    
    1,124
    
    
    
    2,183
    
    
    
    957
    
    
    
    4,750Other liabilities
    
    
    15,297
    
    
    
    510
    
    
    
    
    
    
    
    665
    
    
    
    16,472Total liabilities
    
    
    51,951
    
    
    
    32,338
    
    
    
    74,139
    
    
    
    290,196
    
    
    
    448,624Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    252Paid-in-capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,143
    
    
    
    219,143Accumulated other comprehensive loss


(69
)


(243
    )


(1,251
    )


(312
    )


(1,875
    )Unearned stock compensation
    
    
    (723
    )
    
    
    (1,735
    )
    
    
    (1,339
    )
    
    
    
    
    
    
    (3,797
    )Retained earnings
    
    
    909
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    909Total stockholders equity
    
    
    117
    
    
    
    (1,978
    )
    
    
    (2,590
    )
    
    
    219,208
    
    
    
    214,757Total liabilities and stockholders equity
    
    $
    52,068
    
    
    $
    30,360
    
    
    $
    71,549
    
    
    $
    509,404
    
    
    $
    663,381Interest sensitivity gap
    
    $
    7,454
    
    
    $
    (15,721
    )
    
    $
    2,800
    
    
    $
    5,467Cumulative interest sensitivity gap
    
    $
    7,454
    
    
    $
    (8,267
    )
    
    $
    (5,467
    )
    
    
    Cumulative interest sensitivity gap to
total interest earning assets
    
    
    1.12
    %
    
    
    (1.25
    %)
    
    
    (0.82
    %)
    
    
    
 
 38




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk We believe the negative effect of a rise in interest rates is reduced by
the anticipated securitization of our loans receivable which fixes our cost of
funds associated with the loans over the lives of such loans. In conjunction with the loan funding facility with Citigroup, we entered
into six interest rate swap agreements in an effort to manage interest rate
risk on our floating rate notes payable. The interest rate swaps expired on
April 12, 2004. The interest rate swaps were structured to be hedges against
changes in the benchmark interest rate (LIBOR) of the floating rate notes. We
designated the swaps as hedges for accounting purposes. The hedges were highly
effective and had a minimal impact on the results of operations. In August 2004, we entered into a forward starting interest rate swap for
the purpose of locking in the benchmark interest rate on our securitization
transaction completed in September 2004. On the start date of the swap we
would begin paying a fixed rate of 4.15% and receiving a floating rate of 1.65%
on a notional balance of $170.0 million, which would approximate the expected
balance of the bonds to be sold in the securitization transaction. A rise in
rates during the interim period would increase our borrowing cost in the
securitization, but the increase would be offset by the increased value in the
right to pay a lower fixed rate during the term of the securitized deal making
the hedge highly effective. Upon closing of the securitization transaction on
September 29, 2004, the hedge was terminated. Because interest rates have
fallen during the interim period the cost to terminate the swap was
approximately $1.9 million. This cost will be amortized over the expected life
of the securitization transaction. 39




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk The following table shows our financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments fair values at September 30, 2004, (dollars in thousands): 
 Contractual MaturityThere-
    
    Total2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    after
    
    fair valueInterest sensitive assetsLoans receivable
    
    $
    2,279
    
    
    $
    9,700
    
    
    $
    10,708
    
    
    $
    11,822
    
    
    $
    13,050
    
    
    $
    470,920
    
    
    $
    518,479Average interest rate
    
    
    9.93
    %
    
    
    9.93
    %
    
    
    9.93
    %
    
    
    9.93
    %
    
    
    9.93
    %
    
    
    9.93
    %
    
    
    9.93
    %Interest bearing deposits
    
    
    44,788
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,788Average interest rate
    
    
    0.89
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.89
    %Loan sale proceeds receivable
    
    
    119
    
    
    
    422
    
    
    
    355
    
    
    
    303
    
    
    
    260
    
    
    
    933
    
    
    
    2,392Average interest rate
    
    
    1.50
    %
    
    
    1.50
    %
    
    
    1.50
    %
    
    
    1.50
    %
    
    
    1.50
    %
    
    
    1.50
    %
    
    
    1.50
    %Investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,212
    
    
    
    37,212Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.68
    %
    
    
    7.68
    %Residual interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749
    
    
    
    749Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.00
    %
    
    
    15.00
    %Total interest sensitive
assets
    
    $
    47,186
    
    
    $
    10,122
    
    
    $
    11,063
    
    
    $
    12,125
    
    
    $
    13,310
    
    
    $
    509,814
    
    
    $
    603,620Interest sensitive liabilitiesWarehouse financing
    
    $
    11,147
    
    
    $
    27,024
    
    
    $
    24,711
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    62,882Average interest rate
    
    
    3.24
    %
    
    
    2.95
    %
    
    
    3.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.02
    %Securitization financing
    
    
    3,469
    
    
    
    5,054
    
    
    
    5,592
    
    
    
    6,187
    
    
    
    6,845
    
    
    
    315,821
    
    
    
    342,968Average interest rate
    
    
    5.34
    %
    
    
    5.34
    %
    
    
    5.34
    %
    
    
    5.34
    %
    
    
    5.34
    %
    
    
    5.34
    %
    
    
    5.34
    %Repurchase agreements
    
    
    21,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,552Average interest rate
    
    
    2.42
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.42
    %Recourse liability
    
    
    486
    
    
    
    1,400
    
    
    
    779
    
    
    
    444
    
    
    
    303
    
    
    
    1,338
    
    
    
    4,750Average interest rate
    
    
    10.57
    %
    
    
    10.57
    %
    
    
    10.57
    %
    
    
    10.57
    %
    
    
    10.57
    %
    
    
    10.57
    %
    
    
    10.57
    %Total interest sensitive
liabilities
    
    $
    36,654
    
    
    $
    33,478
    
    
    $
    31,082
    
    
    $
    6,631
    
    
    $
    7,148
    
    
    $
    317,159
    
    
    $
    432,152
 
 40




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##### Table of Contents



Item 4. Controls and Procedures  (a)
    
    Under the supervision and with the participation of the
Companys management, including the Chief Executive Officer, Ronald
A. Klein, and Chief Financial Officer, W. Anderson Geater, Jr., the
Company evaluated the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of the end of
the period covered by this quarterly report, pursuant to Rule 13a-15
of the Securities Exchange Act of 1934 (the Exchange Act). Based
upon that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective to ensure that information
the Company is required to disclose in its filings with the SEC
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and
forms, and to ensure that information required to be disclosed by
the Company in the reports that it files under the Exchange Act is
accumulated and communicated to the Companys management, including
its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosures(b)
    
    There were no significant changes in the Companys
internal control over financial reporting during the quarterly
period ended September 30, 2004, that have materially affected, or
are reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 As
we have previously announced and as described in our Annual Report on
Form 10-K for the year ended December 31, 2004, we were required to
restate our previously issued financial statements for the period
ended December 31, 2003 and the first three quarters of 2004 due to
an interpretative error in applying accounting principles to a pool
of loans acquired at a discount in October 2003. 
 
 The
Audit Committee of our board of directors has instructed management
to implement certain corrective changes to our internal control
procedures to improve the effectiveness of its internal control over
financial reporting to reduce the likelihood of interpretive errors
resulting in material misstatements in the future. Management is
currently in the process of hiring an accounting professional to
increase our capabilities related to interpretive research into
complex accounting issues. In addition, Management has explored the
possibility of retaining an outside expert to consult on complex
accounting issues. 
 41




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##### Table of Contents



PART II            OTHER INFORMATION 
 ITEM 2.   Changes in Securities and Use of Proceeds On August 5, 2004, we issued 111,750 shares of common stock to directors,
officers and employees pursuant to restricted stock grants made under our 2003
Equity Incentive Plan. The common stock was issued pursuant to an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933. No
underwriters were engaged in connection with the issuance of the common stock.
The recipients of the common stock represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates. 
 ITEM 4.  Submission of Matters to a Vote of Security Holders On July 22, 2004, we held our Annual Meeting of Stockholders. The only
matter voted upon at the meeting was the election of six directors to serve
until the 2005 Annual Meeting of Stockholders or until their respective
successors shall have been duly elected and qualified. The results of the
election appear below: Nominees
    
    For
    
    Against
    
    WithheldRonald A. Klein
    
    
    20,784,689
    
    
    
    2,225,401
    
    
    
    2,108,310Paul A. Halpern
    
    
    20,784,689
    
    
    
    2,225,401
    
    
    
    2,108,310Gary A. Shiffman
    
    
    20,784,689
    
    
    
    2,225,401
    
    
    
    2,108,310Richard H. Rogel
    
    
    23,006,600
    
    
    
    3,490
    
    
    
    2,108,310James A. Williams
    
    
    23,006,600
    
    
    
    3,490
    
    
    
    2,108,310Michael J. Wechsler
    
    
    23,006,600
    
    
    
    3,490
    
    
    
    2,108,310
 ITEM 5. Other Information In connection with our short term securitization facility with Citigroup
Global Markets Realty Corp., Gary A. Shiffman, one of our directors, and
William M. Davidson, the principal of one of our stockholders, personally
guaranteed certain of our obligations. Their guaranty was limited to $10.5
million in the aggregate. On July 26, 2004, the personal guaranty was
terminated. 42




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##### Table of Contents



ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Required by Rule 13a-14(b) of the Securities Exchange
Act of 1934, as amended.
 (b) Reports of Form 8-K:  Form 8-K, dated August 3, 2004 furnished for the purpose of reporting, under
Item 12  Results of Operations and Financial Condition, the Companys 2004
second quarter earnings and other financial results. 43




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. 
 Dated: August 12, 2005 
 ORIGEN FINANCIAL, INC.BY:
    /s/ W. Anderson Geater, Jr.W. Anderson Geater Jr., ChiefFinancial Officer and Secretary
(Duly authorized officer and principal
financial officer) 44




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ORIGEN FINANCIAL, INC. EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer Required by Rule 13a-14(b) of the Securities Exchange
Act of 1934, as amended.