**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





_____________________





**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 June 30, 2005


or


o  Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934


For
      the
      Transition Period from   to





Commission
      File Number 001-32447


_____________________





**SAXON
      CAPITAL, INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





Maryland
            30-0228584(State
                or Other Jurisdiction of Incorporation)
            (I.R.S.
                Employer Identification No.)4860
                Cox Road
              Suite
                300
              Glen
                Allen, Virginia 23060
            23060(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant’s
      Telephone Number, Including Area Code: (804) 967-7400.


_____________________








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
            o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Exchange Act Rule 12b-2).





Yes
            x
            No
            o





As
      of
      August 4, 2005 there were 49,952,501 shares of our common stock, par value
      $0.01
      per share, outstanding.








Explanatory
      Note





Saxon
      Capital, Inc. (“Saxon” or “Company”) is filing this amendment to its quarterly
      report on Form 10-Q for the quarter ended June 30, 2005 to restate financial
      statements and to amend other financial information filed with the Securities
      and Exchange Commission, or SEC. This amendment is being filed to correct errors
      in the originally filed quarterly report on Form 10-Q related to the Company’s
      accounting under Statement of Financial Accounting Standards, or SFAS, No.
      133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended.





For
      additional information on the restatement see Note 13, Restatement, to the
      Financial Statements presented under Item 1 of this report.


























































































































**TABLE
                OF CONTENTS**Page**Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Balance Sheets at June 30, 2005 and
                December 31, 2004
            1Unaudited
                Consolidated Statements of Operations for the
                three and six months ended June 30, 2005 and June 30,
                2004
            2Unaudited
                Consolidated Statement of Shareholders’ Equity
                for the six months ended June 30, 2005 and June 30,
                2004
            3Unaudited
                Consolidated Statements of Cash Flows for the
                six months ended June 30, 2005 and June 30, 2004
            4Notes
                to Unaudited Consolidated Financial
                Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            61Item
                4.
            Controls
                and Procedures
            66**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            67Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            67Item
                3.
            Defaults
                Upon Senior Securities
            67Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            67Item
                5.
            Other
                Information
            68Item
                6.
            Exhibits
            68Signatures
            
            69








**Part
      I.****Financial
      Information**


**Item
      1.**  **Financial
      Statements**





**Saxon
                Capital, Inc.****Consolidated
                Balance Sheets****($
                in thousands, except per share data)****(unaudited)****June
                30, 2005 (as restated - see Note 13)**
            **December
                31, 2004 (as restated - see Note 13)****Assets:**Cash
            $10,950
            $12,852Accrued
                interest receivable, net of allowance of $11,856 and $12,418,
                respectively
            38,253
            37,803Trustee
                receivable
            135,424
            112,062Mortgage
                loan portfolio
            6,158,876
            5,997,376Allowance
                for loan losses
            (24,422)
            (24,892)Net
                mortgage loan portfolio
            6,134,454
            5,972,484Restricted
                cash
            204,811
            1,495Servicing
                related advances
            133,787
            109,848Mortgage
                servicing rights, net
            129,040
            98,995Real
                estate owned
            32,733
            34,051Derivative
                assets
            18,222
            17,568Deferred
                tax asset
            42,514
            27,506Other
                assets
            54,518
            83,865Total
                assets
            $6,934,706
            $6,508,529**Liabilities
                and shareholders’ equity:****Liabilities:**Accrued
                interest payable
            $6,909
            $8,045Dividends
                payable
            —
            28,909Warehouse
                financing
            261,105
            600,646Securitization
                financing
            6,023,203
            5,258,344Derivative
                liabilities
            3,234
            2,636Other
                liabilities
            17,596
            22,876Total
                liabilities
            6,312,047
            5,921,456Commitments
                and contingencies - Note 9**Shareholders’
                equity:**Common
                stock, $0.01 par value per share, 100,000,000 shares authorized;
                shares
                issued and outstanding: 49,902,501 and 49,849,386 as of June 30,
                2005 and
                December 31, 2004, respectively
            499
            498Additional
                paid-in capital
            627,456
            625,123Accumulated
                other comprehensive loss, net of tax effect of $(15) and
                $(21)
            (336)
            (474)Accumulated
                deficit
            (4,960)
            (38,074)Total
                shareholders’ equity
            622,659
            587,073Total
                liabilities and shareholders’ equity
            $6,934,706
            $6,508,529





The
      accompanying notes are an integral part of these consolidated financial
      statements.


1





**Saxon
                Capital, Inc.****Consolidated
                Statements of Operations****(in
                thousands, except per share data)****(unaudited)****Three
                Months Ended**
              **June
                30,**
            **Six
                Months****Ended**
              **June
                30,****2005
                (as restated - see Note 13)**
            **2004
                (as restated - see Note 13)**
            **2005
                (as restated - see Note 13)**
            **2004
                (as restated**
              **-
                see**
              **Note
                13)****Revenues:**Interest
                income
            $111,077
            $102,995
            $223,499
            $200,383Interest
                expense
            (61,487)
            (34,228)
            (116,478)
            (65,522)Net
                interest income
            49,590
            68,767
            107,021
            134,861Provision
                for mortgage loan losses
            (9,428)
            (6,810)
            (11,736)
            (11,229)Net
                interest income after provision
              for
                mortgage loan losses
            40,162
            61,957
            95,285
            123,632Servicing
                income, net of amortization and impairment
            17,224
            5,336
            30,790
            9,938Derivative
                (losses) gains
            (15,084)
            23,220
            6,150
            10,763Gain
                on sale of assets
            706
            308
            2,407
            2,859Total
                net revenues, gains and losses
            43,008
            90,821
            134,632
            147,192**Expenses:**Payroll
                and related expenses
            16,255
            18,439
            38,006
            34,854General
                and administrative expenses
            15,339
            12,482
            31,359
            24,469Depreciation
            1,336
            1,575
            2,843
            3,069Other
                expense
            137
            1,685
            1,841
            2,795Total
                expenses
            33,067
            34,181
            74,049
            65,187Income
                before taxes
            9,941
            56,640
            60,583
            82,005Income
                tax expense (benefit)
            2,944
            20,943
            (383)
            27,378**Income
                before cumulative effect of change in accounting
                principle**
            6,997
            35,697
            60,966
            54,627Cumulative
                effect of change in accounting principle
            31
            —
            31
            —**Net
                income**
            $7,028
            $35,697
            $60,997
            $54,627**Earnings
                per share:**Weighted
                average common shares - basic
            49,884
            28,703
            49,867
            28,687Weighted
                average common shares - diluted
            50,848
            31,089
            50,653
            31,196Basic
                earnings per common share before cumulative effect of change in accounting
                principle
            $0.14
            $1.24
            $1.22
            $1.90Cumulative
                effect of change in accounting principle
            —
            —
            —
            —Basic
                earnings per common share
            $0.14
            $1.24
            $1.22
            $1.90Diluted
                earnings per common share before cumulative effect of change in accounting
                principle
            $0.14
            $1.15
            $1.20
            $1.75Cumulative
                effect of change in accounting principle
            —
            —
            —
            —Diluted
                earnings per common share
            $0.14
            $1.15
            $1.20
            $1.75Dividends
                declared per common share
            $0.55
            —
            $0.55
            —




The
      accompanying notes are an integral part of these consolidated financial
      statements.


2





**Saxon
                Capital, Inc.****Consolidated
                Statement of Shareholders’ Equity****($
                in thousands)****(unaudited)****Common
                Shares Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **Accumulated
                Deficit**
            **Total****Balance
                as of January 1, 2005 (as restated - see Note 13)**
            49,849,386
            $498
            $625,123
            $(474)
            $(38,074)
            $587,073Issuance
                of common stock
            53,115
            1
            751
            —
            —
            752Compensation
                expense
            —
            —
            1,592
            —
            —
            1,592Share-based
                compensation tax benefit
            —
            —
            21
            —
            —
            21Cumulative
                effect of change in
              accounting
                principle
            —
            —
            (31)
            —
            —
            (31)Dividends
                declared ($0.55 per share)
            —
            —
            —
            —
            (27,883)
            (27,883)**Comprehensive
                income:**
              Net
                income (as restated - see Note 13)
            —
            —
            —
            —
            60,997Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            (199)
            —Reclassification
                adjustment
            —
            —
            —
            343
            —Tax
                effect
            —
            —
            —
            (6)
            —**Total
                comprehensive income (as restated**
              **-
                see Note 13)**
            —
            —
            —
            138
            60,997
            61,135**Balance
                as of June 30, 2005 (as restated**
              **-
                see Note 13)**
            49,902,501
            $499
            $627,456
            $(336)
            $(4,960)
            $622,659




**Common
                Shares Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **Retained**
              **Earnings**
            **Total****Balance
                at January 1, 2004 (as restated**
              **-
                see Note 13)**
            28,661,757
            $287
            $264,030
            $(832)
            $50,245
            $313,730Issuance
                of common stock
            68,943
            —
            1,110
            —
            —
            1,110Compensation
                expense
            —
            —
            1,281
            —
            —
            1,281**Comprehensive
                income:**
              Net
                income (as restated - see Note 13)
            —
            —
            —
            —
            54,627Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            267
            —Reclassification
                adjustment
            —
            —
            —
            548
            —Tax
                effect
            —
            —
            —
            (274)
            —**Total
                comprehensive income (as restated - see Note 13)**
            —
            —
            —
            541
            54,627
            55,168**Balance
                at June 30, 2004 (as restated**
              **-
                see Note 13)**
            28,730,700
            $287
            $266,421
            $(291)
            $104,872
            $371,289







The
      accompanying notes are an integral part of these consolidated financial
      statements.




3


**Saxon
                Capital, Inc.****Consolidated
                Statements of Cash Flows****($
                in thousands)****(unaudited)****Six
                Months Ended June 30,****Operating
                Activities:**
            **2005
                (as restated -**
              **see
                Note 13)**
            **2004
                (as restated -**
              **see
                Note 13)**Net
                income
            $60,997
            $54,627Adjustments
                to reconcile net income to net cash
              provided
                by operating activities:Depreciation
                and amortization
            34,401
            8,655Deferred
                income tax (benefit) provision
            (15,008)
            246Impairment
                of assets
            3,119
            7,100Gain
                from sale of assets
            (2,407)
            (2,859)Non
                cash derivative losses (gains)
            4,216
            (11,477)Provision
                for mortgage loan losses
            11,736
            11,229Provision
                for past due interest
            6,663
            7,325Compensation
                expense for share-based compensation plans
            1,592
            1,281Cumulative
                effect of change in accounting principle
            (31)
            —(Increase)
                decrease in servicing related advances
            (23,939)
            19,939Decrease
                (increase) in accrued interest receivable
            285
            (3,811)Decrease
                in accrued interest payable
            (1,136)
            (178)Increase
                in trustee receivable
            (23,362)
            (16,128)(Purchases
                of) proceeds from derivative instruments
            (4,271)
            976Increase
                in income tax receivable
            29,729
            11,369Net
                change in miscellaneous assets and liabilities
            (9,070)
            (19,839)Net
                cash provided by operating activities
            73,514
            68,455**Investing
                Activities:**Purchase
                and origination of mortgage loans
            (1,611,029)
            (1,750,620)Principal
                payments received on mortgage loan portfolio
            1,181,764
            965,483Proceeds
                from the sale of mortgage loans
            216,396
            150,690Proceeds
                from the sale of real estate owned
            29,074
            28,783Increase
                in restricted cash
            (203,316)
            (11,086)Principal
                payments received on mortgage bonds
            —
            3,584Acquisition
                of mortgage servicing rights
            (51,998)
            (14,826)Capital
                expenditures
            (5,888)
            (4,146)Net
                cash used in investing activities
            (444,997)
            (632,138)**Financing
                Activities:**Proceeds
                from issuance of securitization financing - bonds
            1,979,971
            1,115,475Proceeds
                from issuance of securitization financing - certificates
            40,824
            —Debt
                issuance costs
            (6,340)
            (3,412)Principal
                payments on securitization financing - bonds
            (1,231,030)
            (993,314)Principal
                payments on securitization financing - certificates
            (18,264)
            (5,239)(Repayment
                of) proceeds from warehouse financing, net
            (339,541)
            451,138Proceeds
                received from issuance of stock
            752
            1,110Payment
                of dividends
            (56,791)
            —Net
                cash provided by financing activities
            369,581
            565,758Net
                (decrease) increase in cash
            (1,902)
            2,075Cash
                at beginning of period
            12,852
            5,245Cash
                at end of period
            $10,950
            $7,320**Supplemental
                Cash Flow Information:**Cash
                paid for interest
            $(119,443)
            $(82,245)Cash
                received (paid) for income taxes
            $15,118
            $(15,706)**Non-Cash
                Financing Activities:**Transfer
                of mortgage loans to real estate owned
            $40,517
            $44,748


The
      accompanying notes are an integral part of these consolidated financial
      statements.


4


**Notes
      to Unaudited Consolidated Financial Statements**





**(1)**  **Organization
      and Summary of Significant Accounting Policies**




**(a)**  **The
      Company and Principles of Consolidation**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
      Regulation S-X for interim financial statements. Accordingly, they do not
      include all of the information and footnotes required by accounting principles
      generally accepted in the United States of America, or GAAP, for complete
      financial statements.





In
      the
      opinion of management, the accompanying unaudited consolidated financial
      statements contain all adjustments, consisting of normal recurring accruals,
      necessary for a fair presentation. The results of operations and other data
      for
      the three and six months ended June 30, 2005 are not necessarily indicative
      of
      the results that may be expected for any other interim periods or the entire
      year ending December 31, 2005. Certain information and footnote disclosures
      normally included in the audited consolidated financial statements prepared
      in
      accordance with GAAP have been omitted. Use of the term “Company”
throughout these Notes to Unaudited Consolidated Financial Statements shall
      be
      deemed to refer to or include the applicable subsidiaries of the Company.  The
      unaudited consolidated financial statements of the Company include the accounts
      of all wholly owned subsidiaries. All inter-company balances and transactions
      have been eliminated in consolidation.





Saxon
      Capital, Inc., a Delaware corporation (“Old Saxon”) was formed on April 23, 2001
      and acquired all of the issued and outstanding capital stock of SCI Services,
      Inc. from Dominion Capital, Inc., a wholly owned subsidiary of Dominion
      Resources, Inc., on July 6, 2001. Saxon Capital, Inc., a Maryland corporation
      (formerly known as Saxon REIT, Inc.) (“New Saxon,” and together with Old Saxon,
      referred to herein as “Saxon” or the “Company”) (NYSE: SAX), was formed on
      February 5, 2004 for the purpose of effecting Old Saxon’s conversion to a real
      estate investment trust, or REIT. The REIT conversion was completed on September
      24, 2004.





**(b)**  **Use
      of Estimates**




The
      preparation of financial statements in conformity with GAAP requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amount of revenues and expenses during
      the reporting period. Actual results could differ from those estimates. The
      recorded balances most affected by the use of estimates are amortization of
      yield adjustments to net interest income,
      the allowance for loan loss, valuation of servicing rights, deferral of certain
      direct loan origination costs, and income taxes.


5




The
      Company recorded a change in accounting estimate during the second quarter
      of
      2005 for a $1.4 million reduction of expense relating to a change in estimate
      in
      accounting for its deferral of certain direct loan origination costs. This
      change in estimate increased net income by $1.4 million and increased basic
      and
      diluted earnings per share by $0.03.




**(c)**  **Early
      Adoption of SFAS 123(R)**




The
      Company adopted SFAS 123(R) *Share
      Based Payment* on April
      1, 2005 to account for its two share-based compensation plans, namely its Stock
      Incentive Plan and its Employee Stock Purchase Plan. The effect of this change
      from applying the original provisions of SFAS 123 had an immaterial effect
      on
      income before income taxes, net income, and earnings per share, as described
      in
      further detail in Note 10. The effect of this change from applying the original
      provisions of SFAS 123 had no effect on cash flow from operations and financing
      activities. The Company recorded a cumulative effect of change in accounting
      principle in the amount of $31.0 thousand as of April 1, 2005 to reflect the
      change in accounting for forfeitures. Pro forma calculations for prior periods
      for the cumulative effect of change in accounting principle are not required
      as
      the change in accounting for forfeitures related to restricted stock units
      granted during the first quarter of 2005.




In
        periods prior to April 1, 2005, the Company had elected to follow the intrinsic
        value method in accounting for stock options issued to employees and
        non-employee directors. The following table illustrates the effect on net
        income
        and earnings per share if the Company had applied the fair value method using
        the Black-Scholes option-pricing model to options and restricted stock units
        granted during the six months ended June 30, 2005 and the three and six months
        ended June 30, 2004. As
        shown
        in the table, there
        would have been no effect on net income and earnings per share if the Company
        had applied the fair value method using the Black-Scholes option pricing
        model
        during the six months ended June 30, 2005. This is because all outstanding
        options were vested upon the Company’s conversion to REIT status in 2004, and
        restricted stock unit awards are accounted for similarly under either method.


**Three
                    Months Ended**
                  **June
                    30,**
                **Six
                    Months Ended**
                  **June
                    30,****2004**
                **2005**
                **2004**($
                    in thousands, except per share data)Net
                    income
                $35,697
                $60,997
                $54,627Add:
                    stock-based compensation expense included in net income, net
                    of related
                    tax effects
                -
                694
                -Deduct:
                    total share-based compensation expense determined under fair
                    value based
                    method for all awards, net of related tax effects
                (638)
                (694)
                (1,276)Pro
                    forma net income
                $35,059
                $60,997
                $53,351Earnings
                    per share:Basic
                $1.24
                $1.22
                $1.90Basic
                    - pro forma
                $1.22
                $1.22
                $1.86Diluted
                $1.15
                $1.20
                $1.75Diluted
                    - pro forma
                $1.13
                $1.20
                $1.71









6


**(d)**  **Reclassifications**




Certain
      items in the prior year consolidated balance sheet have been reclassified to
      conform to the current year presentation. These reclassifications had no effect
      on reported total assets. The Company has changed the format of its 2005
      consolidated balance sheet presentation to report the component of allowance
      for
      loan losses related to past due interest with accrued interest receivable.
      The
      Company also changed the format of its 2005 consolidated balance sheet
      presentation to report the portion of its real estate owned valuation allowance
      that is related to past due interest with accrued interest receivable. The
      consolidated balance sheet for 2004 has been reclassified to conform to these
      formats. A reclassification of $12.4 million in allowance for mortgage loan
      losses to accrued interest receivable and a reclassification of $5.9 million
      in
      real estate owned to accrued interest receivable were made in the December
      31,
      2004 consolidated balance sheet to conform to the June 30, 2005
      presentation.




**(e)**  **Recently
      Issued Accounting Pronouncements**




In
      May
      2005, t he
      Financial Accounting Standards Board issued Statement No. 154, *Accounting
      Changes and Error Corrections,* which
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement replaces APB Opinion No. 20, *Accounting
      Changes,* and
      FASB
      Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements,* and
      applies to all voluntary changes in accounting principle as well as changes
      required by an accounting pronouncement in the rare instance that a new
      pronouncement does not include specific transition provisions. APB Opinion
      No.
      20 previously required that the cumulative effect of a voluntary change to
      a new
      accounting pronouncement be recognized in net income for the period of the
      change. FASB Statement No. 154 now requires retrospective application of a
      voluntary change in accounting principle to prior periods’ financial statements
      unless it is impracticable to determine either the period-specific effects
      or
      the cumulative effect of the change. Additionally, this Statement redefines
      the
      term “restatement” as the revising of previously issued financial statements to
      reflect the correction of an error. Reporting the correction of an error in
      previously issued financial statements and a change in accounting estimate
      is
      carried forward from the guidance provided in APB Opinion 20. FASB Statement
      No.
      154 is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. The adoption of FASB 154 is not
      expected to have a material impact on the Company’s financial position, results
      of operations, or cash flows.




**(2)**  **Subsequent
      Events**




During
      July 2005, the Company purchased $2.0 billion in third party servicing rights
      for approximately $13.3 million.




Effective
      July 14, 2005, the Company’s Senior Vice President and Corporate Strategies
      Director resigned from the Company. Effective July 15, 2005, the Company’s
      Executive Vice President, Capital Markets, separated from service from the
      Company. In connection with these departures, approximately $0.9 million in
      severance will be expensed
      and theCompany
      will incur approximately $1.0 million of expense in connection with the
      acceleration and vesting of restricted stock units during the third quarter
      of
      2005.




7




On
      July
      19, 2005, the Company declared a quarterly dividend of $0.55 per share of common
      stock payable on August 11, 2005 to shareholders of record as of the close
      of
      business on July 29, 2005.




**(3)**  **Earnings
      Per Share**




Basic
      earnings per share is based on the weighted average number of shares
      outstanding, excluding any dilutive effects of options, warrants, or restricted
      stock units. Diluted earnings per share is based on the weighted average number
      of shares, dilutive stock options, dilutive stock warrants, and dilutive
      restricted stock units outstanding during the year. Computations of earnings
      per
      share were as follows:




**Three
                Months Ended June 30,**
            **Six
                Months Ended June 30,****2005**
            **2004**
            **2005**
            **2004**(in
                thousands, except per share data)**Basic:**Net
                income
            $7,028
            $35,697
            $60,997
            $54,627Weighted
                average shares outstanding
            49,884
            28,703
            49,867
            28,687Earnings
                per share
            $0.14
            $1.24
            $1.22
            $1.90**Diluted:**Net
                income
            $7,028
            $35,697
            $60,997
            $54,627Weighted
                average shares outstanding
            49,884
            28,703
            49,867
            28,687Dilutive
                effect of stock options, warrants and restricted stock
                units
            964
            2,386
            786
            2,509Weighted
                average shares outstanding - diluted
            50,848
            31,089
            50,653
            31,196Earnings
                per share
            $0.14
            $1.15
            $1.20
            $1.75








**(4)**  **Mortgage
      Loan Portfolio**




Mortgage
      loans reflected on the Company’s consolidated balance sheets as of June 30, 2005
      and December 31, 2004 were comprised of the following:




**June
                  30,**
                **2005**
              **December
                  31,**
                **2004**($
                  in thousands)Securitized
                  mortgage loans - principal balance
              $5,691,043
              $5,123,071Unsecuritized
                  mortgage loans - principal balance
              370,274
              782,717Premiums,
                  net of discounts
              82,207
              75,562Deferred
                  origination costs, net of deferred fees
              12,201
              11,288Purchase
                  accounting fair value adjustments
              3,151
              4,738Total
              6,158,876
              5,997,376Less
                  allowance for losses
              (24,422)
              (24,892)Net
                  mortgage loan portfolio
              $6,134,454
              $5,972,484






8




During
      the three months ended June 30, 2005, the Company completed one securitization
      of mortgage loans, totaling $0.8 billion in principal balances and $9.4 million
      in unamortized basis adjustments.




From
      time
      to time, the Company’s subsidiaries may choose to sell certain mortgage loans
      rather than securitize them. The following chart summarizes the Company’s
      activity with respect to sold mortgage loans during the periods
      presented.





**Three
                Months Ended June 30,**
            **Six
                Months Ended June 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Performing
                mortgage loans sold:Non
                conforming first lien mortgages
            $-
            $936
            $98,786
            $70,209Conforming
                first lien mortgages (1)
            20,599
            -
            40,086
            -Second
                lien mortgages
            20,829
            36,575
            64,235
            52,271Delinquent
                mortgage loans (2)
            8,812
            -
            8,812
            24,465Total
                mortgage loans sold
            50,240
            37,511
            211,919
            146,945Plus
                (less) basis adjustments
            (482)
            1,207
            2,095
            917Less:
                cash received
            (50,439)
            (39,026)
            (216,396)
            (150,690)Gain
                on sale of mortgage loans (2)(3)
            $681
            $308
            $2,382
            $2,828


___________


(1)
            Loans
                that generally meet the underwriting guidelines of one of the
                government-sponsored entities such as Freddie Mac, Fannie Mae, and
                Ginnie
                Mae.


(2)
            Includes
                real estate owned, or REO, that was part of a delinquent loan
                sale.


(3)
            Total
                gain on sale of assets of $0.7 million, $2.4 million, and $2.9 million
                on
                the consolidated statements of operations for the three months ended
                June
                30, 2005 and for the six months ended June 30, 2005 and 2004,
                respectively, includes the gain recognized on sale of other
                assets.





**(5)**  **Allowance
      for Loan Losses and Past Due Interest**




The
      Company is exposed to risk of loss from its mortgage loan portfolio and
      establishes the allowance for loan losses and past due interest taking into
      account a variety of criteria including the contractual delinquency status,
      historical loss experience, and catastrophic environmental influences or natural
      disasters. The allowance for loan losses and past due interest is evaluated
      monthly and adjusted based on this evaluation.





Activity
      related to the allowance for loan losses and past due interest for the mortgage
      loan portfolio is as follows:





**June
                  30, 2005**
              **December
                  31, 2004**($
                  in thousands)Allowance
                  for loan losses
              $24,422
              $24,892Allowance
                  for past due interest (1)
              11,856
              12,418Total
                  allowance for loan losses and past due interest
              $36,278
              $37,310







9





**Three
                Months Ended June 30,**
            **Six
                Months Ended June 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Beginning
                balance
            $33,580
            $33,837
            $37,310
            $43,369Provision
                for loan losses
            9,428
            6,810
            11,736
            11,229Provision
                for past due interest (2)
            2,131
            2,474
            4,586
            1,873Charge-offs
            (8,861)
            (9,089)
            (17,354)
            (22,439)Ending
                balance
            $36,278
            $34,032
            $36,278
            $34,032


________________




(1)
            Provided for within accrued interest receivable on
              the consolidated balance sheets.(2)
            Recorded
                as a component within interest income on the consolidated statements
                of
                operations and represents the reversal of interest income on loans
                delinquent for 90 days or more.




**(6)**  **Mortgage
      Servicing Rights**





As
      of
      June 30, 2005, the aggregate fair value of the mortgage servicing rights (MSRs)
      was $182.6 million, compared to $155.1 million as of December 31, 2004. The
      Company recognized a permanent impairment during the first six months of 2005
      due to significant prepayment experience in certain underlying loans. The
      following table summarizes activity in mortgage servicing rights and its related
      valuation allowance for the three and six months ended June 30, 2005 and
      2004:







10


**Three
                Months Ended June 30,**
            **Six
                Months Ended June 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Beginning
                balance of MSRs, gross
            $118,045
            $42,511
            $106,619
            $41,942Purchased
            30,201
            11,002
            51,998
            14,826Amortization
            (11,333)
            (3,478)
            (20,521)
            (6,733)Charge-offs
            (1,791)
            -
            (2,974)
            -Ending
                balance of MSRs, gross
            135,122
            50,035
            135,122
            50,035Beginning
                balance of valuation allowance
            (7,945)
            (3,469)
            (7,624)
            (687)Recovery
                (impairment)
            72
            (1,868)
            (1,432)
            (4,650)Charge-offs
            1,791
            -
            2,974
            -Ending
                balance of valuation allowance
            (6,082)
            (5,337)
            (6,082)
            (5,337)MSRs,
                net
            $129,040
            $44,698
            $129,040
            $44,698




As
      of
      June 30, 2005, the following table summarizes the remaining estimated projected
      amortization expense for the carrying value of the mortgage servicing rights
      for
      each of the five succeeding years and thereafter:


**Years
                Ending**
              **December
                31,**($
                in thousands)July
                2005 through December 2005
            $24,3632006
            39,2322007
            24,5942008
            16,0932009
            10,547Thereafter
            20,293Total
            $135,122


11




**(7)**  **Warehouse
      and Securitization Financing**




A
      summary
      of the amounts outstanding under these agreements as of June 30, 2005 and
      December 31, 2004 is as follows:





**June
                30, 2005**
            **December
                31, 2004**($
                in thousands)**Debt
                Outstanding**Warehouse
                financing - loans and servicing advances
            $254,695
            $282,092Repurchase
                agreements - loans (1)
            5,437
            317,500Repurchase
                agreements - mortgage bonds (1) (2)
            973
            1,054Securitization
                financing - servicing advances
            140,548
            117,988Securitization
                financing - loans and real estate owned
            5,882,624
            5,125,572Securitization
                financing - net interest margin
            31
            14,784Total
            $6,284,308
            $5,858,990


___________________


(1)
            Repurchase
                agreements are included as part of warehouse financing on the consolidated
                balance sheets.


(2)
            Amount
                outstanding was borrowed against an uncommitted
                facility.





The
      following table summarizes the Company’s contractual obligations with respect to
      these facilities as of June 30, 2005:




**As
                of June 30, 2005**
            **Total**
            **Less
                than**
              **1
                year**
            **1-3
                years**
            **3-5
                years**
            **After**
              **5
                years**($
                in thousands)Warehouse
                financing - loans and servicing advances
            $254,695
            $254,695
            $—
            $—
            $—Repurchase
                agreements - loans (1)
            5,437
            5,437
            —
            —
            —Repurchase
                agreements - mortgage bonds (1)
            973
            973
            —
            —
            —Securitization
                financing - servicing advances (2)
            140,548
            48,272
            56,070
            13,203
            23,003Securitization
                financing - loans and real estate owned (3)
            5,882,624
            2,022,838
            2,344,277
            552,659
            962,850Securitization
                financing - net interest margin (3)
            31
            31
            —
            —
            —Total
                contractual cash obligations
            $6,284,308
            $2,332,246
            $2,400,347
            $565,862
            $985,853





________________


(1)
            Repurchase
                agreements are included as part of warehouse financing on the consolidated
                balance sheets.


(2)
            Amounts
                shown are estimated debt payments based on anticipated recovery of
                the
                underlying principal and interest servicing
                advances.


(3)
            Amounts
                shown are estimated debt payments based on anticipated receipt of
                principal and interest on underlying mortgage loan collateral using
                historical prepayment speeds.






12


A
                summary of interest expense and the weighted average cost of funds
                is as
                follows:


**Three
                  Months Ended June 30,**
              **Six
                  Months Ended June 30,****2005**
              **2004**
              **2005**
              **2004**($
                  in thousands)**Interest
                  Expense**Warehouse
                  financing
              $1,015
              $927
              $2,181
              $1,210Repurchase
                  agreements
              2,350
              1,813
              4,099
              3,322Securitization
                  financing
              57,013
              30,082
              108,094
              58,294Note
                  payable
              —
              497
              —
              995Other
              1,109
              909
              2,104
              1,701Total
              $61,487
              $34,228
              $116,478
              $65,522**Weighted
                  Average Cost of Funds**Warehouse
                  financing
              2.11%
              1.85%
              2.40%
              1.78%Repurchase
                  agreements
              3.74%
              1.86%
              3.52%
              1.83%Securitization
                  financing
              4.01%
              2.63%
              3.79%
              2.56%Note
                  payable
              —
              8.00%
              —
              8.00%Total
              4.02%
              2.63%
              3.80%
              2.58%






Under
      its
      borrowing agreements, the Company is subject to certain debt covenants and
      is
      required to maintain or satisfy specified financial ratios and tests, as well
      as
      other customary covenants, representations and warranties. In the event of
      default, the Company may be prohibited from paying dividends and making
      distributions under certain of its financing facilities without the prior
      approval of its lenders. As of June 30, 2005, the Company was in compliance
      with
      all covenants under the respective borrowing agreements.





**(8)**  **Derivatives**





The
      Company may use a variety of financial instruments to manage the exposure to
      changes in interest rates. The Company may enter into interest rate swap
      agreements, interest rate cap agreements, interest rate floor agreements,
      financial forwards, financial futures, and options on financial instruments
      (collectively referred to as “Interest Rate Agreements”) to manage the
      sensitivity to changes in market interest rates. The Interest Rate Agreements
      used have an active secondary market, and none are obtained for speculation.
      The
      Company accounts for all of its derivative financial instruments as undesignated
      derivative instruments. The maximum term over which the Company is currently
      managing its exposure for forecasted transactions is 51 months. The Company
      has
      classified cash activity associated with derivatives as an operating activity
      in
      the consolidated statements of cash flows. Derivative (losses) gains totaled
      $(15.1) million and $23.2 million for the three months ended June 30, 2005
      and
      2004, respectively, and $6.2 million and $10.8 million for the six months ended
      June 30, 2005 and 2004, respectively. The components of these derivative
      (losses) gains consist of the following:




**Three
                Months**
              **Ended
                June 30,**
            **Six
                Months**
              **Ended
                June 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Non
                cash fair value (loss) gain
            $(13,288)
            $21,643
            $(4,216)
            $11,477Cash
                settlements, net
            (1,718)
            1,809
            10,618
            (425)Broker
                commissions
            (97)
            (234)
            (291)
            (293)Interest
                on margin
            19
            2
            39
            4Total
            $(15,084)
            $23,220
            $6,150
            $10,763







13


**(9)**  **Commitments
      and Contingencies**




*Mortgage
      Loans*




As
      of
      June 30, 2005 and December 31, 2004, the Company’s subsidiaries had commitments
      to fund mortgage loans with agreed-upon rates of approximately $197.4 million
      and $240.3 million, respectively. These amounts do not necessarily represent
      future cash requirements, as some portion of the commitments are likely to
      expire without being drawn upon or may be subsequently declined for credit
      or
      other reasons.





In
      connection with the approximately $484.5 million of mortgage loans securitized
      in off-balance sheet transactions from May 1996 to July 5, 2001 which are still
      outstanding as of June 30, 2005, and in connection with the sales of mortgage
      loans to nonaffiliated parties, the Company’s subsidiaries made representations
      and warranties about certain characteristics of the loans, the borrowers, and
      the underlying properties. In the event of a breach of these representations
      and
      warranties, those subsidiaries may be required to remove loans from a
      securitization and replace them with cash or substitute loans, and to indemnify
      parties for any losses related to such breach. As of June 30, 2005 those
      subsidiaries neither had nor expect to incur any material obligation to remove
      any such loans, or to provide any such indemnification.





*Mortgage
      Servicing Rights*





The
      Company is committed to purchase third party servicing rights for an additional
      $5.2 billion of mortgage loans during the third quarter of 2005, of which $2.0
      billion have been purchased during July 2005 for approximately $13.3 million.





*Legal
      Matters*




Because
      the business of the Company’s subsidiaries involves the collection of numerous
      accounts as well as the validity of liens and compliance with various state
      and


federal
      lending laws, the Company and its subsidiaries are subject to various legal
      proceedings in the normal course of business. In management’s opinion, the
      resolution of these lawsuits will not have a material adverse effect on the
      financial position or the results of operations of the Company.





Margarita
      Barbosa, et al. v. Saxon Mortgage Services, Inc. (f/k/a Meritech Mortgage
      Services, Inc.) et al . The
      plaintiffs alleged that Saxon Mortgage Services collected prepayment penalties
      on loans that had been accelerated, constituting violations of the Illinois
      Interest Act, the Illinois Consumer Fraud Act, similar laws, if any, in other
      states, and a breach of contract. The claims of one of the named plaintiffs
      have
      been settled, and the claims of the remaining named plaintiff against Saxon
      Mortgage Services have been dismissed without prejudice. The remaining named
      plaintiff re-filed the action in State Court. On the Company’s motion, the
      action was removed to Federal Court. The parties agreed to a settlement that
      would require the Company to pay approximately $0.2 million to a group of 27
      former Illinois borrowers and their attorneys in exchange for a dismissal.
      The
      Court entered an order approving the settlement. Each of the 27 former borrowers
      may choose to opt out of the settlement and may pursue individual actions
      against us. The settlement would not preclude former borrowers in other states
      from bringing similar claims, or attempting to assert similar claims as a class
      action.




Bauer,
      et al., v. Dean Morris, L.L.P., et al., and Patterson,
      et al., v. Dean Morris, et al., are
      successor matters to Bauer, et al., v. Saxon Mortgage Services, Inc., et al.
      On
      January 26, 2005, the plaintiffs in Bauer, et al., v. Saxon Mortgage Services,
      Inc., et al. filed a motion to dismiss the case without prejudice, and the
      court
      entered an order dismissing the case on January 31, 2005. On February 17, 2005,
      the plaintiffs re-filed the case as two separate class action lawsuits, Bauer,
      et al., vs. Dean Morris, et al., filed as Case No. 05-2173 in the Civil District
      Court for the Parish of Orleans, State of Louisiana, and Patterson el al.,
      v.
      Dean Morris, et al., filed as Case No. 05-2174 in the Civil District Court
      for
      the Parish of Orleans, State of Louisiana. There were no material developments
      in this legal proceeding during the quarter ended June 30, 2005. At this time,
      the Company cannot predict the outcome of this matter and cannot reasonably
      estimate a range of possible loss given the current status of the litigation;
      accordingly, no amounts have been accrued in the Company’s accompanying
      consolidated financial statements.





14


The
      Company is also subject to other immaterial legal proceedings arising in the
      normal course of business. In the opinion of management, the resolution of
      these
      other immaterial proceedings is not expected to have a material adverse effect
      on the Company’s financial position or results of operations.





**(10)**  **Stock
      Compensation Plans**




*Stock
      Incentive Plan* -
      Pursuant to the merger agreement in connection with the REIT conversion, the
      Company assumed the Saxon Capital, Inc. 2001 Stock Incentive Plan (the “Stock
      Incentive Plan”), which provides for the issuance of restricted common stock,
      stock appreciation rights, dividend equivalent rights, stock options, or unit
      awards based on the value of the Company’s common stock to eligible employees
      and other eligible participants. The maximum number of shares or other awards
      authorized for issuance under the Stock Incentive Plan is reset as of January
      1
      of each year at the greater of (i) 2,998,556 shares; (ii) 10.69% of the total
      number of then outstanding shares of common stock of the Company as of January
      1
      of each year; or (iii) the maximum number that has been previously awarded
      or
      granted under the Stock Incentive Plan, provided that the total number of shares
      authorized to be issued under the Stock Incentive Plan may not exceed 6,000,000
      shares. The Compensation Committee of the Board of Directors administers the
      Stock Incentive Plan, and has full authority to select the recipients of awards,
      to decide when awards are to be made, to determine the type and number of
      awards, and to establish the vesting requirements as well as other features
      and
      conditions of each award.





All
      options granted under the Company’s Stock Incentive Plan were expensed as a
      result of the Company’s conversion to a REIT in the third quarter of 2004, and
      the Company has not granted any additional options in 2005. Accordingly, no
      additional expense was recorded for these options as a result of the adoption
      of
      SFAS 123(R).




The
      following table summarizes the transactions relating to the Company’s stock
      options for the six months ended June 30, 2005:





**Number
                of**
              **Options**
            **Weighted
                Average**
              **Exercise
                Price**Options
                outstanding, December 31, 2004 (includes 11,000 options with a remaining
                contractual life of 6.8 years currently exercisable under the Stock
                Incentive Plan)
            11,000
            $10.10Options
                granted
            —
            $—Options
                exercised
            (5,000)
            $10.10Options
                cancelled
            —
            $—Options
                outstanding, June 30, 2005 (includes 6,000 options with a remaining
                contractual life of 6.3 years currently exercisable under the Stock
                Incentive Plan)
            6,000
            $10.10





Cash
      received from option exercise under all share-based payment arrangements for
      the
      six months ended June 30, 2005 and 2004, was $50.5 thousand and $100.4 thousand,
      respectively. The actual tax benefit realized for the tax deductions from option
      exercise of the share-based payment arrangements totaled $1.3 thousand and
      $60.4
      thousand, respectively for the six months ended June 30, 2005 and 2004. The
      total intrinsic value of options exercised during the six months ended 2005
      and
      2004 was $34.7 thousand and $158.8 thousand, respectively.





*Restricted
      Stock Units -* In
      the
      first quarter of 2005, the Company granted an aggregate of 789,500 restricted
      stock units to some of the Company’s employees, including each executive
      officer. The restricted stock units vest on the fifth anniversary of the date
      of
      grant. In addition, the Company granted an aggregate of 80,000 restricted stock
      units to its four non-employee directors. The restricted stock units related
      to
      the non-employee directors vest in four equal annual installments on each of
      the
      four anniversaries of the date of grant. The grantees of the restricted stock
      units are entitled to receive all dividends and other distributions paid with
      respect to the common shares of the Company underlying such restricted stock
      units at the time such dividends or distributions are paid to holders of common
      shares.




The
      Company recognizes compensation expense for restricted stock units issued over
      the vesting period for an amount equal to the fair value of the restricted
      stock
      units at grant date. Fair value is determined by the price of the stock on
      the
      grant date. The
      Company incurred $1.6 million of expense related to amortization of these
      restricted stock units and their related dividend equivalent rights during
      the
      first six months of




15


2005.
      As
      of June 30, 2005, there was $15.5 million of total unrecognized compensation
      cost related to nonvested restricted stock units granted under the Plan. That
      cost is expected to be recognized over a weighted-average period of 4.4
      years.




The
      Company recorded $0.1 million in reduction of expense during the second quarter
      of 2005 related to a change in the accounting for forfeitures following the
      Company’s adoption of SFAS 123(R).




A
      summary
      of the status of the Company’s nonvested restricted stock units as of June 30,
      2005, and changes during the six months ended June 30, 2005, is presented
      below:




**Number
                of Restricted Stock Units**
            **Weighted
                Average Grant-Date Fair Value**Nonvested
                at January 1, 2005
            —
            $—Granted
            869,500
            $21.50Vested
            —
            $—Forfeited
            (12,500)
            $21.50Nonvested
                at June 30, 2005
            857,000
            $21.50







*Employee
      Stock Purchase Plan* - The
      Company’s Employee Stock Purchase Plan authorizes the issuance of up to a total
      of 1,000,000 shares of common stock to participating employees. The 1,000,000
      share aggregate limitation will be adjusted proportionately for any increase
      or
      decrease in the number of outstanding shares of the stock. Under the terms
      of
      the Employee Stock Purchase Plan, eligible employees may have up to 15% of
      eligible compensation deducted from their pay during each offering period to
      purchase common stock. Purchases are made on the last trading day of the
      offering period. The per share purchase price is 85% of the last transaction
      price per share of our common stock on the last trading day of the offering
      period.





The
      C ompany
      began recognizing compensation expense for its Employee Stock Purchase Plan
      with
      the adoption of SFAS 123(R) for an amount equal to the difference between the
      fair value and the sales price of the shares on the date of purchase, as a
      result of which the Company incurred $47.3 thousand of expense during the second
      quarter 2005.





Activity
      related to the Company’s Employee Stock Purchase Plan for the periods presented
      is as follows:





**Shares
                Issued**
            **Issuance
                Price**
            **Proceeds**(amounts
                in thousands, except issuance price)**For
                the Six Months Ended June 30, 2005:**March
                31, 2005
            29.7
            $14.62
            $433.5June
                30, 2005
            18.5
            $14.51
            $267.9







16


**(11)**  **Retail
      Branches**




In
      an
      effort to improve productivity levels and increase efficiency in its retail
      operations, the Company has implemented strategic initiatives that have resulted
      in the closing and/or divestiture of several of its retail branches in various
      locations.





During
      the second quarter of 2005, the Company closed retail branches in the following
      locations: Colorado; Pennsylvania; Louisiana; Nevada; Florida; and Georgia.
      The
      closing of these retail branches is expected to reduce the fixed cost structure
      of the Company’s branch network. During the three months ended June 30, 2005,
      the Company recognized $0.1 million, $0.1 million, and $0.1 million of expenses
      for termination benefits, contract termination costs, and other associated
      costs, respectively and does not expect to incur any additional expenses related
      to these branch closings during the remainder of 2005. These costs are included
      in the consolidated
      statements of operations under
      payroll and related expenses for termination benefits, and under general and
      administrative expenses for contract termination and other associated costs,
      and
      are included in the Company’s mortgage loan production segment.





Also,
      during the second quarter of 2005, the Company’s subsidiary, America’s
      MoneyLine, entered into an agreement to divest a portion of its retail branches
      to Bravo Credit Corporation, a wholly owned subsidiary of ECC Capital, Inc.
      Under this agreement, Bravo Credit Corporation acquired five branches from
      America’s MoneyLine, located in Connecticut, Maryland, North Carolina, New
      Jersey, and Texas, and offered employment to all America’s MoneyLine employees
      at those five retail branches as well as the Florida branch. Because Bravo
      Credit Corporation assumed all lease and associated costs of the five divested
      branches, the Company did not incur any material contract termination or other
      associated costs with respect to its divestiture of these branches. Because
      of
      the offer of employment to all employees at the five divested America’s
      MoneyLine branches as well as the Florida branch, the Company also did not
      incur
      any material severance costs with respect to these six branches. The Company
      recorded a gain relating to the sale of these branches of $25.8 thousand during
      the second quarter of 2005.





**(12)**  **Segments**




The
      operating segments reported below are the segments of the Company for which
      separate financial information is available and for which amounts are evaluated
      regularly by management in deciding how to allocate resources and in assessing
      performance. The Company’s segment information for the three and six months
      ended June 30, 2004 has been restated to reflect a change in the composition
      of
      its reportable segments.





The
      portfolio segment uses the Company’s equity capital and borrowed funds to invest
      in its mortgage loan portfolio, thereby producing net interest income. The
      mortgage loan production segment purchases and originates non-conforming
      residential mortgage loans through relationships with various mortgage
      companies, mortgage brokers, and correspondent lenders, and directly to
      borrowers through its nine branch


17


offices.
      The mortgage loan production segment also records interest income, interest
      expense, and provision for mortgage loan losses on the mortgage loans it holds
      prior to selling its loans to the portfolio segment. This segment also collects
      revenues, such as origination and underwriting fees and other certain
      nonrefundable fees, which are deferred and recognized over the life of the
      loan
      as an adjustment to interest income recorded in the portfolio segment. The
      servicing segment services loans, seeking to ensure that loans are repaid in
      accordance with their terms.







**Three
                Months Ended June 30, 2005****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $93,154
            $10,592
            $1
            $7,330
            $111,077Interest
                expense
            (57,013)
            (4,474)
            —
            —
            (61,487)Net
                intercompany interest
            (572)
            753
            (181)
            —
            —Net
                interest income
            35,569
            6,871
            (180)
            7,330
            49,590Provision
                for mortgage loan losses
            (9,914)
            486
            —
            —
            (9,428)Net
                interest income after
              provision
                for mortgage loan losses
            25,655
            7,357
            (180)
            7,330
            40,162Servicing
                income, net of amortization
              and
                impairment
            —
            688
            23,565
            (7,029)
            17,224Derivative
                losses
            (15,084)
            —
            —
            —
            (15,084)Gain
                (loss) on sale of mortgage assets
            (358)
            20,633
            (4,200)
            (15,369)
            706Total
                net revenues and gains
            10,213
            28,678
            19,185
            (15,068)
            43,008Payroll,
                general and administrative,
              and
                other expenses
            17,556
            16,580
            11,004
            (13,409)
            31,731Depreciation
            —
            879
            457
            —
            1,336Total
                operating expenses
            17,556
            17,459
            11,461
            (13,409)
            33,067Income
                (loss) before taxes
            (7,343)
            11,219
            7,724
            (1,659)
            9,941Income
                tax expense (benefit)
            24
            4,335
            2,940
            (4,355)
            2,944**Income
                (loss) before cumulative effect of change in accounting
                principle**
            (7,367)
            6,884
            4,784
            2,696
            6,997Cumulative
                effect of change in
              accounting
                principle
            31
            —
            —
            —
            31**Net
                income (loss)**
            $(7,336)
            $6,884
            $4,784
            $2,696
            $7,028









18


**Three
                Months Ended June 30, 2004****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $75,910
            $21,800
            $8
            $5,277
            $102,995Interest
                expense
            (29,700)
            (3,648)
            (880)
            —
            (34,228)Net
                intercompany interest
            (1,308)
            164
            1,144
            —
            ——


Net
                interest income
            44,902
            18,316
            272
            5,277
            68,767Provision
                for mortgage loan losses
            (4,094)
            (2,716)
            —
            —
            (6,810)Net
                interest income after
              provision
                for mortgage loan losses
            40,808
            15,600
            272
            5,277
            61,957Servicing
                income, net of amortization
              and
                impairment
            —
            757
            10,767
            (6,188)
            5,336Derivative
                gains
            23,220
            —
            —
            —
            23,220Gain
                on sale of mortgage assets
            —
            8,880
            —
            (8,572)
            308Total
                net revenues and gains
            64,028
            25,237
            11,039
            (9,483)
            90,821Payroll,
                general and administrative,
              and
                other expenses
            3,399
            27,200
            7,203
            (5,196)
            32,606Depreciation
            —
            980
            595
            —
            1,575Total
                operating expenses
            3,399
            28,180
            7,798
            (5,196)
            34,181Income
                (loss) before taxes
            60,629
            (2,943)
            3,241
            (4,287)
            56,640Income
                tax expense (benefit)
            21,220
            (1,131)
            1,246
            (392)
            20,943**Net
                income (loss)**
            $39,409
            $(1,812)
            $1,995
            $(3,895)
            $35,697







19


**Six
                Months Ended June 30, 2005****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $196,193
            $20,583
            $(22)
            $6,745
            $223,499Interest
                expense
            (108,094)
            (8,384)
            —
            —
            (116,478)Net
                intercompany interest
            (1,514)
            1,616
            (102)
            —
            —Net
                interest income
            86,585
            13,815
            (124)
            6,745
            107,021Provision
                for mortgage loan losses
            (11,289)
            (447)
            —
            —
            (11,736)Net
                interest income after
              provision
                for mortgage loan losses
            75,296
            13,368
            (124)
            6,745
            95,285Servicing
                income, net of amortization
              and
                impairment
            —
            1,514
            42,788
            (13,512)
            30,790Derivative
                gains
            6,150
            —
            —
            —
            6,150Gain
                (loss) on sale of mortgage assets
            (358)
            38,061
            (7,442)
            (27,854)
            2,407Total
                net revenues and gains
            81,088
            52,943
            35,222
            (34,621)
            134,632Payroll,
                general and administrative,
              and
                other expenses
            22,934
            39,430
            22,251
            (13,409)
            71,206Depreciation
            —
            1,936
            907
            —
            2,843Total
                operating expenses
            22,934
            41,366
            23,158
            (13,409)
            74,049Income
                before taxes
            58,154
            11,577
            12,064
            (21,212)
            60,583Income
                tax expense
            1,740
            4,477
            4,666
            (11,266)
            (383)**Income
                (loss) before cumulative effect of change in accounting
                principle**
            56,414
            7,100
            7,398
            (9,946)
            60,966Cumulative
                effect of change in
              accounting
                principle
            31
            —
            —
            —
            31**Net
                income**
            $56,445
            $7,100
            $7,398
            $(9,946)
            $60,997




**Six
                Months Ended June 30, 2004****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $151,443
            $38,580
            $11
            $10,349
            $200,383


Interest
                expense
            (57,513)
            (6,233)
            (1,776)
            —
            (65,522)Net
                intercompany interest
            (2,454)
            148
            2,306
            —
            —Net
                interest income
            91,476
            32,495
            541
            10,349
            134,861Provision
                for mortgage loan losses
            (9,549)
            (1,680)
            —
            —
            (11,229)Net
                interest income after
              provision
                for mortgage loan losses
            81,927
            30,815
            541
            10,349
            123,632Servicing
                income, net of amortization
              and
                impairment
            —
            1,391
            20,446
            (11,899)
            9,938Derivative
                gains
            10,763
            —
            —
            —
            10,763Gain
                on sale of mortgage assets
            —
            19,475
            31
            (16,647)
            2,859Total
                net revenues and gains
            92,690
            51,681
            21,018
            (18,197)
            147,192Payroll,
                general and administrative,
              and
                other expenses
            6,013
            51,883
            14,328
            (10,106)
            62,118Depreciation
            —
            1,886
            1,183
            —
            3,069Total
                operating expenses
            6,013
            53,769
            15,511
            (10,106)
            65,187Income
                (loss) before taxes
            86,677
            (2,088)
            5,507
            (8,091)
            82,005Income
                tax expense (benefit)
            30,337
            (798)
            2,105
            (4,266)
            27,378**Net
                income (loss)**
            $56,340
            $(1,290)
            $3,402
            $(3,825)
            $54,627





20


Management
        evaluates assets only for the servicing and portfolio segments. Assets not
        identifiable to an individual segment are corporate assets, which are comprised
        of cash and other assets.




**June
                30, 2005**
            **December
                31, 2004****Segment
                Assets:**Portfolio
            $6,545,675
            $6,157,895Servicing
            262,827
            208,843Total
                segment assets
            6,808,502
            6,366,738Corporate
                assets
            126,204
            141,791Total
                assets
            $6,934,706
            $6,508,529





**(13)**  **Restatement**




Subsequent
      to the issuance of the Company's June 30, 2005 unaudited consolidated financial
      statements, the Company determined that it needed to restate prior financial
      results to correct the way it has historically accounted for
      derivatives. ******





On
      December 5, 2005, the staff of the SEC expressed their views regarding the
      appropriate application of hedge accounting. The Company subsequently
      re-evaluated its application of hedge accounting and determined that it was
      inappropriately applying hedge accounting to its derivatives. Prior to this
      re-evaluation, the Company had believed that its accounting was consistent
      with
      GAAP.





Previously,
      changes in the fair value of cash flow hedges were recorded in other
      comprehensive income, net of income taxes, and the change in the fair value
      of
      previous fair value hedges were recorded as basis adjustments on mortgage loans
      which were amortized
      into earnings through interest income as a yield adjustment of the previously
      hedged loans. The Company now accounts for all of its derivative financial
      instruments as undesignated derivative instruments with all changes in the
      fair
      value of the derivatives recorded in the consolidated statements of operations.





The
      Company's designation of its derivative instruments as cash flow hedges for
      the
      period October 1, 2002 to September 30, 2005 did not meet the requirements
      of
      SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      with
      regard to documentation and effectiveness testing. Additionally, the Company's
      designation of its derivative instruments as fair value hedges for the period
      July 6, 2001 to September 30, 2002 did not meet the requirements of SFAS No.
      133
      with regard to hedging similar assets. As a result, the accompanying
      consolidated financial statements as of June 30, 2005 and for the three and
      six
      months ended June 30, 2005 and 2004 have been restated from the amounts
      previously reported to account for the derivative instruments as undesignated
      derivatives with all changes in the fair value of the derivative instruments
      recognized in the consolidated statements of operations.





In
      addition, the Company restated certain amounts previously recorded in interest
      income to provision for loan loss and servicing income for the three and six
      months ended June 30, 2005 and 2004.







21


The
      following tables summarize the significant effects of the restatement.


**Three
                  Months Ended**
                **June
                  30,**
              **Six
                  Months Ended**
                **June
                  30,****2005****As
                  Previously Reported**
              **As**
                **Restated**
              **As
                  Previously Reported**
              **As**
                **Restated****Statement
                  of Operations:**
              (in
                  thousands, except per share amounts)Interest
                  income
              $111,638
              $111,077
              $225,701
              $223,499Interest
                  expense
              (61,568)
              (61,487)
              (116,740)
              (116,478)Net
                  interest income
              50,070
              49,590
              108,961
              107,021Provision
                  for mortgage loan losses
              (13,483)
              (9,428)
              (19,182)
              (11,736)Net
                  interest income after provision for mortgage loan
                  losses
              36,587
              40,162
              89,779
              95,285Servicing
                  income, net of amortization and impairment
              17,223
              17,224
              30,789
              30,790Derivative
                  (losses) gains
              —
              (15,084)
              —
              6,150Total
                  net revenues and gains
              54,516
              43,008
              122,975
              134,632Other
                  (income) expense
              (117)
              137
              1,294
              1,841Total
                  expenses
              32,813
              33,067
              73,502
              74,049Income
                  before taxes
              21,703
              9,941
              49,473
              60,583Income
                  tax expense (benefit)
              2,336
              2,944
              (1,629)
              (383)Income
                  before cumulative effect of change in accounting
                  principle (SFAS 123R)
              19,367
              6,997
              51,102
              60,966Net
                  income
              19,398
              7,028
              51,133
              60,997Earnings
                  per share - basic
              $0.39
              $0.14
              $1.03
              $1.22Earnings
                  per share - diluted
              $0.38
              $0.14
              $1.01
              $1.20**Balance
                  Sheet:****Balance
                  as of June 30, 2005:**Mortgage
                  loan portfolio
              
              
              $6,184,625
              $6,158,876Servicing
                  related advances
              
              
              136,974
              133,787Derivative
                  assets
              
              
              17,279
              18,222Deferred
                  tax asset
              
              
              43,234
              42,514Other
                  assets
              
              
              55,159
              54,518Total
                  assets
              
              
              6,960,873
              6,934,706Derivative
                  liabilities
              
              
              2,793
              3,234Total
                  liabilities
              
              
              6,311,606
              6,312,047Total
                  liabilities and shareholders’ equity
              
              
              6,960,873
              6,934,706**Statement
                  of Shareholders’ Equity:****Balance
                  as of January 1, 2005:**Accumulated
                  other comprehensive loss
              
              
              $(3,842)
              $(474)Accumulated
                  deficit
              
              
              (2,850)
              (38,074)Total
              
              
              618,929
              587,073**Comprehensive
                  income:**Net
                  income
              
              
              $51,133
              $60,997Cash
                  flow hedging instruments - change in unrealized
                  gain
              
              
              6,459
              —Cash
                  flow hedging instruments - reclassification
                  adjustment
              
              
              (999)
              —Cash
                  flow hedging instruments - tax effect
              
              
              (845)
              —Total
                  comprehensive income
              
              
              55,886
              61,135**Balance
                  as of June 30, 2005:**Accumulated
                  other comprehensive income (loss)
              
              
              $911
              $(336)Retained
                  earnings (accumulated deficit)
              
              
              20,401
              (4,960)Total
              
              
              649,267
              622,659**Statement
                  of Cash Flows:****Operating
                  Activities:**Net
                  income
              
              
              $51,133
              $60,997Depreciation
                  and amortization
              
              
              45,156
              35,993Deferred
                  income tax benefit
              
              
              (15,409)
              (15,008)Impairment
                  of assets
              
              
              2,371
              3,119Non
                  cash derivative losses
              
              
              —
              4,216Provision
                  for mortgage loan losses
              
              
              19,182
              11,736(Recovery
                  of) provision for past due interest
              
              
              (2,112)
              6,663Increase
                  in servicing related advances
              
              
              (23,845)
              (23,939)Purchases
                  of derivative instruments
              
              
              —
              (4,271)Net
                  change in miscellaneous assets and liabilities
              
              
              23,623
              (9,070)Net
                  cash provided by operating activities
              
              
              73,448
              73,514**Investing
                  Activities:**Principal
                  payments received on mortgage loan portfolio
              
              
              $1,180,453
              $1,181,764Net
                  cash used in investing activities
              
              
              (446,308)
              (444,997)**Financing
                  Activities:**Debt
                  issuance costs
              
              
              $(6,729)
              $(6,340)Proceeds
                  from derivative instruments
              
              
              1,766
              —Net
                  cash provided by financing activities
              
              
              370,958
              369,581 22


**Three
                    Months Ended June 30,**
                **Six
                    Months Ended June 30,****2004****As
                    Previously Reported**
                **As**
                  **Restated**
                **As
                    Previously Reported**
                **As**
                  **Restated****Statement
                    of Operations:**
                (in
                    thousands, except per share amounts)Interest
                    income
                $99,051
                $102,995
                $190,050
                $200,383Interest
                    expense
                (36,045)
                (34,228)
                (69,212)
                (65,522)Net
                    interest income
                63,006
                68,767
                120,838
                134,861Provision
                    for mortgage loan losses
                (10,160)
                (6,810)
                (14,038)
                (11,229)Net
                    interest income after provision for mortgage loan losses
                52,846
                61,957
                106,800
                123,632Servicing
                    income, net of amortization and impairment
                6,931
                5,336
                11,823
                9,938Derivative
                    gains
                —
                23,220
                —
                10,763Total
                    net revenues and gains
                60,085
                90,821
                121,482
                147,192Other
                    expense
                1,248
                1,685
                2,391
                2,795Total
                    expenses
                33,744
                34,181
                64,783
                65,187Income
                    before taxes
                26,341
                56,640
                56,699
                82,005Income
                    tax expense
                8,893
                20,943
                19,559
                27,378Income
                    before cumulative effect of change in accounting principle (SFAS
                    123R)
                17,448
                35,697
                37,140
                54,627Net
                    income
                17,448
                35,697
                37,140
                54,627Earnings
                    per share - basic
                $0.61
                $1.24
                $1.30
                $1.90Earnings
                    per share - diluted
                $0.56
                $1.15
                $1.19
                $1.75**As
                    of December 31,:**Mortgage
                    loan portfolio
                
                
                $6,027,620
                $5,997,376Derivative
                    assets
                
                
                16,573
                17,568Other
                    assets
                
                
                84,898
                83,865Derivative
                    liabilities
                
                
                1,809
                2,636Deferred
                    tax asset (liability)
                
                
                27,825
                27,506Other
                    comprehensive loss
                
                
                (3,842)
                (474)**Statement
                    of Shareholders’ Equity:****Balance
                    as of January 1, 2004:**Accumulated
                    other comprehensive loss
                
                
                $(5,497)
                $(832)Retained
                    earnings
                
                
                86,226
                50,245Total
                
                
                345,046
                313,730**Comprehensive
                    income:**Net
                    income
                
                
                $37,140
                $54,627Cash
                    flow hedging instruments - change in unrealized gain
                
                
                10,157
                —Cash
                    flow hedging instruments - reclassification adjustment
                
                
                30
                —Cash
                    flow hedging instruments - tax effect
                
                
                (3,963)
                —Total
                    comprehensive income
                
                
                43,863
                55,168**Balance
                    as of June 30, 2004:**Accumulated
                    other comprehensive income (loss)
                
                
                $1,226
                $(291)Retained
                    earnings
                
                
                123,366
                104,872Total
                
                
                391,300
                371,289**Statement
                    of Cash Flows:****Operating
                    Activities:**Net
                    income
                
                
                $37,140
                $54,627Depreciation
                    and amortization
                
                
                23,208
                8,655Deferred
                    income tax (benefit) provision
                
                
                (3,567)
                246Impairment
                    of assets
                
                
                6,692
                7,100Non
                    cash derivative gains
                
                
                —
                (11,477)Provision
                    for mortgage loan losses
                
                
                14,038
                11,229(Recovery
                    of) provision for past due interest
                
                
                (529)
                7,325Decrease
                    in servicing related advances
                
                
                19,172
                19,939Proceeds
                    from selling of derivative instruments
                
                
                —
                976Net
                    change in miscellaneous assets and liabilities
                
                
                (5,693)
                (18,558)Net
                    cash provided by operating activities
                
                
                67,485
                68,455**Financing
                    Activities:**Debt
                    issuance costs
                
                
                $(4,017)
                $(3,412)Proceeds
                    from derivative instruments
                
                
                1,575
                —Net
                    cash provided by financing activities
                
                
                566,728
                565,758


23






**Item
      2. Management’s Discussion and Analysis of Financial Condition
      and Results of Operations**




This
      discussion should be read in conjunction with the unaudited consolidated
      financial statements, notes and tables included elsewhere in this report.




Certain
      information contained in this report constitutes forward-looking statements
      within the meaning of Section 27A of the Securities Act of 1933 and Section
      21E
      of the Securities Exchange Act of 1934. Generally, forward-looking statements
      can be identified by the use of forward-looking terminology including, but
      not
      limited to, “may,” “expect,” “intend,” “should,” “anticipate,” “estimate,” “is
      likely to,” “could,” “are confident that,” or “believe” or comparable
      terminology. All statements contained in this item as well as those discussed
      elsewhere in this report addressing our operating performance, events, or
      developments that we expect or anticipate will occur in the future, including
      statements relating to net interest income growth, earnings or earnings per
      share growth, and market share, as well as statements expressing optimism or
      pessimism about future operating results, are forward-looking statements. The
      forward-looking statements are based upon management’s views and assumptions as
      of the date of this Report, regarding future events and operating performance
      and are applicable only as of the dates of such statements. By their nature,
      all
      forward-looking statements involve risk and uncertainties. Actual results may
      differ materially from those contemplated by the forward-looking statements
      for
      a number of reasons. Factors that might cause actual results to differ from
      our
      plans and expectations and which could have a material adverse affect on our
      operations and future prospects include, but are not limited to:





·
            changes
                in overall economic conditions or changes in interest
                rates;





24


·
            our
                ability to successfully implement our growth
                strategy;


·
            greater
                than expected declines in consumer demand for residential mortgage
                loans,
                particularly non-conforming loans.





·
            our
                ability to sustain loan origination growth at levels sufficient to
                absorb
                costs of production and operational
                costs;





·
            continued
                availability of financing facilities and access to the securitization
                markets or other funding sources;





·
            deterioration
                in the credit quality of our loan portfolio and the loan portfolios
                of
                others serviced by us;





·
            lack
                of access to the capital markets for additional
                funding;





·
            challenges
                in successfully expanding our servicing platform and technological
                capabilities;





·
            changes
                to the rating of our servicing
                operation;





·
            difficulty
                in satisfying complex rules in order for us to maintain qualification
                as a
                real estate investment trust, or REIT, for federal income tax
                purposes;





·
            the
                ability of certain of our subsidiaries to qualify as qualified REIT
                subsidiaries for federal income tax
                purposes;





·
            our
                ability and the ability of our subsidiaries to operate effectively
                within
                the limitations imposed by the federal income tax laws and regulations
                applicable to REITs;





·
            changes
                in federal income tax laws and regulations applicable to
                REITs;





·
            increased
                servicing termination trigger
                events;





·
            future
                litigation developments or regulatory or enforcement actions;
                and





·
            increased
                competitive conditions or changes in the legal and regulatory environment
                in our industry.





These
      risks and uncertainties should be considered in evaluating forward-looking
      statements, and undue reliance should not be placed on such statements. We
      undertake no obligation to update publicly any of these statements in light
      of
      future events except as required in subsequent periodic reports we file with
      the
      Securities and Exchange Commission.


25


The
      following sets forth the table of contents for this management’s discussion and
      analysis of financial condition and results of operations.







**Table
                of Contents**
            **Page**Executive
                Summary
            26Description
                of Other Data
            292005
                Events and Outlook
            31Critical
                Accounting Policies
            32Consolidated
                Results
            36Business
                Segment Results
            51Financial
                Condition
            55Liquidity
                and Capital Resources
            56Off
                Balance Sheet Items and Contractual
                Obligations
            60Other
                Matters
            61







**Executive
      Summary**




*Company
      Overview*




We
      are in
      the business of originating, securitizing, and servicing non-conforming mortgage
      loans, including sub-prime residential mortgage loans. We operate through three
      business segments. These segments are:





·
            Portfolio
                Management, or our portfolio
                segment;





·
            Mortgage
                Loan Servicing, or our servicing
                segment;





·
            Mortgage
                Loan Operations, or our mortgage loan production
                segment;





Through
      our taxable REIT subsidiary, Saxon Capital Holdings, Inc., and its subsidiaries,
      which we refer to collectively as our taxable REIT subsidiaries, we originate
      or
      purchase mortgage loans for our portfolio segment through our wholesale, retail,
      and correspondent channels, which we refer to collectively as our “mortgage loan
      production segment”. We earn most of our revenues from the interest income from
      those mortgages through our portfolio segment and from servicing loans for
      other
      companies through our servicing segment. We also earn revenues through whole
      loan sales of some of our mortgage loans. We pay interest to finance our
      mortgage loan portfolio and servicing advances and incur general and
      administrative expenses to operate our business. We maintain a provision for
      mortgage loan losses that may occur from impaired mortgage loans that are in
      our
      portfolio. We fund our mortgage loan originations through short-term warehouse
      lines of credit and through repurchase facilities. These short-term facilities
      are replaced by permanent financing when we securitize the loans. When our
qualified
      REIT subsidiaries securitize our mortgage loans, they structure those
      transactions as financing transactions. As such, the mortgage loans and related
      debt to finance those loans remain on our balance sheet.


26




In
      general, the primary factors in our business that affect our revenues are
      changes in interest rates and changes in the size of our mortgage loan portfolio
      and servicing portfolio. Decreases in interest rates generally result in a
      decrease in the interest rates we charge on the mortgage loans we originate,
      but
      also result in growth in our mortgage loan portfolio. Decreases also lead to
      increases in loan prepayments, which result in increases in prepayment penalty
      income, but decrease servicing income. In addition, decreases in interest rates
      reduce our cost to borrow, but generally lead to increases in our borrowings
      because loan originations tend to rise during periods of decreased interest
      rates.




Conversely,
      increases in interest rates generally result in an increase in the interest
      rates we charge on the mortgage loans we originate. Increases in interest rates
      also generally lead to decreases in loan prepayments, reducing prepayment
      penalty income, but increasing servicing income. In addition, increases in
      interest rates increase our cost to borrow but generally lead to decreases
      in
      our borrowings because loan originations tend to decline during periods of
      increased interest rates.




In
      general, the primary factors in our business that lead to increased expenses
      are
      the volume and credit mix of mortgage loans we originate or purchase, the number
      of retail branches and centralized origination and operation platforms we
      operate, the number of sales representatives we employ, the volume of third
      party servicing we acquire, the costs to comply with governmental regulations,
      and the costs of being a public company. As our loan production increases and
      our loan portfolio grows, we would generally expect to hire additional employees
      and we would also expect our variable expenses to increase. Also, we may incur
      additional marketing and advertising expenses in order to achieve our production
      goals. There are also increased cash requirements that are associated with
      being
      a public company, such as investor relations’ responsibilities and expending the
      resources necessary to ensure that we have met the requirements set forth by
      the
      Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission and others
      by
      hiring outside consultants and additional employees when required. From time
      to
      time, we may also be required to upgrade existing computer systems and focus
      on
      other beneficial projects, and during those periods we will experience increased
      expenses.




For
      the
      three months ended June 30, 2005 and 2004 we originated or purchased
      approximately $0.8 billion and $0.9 billion, respectively, and securitized
      approximately $0.8 billion and $0.5 billion, respectively, of residential
      mortgage loans. For the six months ended June 30, 2005 and 2004 we originated,
      purchased, or called approximately $1.6 billion and $1.7 billion, respectively,
      and securitized approximately $1.8 billion and $1.1 billion, respectively,
      of
      residential mortgage loans. Called loans occur upon exercise of the clean-up
      call option by our taxable REIT subsidiaries, who serve as servicer or master
      servicer, of various securitized pools within our mortgage loan servicing
      portfolio. A clean-up call option is an option to acquire all remaining mortgage
      loans, and any real estate owned, referred to as REO, in a securitized pool
      that
      arises at the
      time
      the aggregate unpaid scheduled principal balance of the loans declines to an
      amount that is less than 10% of the aggregate unpaid scheduled principal balance
      of the total pool at the time of securitization. We did not exercise any
      clean-up call options during the first six months of
      2005.


27






We
      intend
      to continue accessing the asset-backed securitization market to provide
      long-term financing for our mortgage loans. We finance the loans initially
      under
      one of several different secured and committed warehouse financing facilities.
      These loans are subsequently financed using asset-backed securities issued
      through securitization trusts. From May 1996 to June 30, 2005, we securitized
      approximately $20.8 billion in mortgage loans. Since July 6, 2001, we have
      structured our securitizations as financing transactions for financial reporting
      purposes under accounting principles generally accepted in the United States
      of
      America, or GAAP. Accordingly, following a securitization, (1) the mortgage
      loans we originate or purchase remain on our consolidated balance sheet; (2)
      the
      securitization indebtedness replaces the warehouse debt associated with the
      securitized mortgage loans; and (3) we record interest income on the mortgage
      loans and interest expense on the securities issued in the securitization over
      the life of the securitization, instead of recognizing a gain or loss upon
      completion of the securitization. This accounting treatment more closely matches
      the recognition of income with the receipt of cash payments on the individual
      loans than does gain on sale accounting, which we used prior to July 6,
      2001.




*Industry
      Overview and Prospective Trends*






Described
      below are some of the marketplace conditions and prospective trends that may
      impact our future results of operations.




According
      to the Mortgage Bankers Association of America website as of July 12, 2005,
      lenders in the United States originated $2.6 trillion in single-family mortgage
      loans in 2004. Approximately 44% of the loan originations in 2004 were
      attributable to mortgage loan refinancings by customers taking advantage of
      the
      decline in interest rates. As of July 12, 2005, lenders in the United States
      are
      expected to originate approximately $2.7 trillion in single-family mortgage
      loans in 2005. Generally, we believe sub-prime borrowers are not solely
      motivated by fluctuations in interest rates. We experienced a decrease of $156.2
      million, or 17%, in our production volume to $787.8 million for the second
      quarter of 2005 compared to $944.0 million for the second quarter of 2004.
      Similarly, we experienced a decrease of $0.1 billion, or 6%, in our production
      volume to $1.6 billion for the first six months of 2005 compared to $1.7 billion
      for the first six months of 2004. Our production levels during the first six
      months of 2005 were negatively impacted by the closing and/or divestiture of
      several of our retail branches , intense pricing competition currently existing
      in the marketplace, and the introduction of new products to the marketplace
      by
      our competitors.




The
      non-conforming, residential mortgage industry has undergone rapid consolidation
      in recent years. Today the industry is dominated by a small number of large
      companies. According to the B & C Lending Survey, the top three
      mortgage


28




lenders
      controlled a combined 31% of the mortgage origination market as of March 31,
      2005, up from 27% as of December 31, 2003, and up from 15% as of December 31,
      1997. We expect this consolidation trend to continue in the future, as market
      forces drive out weaker competitors. To compete effectively, we will be required
      to maintain a high level of operational, technological and managerial expertise,
      as well as an ability to attract capital at a competitive cost.




The
      non-conforming, residential mortgage industry is subject to extensive
      regulation, supervision and licensing by federal, state and local governmental
      authorities and our business is subject to various laws and judicial and
      administrative decisions imposing requirements and restrictions on a substantial
      portion of our operations. Changes to laws, regulations or regulatory policies
      can have a significant adverse effect on our operations and profitability.
      For
      example, proposed state and federal legislation targeted at predatory lending
      could have the unintended consequence of raising the cost or otherwise reducing
      the availability of mortgage credit for non-prime borrowers. This could result
      in a reduction of otherwise legitimate non-prime lending opportunities and
      is
      likely to increase our legal and compliance costs.




Over
      the
      last several years, the housing price index has increased faster than the
      consumer price index and growth in personal income. We expect that this trend
      may slow in the coming years. Over the long term, however, we anticipate that
      housing appreciation will be positively correlated with both consumer price
      inflation and growth in personal income. Rising housing values point to healthy
      demand for purchase-money mortgage financing, increased average loan balances
      and a reduction in the risk of loss on sale of foreclosed real estate in the
      event a loan defaults. However, as housing values appreciate, prepayments of
      existing mortgages tend to increase as borrowers look to realize the additional
      equity in their homes. If housing prices should fall significantly, our future
      results of operations would be adversely affected.







**Description
      of Other Data**






In
      this
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations, we present certain data that we consider helpful in understanding
      our financial condition and results of operations, and our calculations of
      these
      data may be calculated differently than other registrants. These measures have
      limitations as analytical tools, and you should not consider them in isolation
      or as a substitute for analysis of our results as reported under GAAP. These
      measures should be used only supplementally. See our consolidated financial
      statements and related notes included elsewhere in this report and see
“Consolidated Results” for the reconciliation of these financial measures to
      GAAP. Descriptions of these financial measures are set forth below.




*Net
      interest margin.* Net
      interest margin is calculated as the difference between our interest income
      and
      interest expense divided by our average interest-earning assets. Average
      interest-earning assets are calculated using a daily average balance over the
      time period indicated.


29






*Reconciliation
      of securitization net losses on liquidated loans to
      charge-offs.* Securitization net losses on liquidated loans is a non-GAAP financial measure
      within the meaning of Regulation G promulgated by the Securities and Exchange
      Commission. We present a reconciliation of securitization net losses on
      liquidated loans to charge-offs, which are recognized in our financial
      statements in accordance with GAAP, because management believes that it is
      meaningful to show both measures of losses to evaluate securitization net losses
      on liquidated loans and the information is provided on a monthly basis to the
      investors in each securitization. GAAP requires losses to be recognized
      immediately upon a loan being transferred to REO, whereas securitization net
      losses on liquidated loans do not recognize a loss on REO until the loan is
      sold. This causes a timing difference between charge-offs and securitization
      net
      losses on liquidated loans. In addition, securitization net losses on liquidated
      loans exclude losses resulting from delinquent loan sales.




*Working
      capital.* It is
      common business practice to define working capital as current assets less
      current liabilities. We do not have a classified balance sheet and therefore
      calculate our working capital using our own internally defined formula, which
      is
      generally calculated as unrestricted cash and investments as well as
      unencumbered assets that can be pledged against existing committed facilities
      and converted to cash in five days or less.




*Reconciliation
      of GAAP net income to estimated taxablet income.* To
      maintain our status as a REIT, we are required to distribute at least 90% of
      our
      REIT taxable income each year to our shareholders. REIT taxable income is
      calculated under federal tax laws in a manner that, in certain respects, differs
      from the calculation of consolidated net income pursuant to GAAP. We expect
      that
      our consolidated GAAP net income may differ from our REIT taxable income for
      many reasons, including the following:





·
            the
                provision for mortgage loan loss expense recognized for GAAP purposes
                is
                based upon our estimate of probable loan losses inherent in our current
                portfolio of loans held for investment, for which we have not yet
                recorded
                a charge-off (tax accounting rules allow a deduction for loan losses
                only
                in the period when a charge-off
                occurs);





·
            there
                are several differences between GAAP and tax methodologies for
                capitalization of origination
                expenses;





·
            there
                are differences between GAAP and tax related to the timing of recognition
                of income (loss) from derivative instruments;
                and





·
            income
                of a taxable REIT subsidiary is generally included in the REIT’s earnings
                for consolidated GAAP purposes, but is not recognized in REIT taxable
                income.


30


We
      expect
      that our REIT taxable income will continue to differ from our GAAP consolidated
      income, particularly during the period in which we build our mortgage loan
      portfolio.




Estimated
      REIT taxable income is a non-GAAP financial measure within the meaning of
      Regulation G promulgated by the Securities and Exchange Commission. Management
      believes that the presentation of REIT taxable income provides useful
      information to investors regarding our estimated annual distributions to our
      investors. The presentation of REIT taxable income is not to be considered
      in
      isolation or as a substitute for financial results prepared in accordance with
      GAAP.




Descriptions
      of certain components of our revenues and expenses are set forth in more detail
      in our 2004 Form 10-K.







**2005
      Events and Outlook**




During
      the first half of 2005, we closed 10 retail branches and divested 5 branches,
      with a majority of these events occurring in the second quarter 2005. The
      branches impacted by these closings had produced 40% of our 2004 retail
      production. In 2005, we have been focused on refining our retail lending
      platform through a more efficient network of strategically located retail
      mortgage branches and our three centralized retail origination lending platforms
      located in Virginia, Texas and California. We believe this new refined platform
      enables us to streamline processes, increase efficiencies and productivity,
      improve training and employee development, and leverage marketing efficiency
      and
      scale, while reducing the overall cost to produce.





We
      also
      aligned our wholesale and retail back-end operations during the first half
      of
      2005, and in June 2005, we opened our Central Region office which will allow
      us
      to service our brokers in all capacities, including underwriting, closing,
      funding, and post-closing duties in that region.




In
      the
      second quarter of 2005, we continued to experience an increase in short-term
      borrowing interest rates, we began to see the return of faster prepayment speeds
      due to the popularity of interest-only and other longer amortization products
      in
      the marketplace, and we continued to see a marked increase in competitive
      pricing, product, and credit exception practices within our industry. We also
      noted a flattening of the longer-term portion of the yield curve. We anticipate
      these trends to continue through the second half of the year. We plan to begin
      introducing expanded product offerings during the second half of 2005 in order
      to remain competitive in the marketplace. We also will seek to leverage the
      whole loan sale market as a strategy for non-portfolio assets.





We
      began
      closing loans in certain states in our retail and wholesale units in the REIT’s
      name during the second quarter of 2005 and anticipate that the REIT will fund
      more of its mortgage loans in its own name in the second half of 2005. We expect
      it to be more economical for the REIT to fund loans in its own name, rather
      than
      acquiring these loans from our taxable REIT subsidiaries, due to the resulting
      treatment of certain origination
      costs at the REIT. Correspondent loans are closed prior to the time of purchase;
      and therefore, are unable to be closed in the REIT’s
      name.


31




In
      addition, we intend to continue to grow our mortgage loan portfolio and
      servicing portfolio in order to produce higher levels of net interest income,
      and produce higher levels of servicing income. Management’s continued analysis
      and examination of our cost structure has resulted in a focus on controlling
      our
      general and administrative expenses while growing our mortgage loan portfolio
      and servicing portfolio in 2005.




**Critical
      Accounting Policies**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses our consolidated financial statements, which have been prepared in
      accordance with GAAP. The preparation of these consolidated financial statements
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and the disclosure of contingent assets and
      liabilities as of the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. On an
      on-going basis, management evaluates its estimates and judgments. Management
      bases its estimates and judgments on historical experience and on various other
      factors that it believes to be reasonable under the circumstances, the results
      of 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 and the estimates will change under different
      assumptions or conditions.





Critical
      accounting estimates are defined as those that reflect significant judgments
      and
      uncertainties and potentially result in materially different outcomes under
      different assumptions and conditions. Our critical accounting estimates are
      discussed below and consist of:





·
            amortization
                of yield adjustments to net interest
                income;




·
            allowance
                for loan losses and past due
                interest;




·
            mortgage
                servicing rights;




·
            deferral
                of direct loan origination costs;
                and




·
            accounting
                for income taxes.





*Amortization
      of Yield Adjustments to Net Interest Income*




Net
      interest income is calculated as the difference between our interest income
      and
      interest expense. Interest income on our mortgage loan portfolio is a
      combination of accruing interest based on the outstanding balance and
      contractual terms of the mortgage loans and the amortization of yield
      adjustments using the interest method, principally the amortization of premiums,
      discounts, and other net capitalized fees or costs associated with originating
      our mortgage loans. These yield adjustments are amortized against interest
      income over the lives of the assets using the interest method adjusted for
      the




32




effects
      of estimated prepayments. Management does not currently use the payment terms
      of
      each loan contract in the calculation of amortization. Because we hold a large
      number of similar loans for which prepayments are probable, we currently use
      a
      prepayment model to project loan prepayment activity based upon loan age, loan
      type and remaining prepayment penalty coverage. Estimating prepayments and
      estimating the remaining lives of our mortgage loan portfolio requires
      management judgment, which involves consideration of possible future interest
      rate environments and an estimate of how borrowers will behave in those
      environments. Reasonableness tests are performed against past history, mortgage
      asset pool specific events, current economic outlook and loan age to verify
      the
      overall prepayment projection. If these mortgage loans prepay at an actual
      speed
      that differs from the projections used in our estimates, GAAP requires us to
      adjust the remaining capitalized yield adjustments accordingly on a prospective
      and retrospective basis.




Mortgage
      prepayments generally increase on our adjustable rate mortgages when fixed
      mortgage interest rates fall below the then-current interest rates on
      outstanding adjustable rate mortgage loans. Prepayments on mortgage loans are
      also affected by the terms and credit grades of the loans, conditions in the
      housing and financial markets and general economic conditions. We have sought
      to
      minimize the effects caused by faster than anticipated prepayment rates by
      lowering premiums paid to acquire mortgage loans, which decreases the balance
      to
      be amortized, and by purchasing and originating mortgage loans with prepayment
      penalties. Those penalties typically expire two to three years from origination.
      As of June 30, 2005, approximately 75% of our mortgage loan portfolio had active
      prepayment penalty features. We anticipate that prepayment rates on a
      significant portion of our adjustable rate mortgage portfolio will increase
      as
      these adjustable rate loans reach their initial adjustments during 2005 and
      2006, due to the high concentration of two to three year hybrid loans we
      originated or purchased during 2002 and 2003. However, management expects that
      the amendments to government regulations related to the Alternative Mortgage
      Transactions Parity Act, which restricted the ability of state-chartered
      mortgage lenders to charge prepayment penalties on certain types of mortgage
      loans, effective July 1, 2003, could reduce our percentage of loans with active
      prepayment penalty features in future periods. The constant prepayment rate,
      or
      CPR, currently used to project cash flows is 34 percent over twelve months. Actual
      prepayment penalty income is recorded when the cash is collected and is not
      recorded based on CPR assumptions. Therefore, in instances where our CPR
      increases, we anticipate also having an increase in prepayment penalty
      income.




Interest
      expense on our warehouse and securitization financings is a combination of
      accruing interest based on the contractual terms of the financing arrangements
      and the amortization of premiums, discounts, debt issuance costs, and
      accumulated other comprehensive income relating to cash flow hedging. These
      yield adjustments are amortized against interest expense over the life of the
      debt, similar to the manner described above, using the interest method based
      on
      the estimated payments on the debt.







*Allowance
      for Loan Losses and Past Due Interest*


33


The
      allowance for loan losses is established through the provision for mortgage
      loan
      losses, which is charged to earnings on a monthly basis. The allowance for
      past
      due interest is charged to earnings through interest income. The accounting
      estimate of the allowance for loan losses and past due interest is considered
      critical as significant changes in the mortgage loan portfolio, which includes
      both securitized and unsecuritized mortgage loans, and/or economic conditions
      may affect the allowance for loan losses and past due interest and our results
      of operations. The assumptions used by management regarding these key estimates
      are highly uncertain and involve a great deal of judgment.





Provisions
      are made to the allowance for loan losses and past due interest for currently
      impaired loans in the outstanding mortgage loan portfolio. We define a mortgage
      loan as impaired at the time the loan becomes 30 days delinquent under its
      payment terms. Charge-offs to the allowance are recorded at the time of
      liquidation or at the time the loan is transferred to REO status. The allowance
      for loan losses and past due interest is regularly evaluated by management
      for
      propriety by taking into consideration factors such as: changes in the nature
      and volume of the loan portfolio; trends in actual and forecasted portfolio
      performance and credit quality, including delinquency, charge-off and bankruptcy
      rates; and current economic conditions that may affect a borrower’s ability to
      pay and the underlying value of the collateral. An internally developed roll
      rate analysis, static pool analysis and historical losses are the primary tools
      used in analyzing our allowance for loan losses and past due interest. Our
      roll
      rate analysis is defined as the historical progression of our loans through
      the
      various delinquency statuses. Our static pool analysis provides data on
      individual pools of loans based on year of origination. These tools take into
      consideration historical information regarding delinquency and loss severity
      experience and apply that information to the portfolio and the portfolio’s basis
      adjustments. Loss severity, as a percentage, is defined as the total loss amount
      divided by the actual unpaid principal balance at the time of liquidation.
      Total
      loss amounts include all accrued interest, fees, principal balances, all costs
      of liquidating and all other servicing advances for taxes, property insurance,
      and other servicing costs incurred and invoiced to us within 90 days following
      the liquidation date. If actual results differ from our estimates, we would
      adjust our provision accordingly. Likewise, the use of different estimates
      or
      assumptions could produce different provisions for loan losses.





*Mortgage
      Servicing Rights*





The
      valuation of mortgage servicing rights, or MSRs, requires that we make estimates
      of numerous market assumptions. Interest rates, prepayment speeds, servicing
      costs, discount rates, and the payment performance of the underlying loans
      significantly affect the fair value and the rate of amortization of MSRs.
      Increasing prepayments attributable to increased mortgage refinancing activity
      result in a decline in the value of MSRs.





The
      carrying values of the MSRs are amortized in proportion to, and over the period
      of, the anticipated net servicing income. MSRs are assessed periodically to
      determine if there has been any impairment to the carrying value, based on
      the
      fair value as of the date of the assessment and by stratifying the MSRs based
      on
      underlying loan characteristics, including the date of the related
      securitization. We obtain quarterly independent valuations for our
      MSRs.


34






Due
      to
      subsequent changes in economic and other relevant conditions, the actual rates
      of prepayments and defaults and the value of collateral may differ from our
      initial estimates, and these differences may be material. If actual prepayment
      and default rates were higher than those assumed, we would earn less mortgage
      servicing income, which would adversely affect the value of the MSRs.
      Significant changes in prepayment speeds, delinquencies, and losses may result
      in impairment of most of our MSRs. On a quarterly basis, we perform an
      impairment analysis using the independent valuations we obtained, and
      considering estimates of numerous market assumptions, changes in interest rates,
      prepayment speeds, servicing costs, discount rates, and the payment performance
      of the underlying loans, all of which could significantly affect the fair value
      and the rate of amortization of MSRs. If we determine that a pool of MSRs is
      impaired, we analyze certain attributes of that pool to assess whether the
      impairment is temporary or permanent. If we conclude that the impairment is
      temporary, we establish a valuation allowance and record an expense. Charge-offs
      to the valuation allowance are recorded if we conclude that the impairment
      is
      permanent..





*Deferral
      of Direct Loan Origination Costs*





We
      incur
      certain direct loan origination costs in connection with our loan origination
      activities. Such amounts are recognized over the life of the related loans
      as an
      adjustment of yield, as discussed above in the section relating to our critical
      accounting estimate with respect to accounting for net interest
      income.





We
      determine the amount of direct loan origination costs to be deferred based
      on an
      estimate of the standard cost per loan originated. The standard cost per loan
      is
      based on the amount of time spent and costs incurred by loan origination
      personnel in the performance of certain activities directly related to the
      origination of funded mortgage loans. These activities include evaluating the
      prospective borrower’s financial condition, evaluating and recording collateral
      and security arrangements, negotiating loan terms, processing loan documents
      and
      closing the loan. Management believes these estimates reflect an accurate cost
      estimate related to successful loan origination efforts for the three and six
      months ended June 30, 2005 as defined by GAAP. Management evaluates its time
      and
      cost estimates quarterly to determine if updates and refinements to the deferral
      amounts are necessary. Updates would be considered necessary if it was
      determined that the time spent and/or costs incurred related to performing
      the
      above activities had significantly changed from the previous period. This
      estimate is made for all loans originated by our wholesale and retail channels.
      Correspondent production is not included, as we purchase these loans as closed
      loans and therefore, loan origination costs related to these purchases are
      recorded as incurred.




*Accounting
      for Income Taxes*




35


Significant
      management judgment is required in developing our provision for income taxes,
      including the determination of deferred tax assets and liabilities and any
      valuation allowances that might be required against the deferred tax asset.
      As
      of June 30, 2005, we had not recorded a valuation allowance on our deferred
      tax
      assets based on management’s belief that operating income will, more likely than
      not, be sufficient to realize the benefit of these assets over time. The
      evaluation of the need for a valuation allowance takes into consideration our
      taxable income, current tax position, and estimates of taxable income in the
      near term. The tax character (ordinary versus capital) and the carryforward
      periods of certain tax attributes such as capital losses and tax credits must
      also be considered. Significant judgment is required in considering the relative
      impact of negative and positive evidence related to the ability to realize
      deferred tax assets. In the event that actual results differ from these
      estimates or if our current trend of positive taxable income changes, we may
      be
      required to record a valuation allowance on our deferred tax assets, which
      could
      have a material adverse effect on our consolidated financial condition and
      results of operations. We recognize deferred tax assets if we believe that
      it is
      more likely than not, given all available evidence, that all of the benefits
      of
      the carryforward losses and other deferred tax assets will be realized.
      Management believes that, based on the available evidence, it is more likely
      than not that we will realize the benefit from our deferred tax
      assets.





We
      have
      sought to comply with the REIT provisions of the Internal Revenue Code for
      the
      six months ended June 30, 2005 and intend to continue to do so. Accordingly,
      we
      expect to not be subject to federal or state income tax on net income that
      is
      distributed to shareholders to the extent that our annual distributions to
      shareholders are equal to at least 90% of our REIT taxable income (determined
      without regard to the deduction for dividends paid and by excluding any net
      capital gain) **** for
      a
      given year and as long as certain asset, income and stock ownership tests are
      met. In the event that we do not qualify as a REIT in any year, we will be
      subject to federal income tax as a domestic corporation and the amount of our
      after-tax cash available for distribution to our shareholders will be reduced.
      However, our taxable REIT subsidiaries will be subject to federal and state
      income tax and we intend to continue to employ the accounting policy described
      above with respect to our taxable REIT subsidiaries.





For
      further information about our critical accounting policies, refer to our 2004
      Form 10-K.




**Consolidated
      Results**





*Three
      and Six Months Ended June 30, 2005 versus Three and Six Months Ended June 30,
      2004*





*Overview.* Net
      income decreased $28.7 million, or 80%, to $7.0 million for the three months
      ended June 30, 2005 from $35.7 million for the three months ended June 30,
      2004.
      This decrease was primarily the result of an increase in our interest expense,
      provision for mortgage loan losses and derivative losses, offset by an increase
      in our servicing income, net of amortization and impairment, and a decrease
      in
      our tax expense.




36


Net
      income increased $6.4 million, or 12%, to $61.0 million for the six months
      ended
      June 30, 2005 from $54.6 million for the six months ended June 30, 2004. The
      increase was primarily the result of an increase in servicing income, an
      increase in our interest income, and the impact of our REIT status on our income
      taxes. This increase was partially offset by decreases in our derivative gains
      and increases in interest expense, provision for mortgage loan losses, and
      total
      operating expenses. Overall, our net income was positively impacted by the
      growth in our mortgage loan and servicing portfolios and was negatively affected
      by an increase in one-month LIBOR rates, which significantly increased our
      borrowing costs. To the extent that we continue to grow our mortgage loan and
      servicing portfolios, we would expect an increase in interest income and
      servicing income. However, if one-month LIBOR rates continue to rise, the
      increased interest income would be offset by higher interest expense. Also,
      our
      ability to grow our mortgage loan portfolio could be negatively impacted by
      the
      intense pricing pressures currently being experienced in our industry.




**Revenues**





*Total
      Net Revenues, Gains and Losses.* Total
      net revenues, gains and losses decreased $47.8 million, or 53%, to $43.0 million
      for the three months ended June 30, 2005 from $90.8 million for the three months
      ended June 30, 2004. Total net revenues, gains and losses decreased $12.6
      million, or 9%, to $134.6 million for the six months ended June 30, 2005 from
      $147.2 million for the six months ended June 30, 2004. The decrease in total
      net
      revenues, gains and losses was due primarily to a decrease in our net interest
      income after provision for mortgage loan losses relating to increased borrowing
      costs and increased provision for mortgage loan losses, partially offset by
      an
      increase in our servicing income. For the past eighteen months, our interest
      income has not grown at the same rate as our interest expense due to the intense
      pricing competition affecting the sub-prime residential mortgage loan industry
      and the flattened yield curve existing in the marketplace during the second
      quarter of 2005. The decrease was also due to the change in derivatives gains
      (losses) of $(38.3) million for the three months ended June 30, 2005 as compared
      to the three months ended June 30, 2004 and a decrease in derivative gains
      of
      $4.6 million for the six months ended June 30, 2005 as compared to the six
      months ended June 30, 2004.





*Interest
      Income* .
      Interest income increased $8.1 million, or 8%, to $111.1 million for the three
      months ended June 30, 2005, from $103.0 million for the three months ended
      June
      30, 2004. Interest income increased $23.1 million, or 12%, to $223.5 million
      for
      the six months ended June 30, 2005, from $200.4 million for the six months
      ended
      June 30, 2004. The increase in interest income was due primarily to growth
      in
      our mortgage loan portfolio. This increase was partially offset by (1) the
      impact of lower weighted-average coupon rates (WAC) on our mortgage loans and
      (2) a decrease in prepayment penalty income. The WAC on our production for
      2004
      and for the first six months of 2005, which represents 83% of our owned
      portfolio, was negatively impacted by the intense pricing competition affecting
      the sub-prime residential mortgage loan industry and the flattened yield curve
      existing in the marketplace during the second quarter of 2005. This competition
      has resulted in lower WAC on our mortgage loans compared
      to the first six months of 2004. The components of these decreases are discussed
      in more detail below.


37





*Rate/Volume
      Table For the Three and Six Months Ended June 30, 2005 Compared to the Three
      and
      Six Months Ended June 30, 2004*





As
      shown
      in the table below, compared to the three and six months ended June 30, 2004,
      our interest income increased $18.3 million and $41.6 million for the three
      and
      six months ended June 30, 2005, respectively, due to an increase in the size
      of
      our mortgage loan portfolio, and decreased $9.0 million and $16.2 million for
      the three and six months ended June 30, 2005, respectively, due to a decrease
      in
      the WAC on our mortgage loan portfolio.




**Three
                Months Ended June 30, 2005**
              **Compared
                to**
              **Three
                Months Ended June 30, 2004**
            **Six
                Months Ended June 30, 2005**
              **Compared
                to**
              **Six
                Months Ended June 30, 2004******
            **Change
                in**
              **Rate**
            **Change
                in Volume**
            **Total
                Change in Interest Income**
            **Change
                in**
              **Rate**
            **Change
                in Volume**
            **Total
                Change in Interest Income**(in
                thousands)Securitized
                loans
            $(10,696)
            $21,100
            $10,404
            $(18,388)
            $43,806
            $25,418Warehouse
                loans
            1,379
            (2,820)
            (1,441)
            1,853
            (2,280)
            (427)Mortgage
                bonds
            329
            20
            349
            381
            116
            497Other
            —
            (13)
            (13)
            —
            (9)
            (9)Total
            $(8,988)
            $18,287
            $9,299
            $(16,154)
            $41,633
            $25,479Prepayment
                penalty income
            —
            —
            (1,217)
            —
            —
            (2,363)$8,082
            
            
            $23,116





*Interest
      Income Yield Analysis For the Three and Six Months Ended June 30, 2005 and
      2004*




38


The
      following table presents the average yield on our interest-earning assets for
      the three and six months ended June 30, 2005 and 2004.





**Three
                Months Ended June 30, 2005**
            **Three
                Months Ended June 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**
            **Average
                Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**($
                in thousands)Gross
            $6,051,182
            $110,765
            7.32%
            $4,986,364
            $99,446
            7.98%Less
                amortization of yield adjustments (1)
            —
            (8,264)
            (0.55)%
            —
            (6,245)
            (0.50)%$6,051,182
            $102,501
            6.77%
            $4,986,364
            $93,201
            7.48%Add
                prepayment penalty income
            —
            8,576
            0.57%
            —
            9,794
            0.78%**Total
                interest-earning assets**
            $6,051,182
            $111,077
            7.34%
            $4,986,364
            $102,995
            8.26%





**Six
                Months Ended June 30, 2005**
            **Six
                Months Ended June 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**
            **Average
                Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**($
                in thousands)Gross
            $6,038,543
            $221,023
            7.32%
            $4,856,350
            $195,794
            8.06%Less
                amortization of yield adjustments (1)
            —
            (12,864)
            (0.43)%
            —
            (13,114)
            (0.54)%$6,038,543
            $208,159
            6.89%
            $4,856,350
            $182,680
            7.52%Add
                prepayment penalty income
            —
            15,340
            0.51%
            —
            17,703
            0.73%**Total
                interest-earning assets**
            $6,038,543
            $223,499
            7.40%
            $4,856,350
            $200,383
            8.25%


______________


(1)  Yield
      adjustments include premiums, discounts, net deferred origination costs and
      nonrefundable fees.





39


The
      increase in gross interest income is consistent with the growth of our mortgage
      loan portfolio. Our mortgage loan portfolio increased $0.9 billion, or 17%,
      to
      $6.2 billion as of June 30, 2005 from $5.3 billion as of June 30, 2004. However,
      this growth was offset partially by the 74 basis point decrease in gross WAC
      for
      the six months ended June 30, 2005 as compared to the six months ended June
      30,
      2004 due to intense pricing competition, the liquidation of higher WAC loans,
      and the increase in the credit quality of our mortgage loan portfolio. Our
      anticipation of our change in tax status to a REIT enabled us to lower our
      pricing in early 2004, and therefore receive a lower WAC on our mortgage loan
      production, which we believe enabled us to remain competitive in the face of
      intense pricing competition in our industry. We anticipate that our gross
      interest income in dollars will continue to grow as our mortgage loan portfolio
      grows. This growth could be negatively impacted by the intense pricing pressures
      and flattened yield curve in the current environment.





Amortization
      expense of yield adjustments increased $2.1 million, or 34%, to $8.3 million
      for
      the three months ended June 30, 2005 from $6.2 million for the three months
      ended June 30, 2004, and decreased $0.2 million, or 2%, to $12.9 for the six
      months ended June 30, 2005 from $13.1 million for the six months ended June
      30,
      2004. The increase was due to a rise in prepayment speeds during the second
      quarter of 2005. During the six months ended June 30, 2005, however, the
      increase in amortization expense of yield adjustments was partially offset
      by
      lower premiums paid due to higher credit quality. Refinancing activity continues
      to be strong due to an increased home price index allowing borrowers to access
      the equity in their homes in the form of cash and also with the popularity
      of
      interest only products, where the borrower only pays interest for a specified
      period before beginning to repay principal, thus lowering the borrower’s monthly
      payment at the beginning of the loan term. To the extent this activity remains
      strong, we would expect to see higher levels of amortization expense of yield
      adjustments in the future.




Prepayment
      penalty income decreased $1.2 million, or 12%, to $8.6 million for the three
      months ended June 30, 2005 from $9.8 million for the three months ended June
      30,
      2004, and decreased $2.4 million, or 14%, to $15.3 million for the six months
      ended June 30, 2005 from $17.7 million for the six months ended June 30, 2004. Despite
      the return of faster prepayment speeds during the second quarter of 2005, we
      were unable to collect prepayment penalty income on a portion of our prepaid
      loans due to the amendment of government regulations related to the Alternative
      Mortgage Transactions Parity Act. Management expects that these amendments
      could
      continue to reduce our prepayment penalty income in future periods.





*Securitized
      Mortgage Loan Coupon and Prepayment Penalty Coverage*





Our
      WAC
      on our securitizations has decreased since 2001 due to (1) our origination
      of
      higher credit grade mortgage loans from 2001 through the second quarter of
      2005,
      (2) the prepayments of higher WAC loans; and (3) recent intense pricing competition.
      The WAC on future production could be negatively impacted by the intense pricing
      pressures and flattened yield curve if the current environment persists.


40





Our
      loan
      principal balance was composed of 67% adjustable rate loans and 33% fixed rate
      loans at June 30, 2005. The percentage of our adjustable rate loans in their
      reset period was 13% at June 30, 2005. The following tables set forth
      information about our securitized mortgage loan portfolio including those loans
      associated with our securitized REO properties as of June 30, 2005 and December
      31, 2004.





**Issue
                  Date**
              **Original
                  Loan Principal Balance**
              **Current
                  Loan Principal Balance**
              **Fixed
                  Current Loan Principal Balance**
              **Arm
                  Current Loan Principal Balance**
              **Percentage
                  of Portfolio**
              **Percentage
                  of Original Remaining**
              **Remaining
                  WAC Fixed**
              **Remaining
                  WAC Arm**($
                  in thousands)**June
                  30, 2005**SAST
                  2001-2
              8/2/2001
              $650,410
              $115,558
              $81,348
              $34,210
              2%
              18%
              9.28%
              10.09%SAST
                  2001-3
              10/11/2001
              $699,999
              $108,508
              $44,357
              $64,151
              2%
              16%
              9.92%
              9.76%SAST
                  2002-1
              3/14/2002
              $899,995
              $180,452
              $95,122
              $85,330
              3%
              20%
              8.86%
              9.21%SAST
                  2002-2
              7/10/2002
              $605,000
              $144,239
              $60,331
              $83,908
              3%
              24%
              8.87%
              9.33%SAST
                  2002-3
              11/8/2002
              $999,999
              $268,234
              $109,383
              $158,851
              5%
              27%
              8.32%
              8.63%SAST
                  2003-1
              3/6/2003
              $749,996
              $249,041
              $147,957
              $101,084
              4%
              33%
              7.39%
              8.43%SAST
                  2003-2
              5/29/2003
              $599,989
              $217,125
              $106,196
              $110,929
              4%
              36%
              7.22%
              7.88%SAST
                  2003-3
              9/16/2003
              $1,000,000
              $482,723
              $235,808
              $246,915
              8%
              48%
              7.20%
              7.54%SAST
                  2004-1
              2/19/2004
              $1,099,999
              $642,918
              $189,879
              $453,039
              11%
              58%
              7.82%
              7.38%SAST
                  2004-2
              7/27/2004
              $1,199,994
              $905,910
              $461,130
              $444,780
              16%
              75%
              6.99%
              6.69%SAST
                  2004-3
              10/27/2004
              $899,956
              $738,282
              $121,050
              $617,232
              13%
              82%
              7.80%
              7.06%SAST
                  2005-1
              1/25/2005
              $999,972
              $913,133
              $121,247
              $791,886
              16%
              91%
              7.40%
              6.80%SAST
                  2005-2
              6//07/2005
              $777,015
              $765,358
              $108,857
              $656,501
              13%
              98%
              7.53%
              7.21%Total
              
              $11,182,324
              $5,731,481
              $1,882,665
              $3,848,816Less:
                  unpaid principal balance of securitized
                REO
                  properties
              (40,438)Total
                  securitized loans
              $5,691,043**December
                  31, 2004**SAST
                  2001-2
              8/2/2001
              $650,410
              $142,563
              $98,239
              $44,324
              3%
              22%
              9.35%
              9.85%SAST
                  2001-3
              10/11/2001
              $699,999
              $141,710
              $54,027
              $87,683
              3%
              20%
              10.01%
              9.60%SAST
                  2002-1
              3/14/2002
              $899,995
              $247,779
              $118,020
              $129,759
              5%
              28%
              8.87%
              9.01%SAST
                  2002-2
              7/10/2002
              $605,000
              $192,448
              $74,037
              $118,411
              4%
              32%
              8.87%
              9.16%SAST
                  2002-3
              11/8/2002
              $999,999
              $352,051
              $133,009
              $219,042
              7%
              35%
              8.34%
              8.31%SAST
                  2003-1
              3/6/2003
              $749,996
              $344,066
              $178,206
              $165,860
              7%
              46%
              7.45%
              8.09%SAST
                  2003-2
              5/29/2003
              $599,989
              $317,171
              $132,299
              $184,872
              6%
              53%
              7.30%
              7.41%SAST
                  2003-3
              9/16/2003
              $1,000,000
              $616,099
              $280,365
              $335,734
              12%
              62%
              7.23%
              7.52%SAST
                  2004-1
              2/19/2004
              $1,099,999
              $835,925
              $226,877
              $609,048
              16%
              76%
              7.85%
              7.39%SAST
                  2004-2
              7/27/2004
              $1,199,994
              $1,097,890
              $532,313
              $565,577
              21%
              91%
              7.02%
              6.74%SAST
                  2004-3
              10/27/2004
              $899,956
              $877,628
              $133,122
              $744,506
              17%
              98%
              7.87%
              7.11%Total
              $9,405,337
              $5,165,330
              $1,960,514
              $3,204,816Less:
                  unpaid principal balance of securitized
                REO
                  properties
              (42,259)Total
                  securitized loans
              $5,123,071




Borrowers
      who accept a prepayment penalty receive a lower interest rate on their mortgage
      loan. A number of states restrict our ability to charge prepayment penalties
      on
      mortgage loans made to borrowers in such states. Borrowers always retain the
      right to refinance their loan, but may have to pay a fee of up to six-months
      interest on 80% of the remaining principal when prepaying their loans. If the
      mortgage loan prepays within the prepayment penalty coverage period, we will
      record revenue from collection of a


41


prepayment
      penalty. We report prepayment penalties when we collect such fees in interest
      income. In addition, if a loan prepays we fully expense any related deferred
      costs for that loan upon prepayment. We reflect the amortization of deferred
      costs in interest income.





We
      experienced an increase in prepayments of our mortgage loans during the second
      quarter of 2005 compared to the first quarter of 2005 and the fourth quarter
      of
      2004. Refinancing activity continues to be strong due to an elevated home price
      index allowing borrowers to access the equity in their homes in the form of
      cash
      and also with the popularity of interest-only products. We expect our prepayment
      speeds to continue at generally the same levels in future periods if refinancing
      activity continues to be strong, particularly in light of the popularity of
      interest-only and longer amortization products in the marketplace.





**12
                Month Constant Prepayment Rate (Annual Percent)**
            **Life-to-date
                Constant Prepayment Rate**
              **(Annual
                Percent)******
            **Issue
                Date**
            **Percent
                with Prepayment Penalty**
            **Fixed**
            **Arm**
            **Fixed**
            **Arm****June
                30, 2005**
            ****
            ****
            ****
            ****
            ****SAST
                2001-2
            8/2/2001
            49.83%
            33.30%
            47.56%
            30.59%
            42.45%SAST
                2001-3
            10/11/2001
            28.18%
            34.79%
            49.02%
            35.11%
            42.88%SAST
                2002-1
            3/14/2002
            34.84%
            34.71%
            50.11%
            32.03%
            43.35%SAST
                2002-2
            7/10/2002
            48.34%
            33.35%
            49.03%
            32.95%
            41.31%SAST
                2002-3
            11/8/2002
            52.75%
            32.85%
            53.66%
            30.44%
            42.65%SAST
                2003-1
            3/6/2003
            60.31%
            33.04%
            59.00%
            27.56%
            46.51%SAST
                2003-2
            5/29/2003
            58.75%
            36.57%
            55.21%
            28.10%
            44.22%SAST
                2003-3
            9/16/2003
            71.85%
            30.87%
            47.47%
            22.72%
            38.03%SAST
                2004-1
            2/19/2004
            63.72%
            25.83%
            39.74%
            22.71%
            36.03%SAST
                2004-2
            7/27/2004
            63.81%
            —
            —
            18.80%
            31.27%SAST
                2004-3
            10/27/2004
            58.37%
            —
            —
            12.29%
            27.00%SAST
                2005-1
            1/25/2005
            58.97%
            —
            —
            8.20%
            21.40%SAST
                2005-2
            6/07/2005
            57.56%
            —
            —
            —
            —**December
                31, 2004**SAST
                2001-2
            8/2/2001
            48.42%
            36.11%
            52.36%
            30.75%
            42.96%SAST
                2001-3
            10/11/2001
            25.67%
            41.45%
            50.46%
            35.79%
            42.73%SAST
                2002-1
            3/14/2002
            68.44%
            34.12%
            49.03%
            31.29%
            40.97%SAST
                2002-2
            7/10/2002
            60.73%
            36.03%
            47.77%
            32.90%
            39.90%SAST
                2002-3
            11/8/2002
            57.17%
            38.17%
            51.72%
            30.56%
            41.09%SAST
                2003-1
            3/6/2003
            75.10%
            34.98%
            49.58%
            26.83%
            40.17%SAST
                2003-2
            5/29/2003
            76.57%
            31.87%
            44.93%
            25.88%
            37.15%SAST
                2003-3
            9/16/2003
            71.35%
            24.44%
            41.52%
            20.23%
            35.48%SAST
                2004-1
            2/19/2004
            64.45%
            —
            —
            18.89%
            30.77%SAST
                2004-2
            7/27/2004
            62.73%
            —
            —
            12.37%
            22.62%SAST
                2004-3
            10/27/2004
            55.86%
            —
            —
            1.77%
            21.59%





*Interest
      Expense* .
      Interest expense increased $27.3 million, or 80%, to $61.5 million for the
      three
      months ended June 30, 2005 from $34.2 million for the three months ended June
      30, 2004, and increased $51.0 million, or 78%, to $116.5 million for the six
      months ended June 30, 2005 from $65.5 million for the six months ended June
      30,
      2004. The table below presents the total change in interest expense from the
      three and six months ended June 30, 2005 to the three and six months ended
      June
      30, 2004, and the amount of the total change that is attributable to increasing
      interest rates and an increase in our outstanding debt. Compared to the three
      and six months ended June 30, 2004, our interest expense increased $20.0 million
      and $35.5 million for the three and six months ended June 30, 2005,
      respectively, as a result of higher interest rates on our interest bearing
      liabilities and increased $7.2 million and $15.5 million for the three and
      six
      months ended June 30, 2005, respectively, due to an increase in our
      borrowings.


42





*Rate/Volume
      Table For the Three and Six Months Ended June 30, 2005 Compared to the Three
      and
      Six Months Ended June 30, 2004*




**Three
                Months Ended June 30, 2005 Compared to**
              **Three
                Months Ended June 30, 2004**
            **Six
                Months Ended June 30, 2005 Compared to Six Months Ended June 30,
                2004******
            **Change
                in**
              **Rate**
            **Change
                in Volume**
            **Total
                Change**
              **in
                Interest Expense**
            **Change
                in**
              **Rate**
            **Change
                in Volume**
            **Total
                Change**
              **in
                Interest Expense**(in
                thousands)Securitization
                financing
            $18,542
            $8,388
            $26,930
            $32,712
            $17,088
            $49,800Warehouse
                financing:Lines
                of credit
            128
            (40)
            88
            490
            481
            971Repurchase
                agreements
            1,353
            (815)
            538
            2,280
            (1,503)
            777Other
            —
            (297)
            (297)
            —
            (592)
            (592)Total
            $20,023
            $7,236
            $27,259
            $35,482
            $15,474
            $50,956







As
      seen
      in the table below, our increase in interest expense was due primarily to the
      increase in the average yield on interest-bearing liabilities of 139 basis
      points and 122 basis points for the three and six months ended June 30, 2005,
      respectively. One-month LIBOR rates increased 197 basis points from June 30,
      2004 to June 30, 2005. Our average balance of borrowings increased $0.9 billion,
      or 17%, to $6.1 billion for the three months ended June 30, 2005 from $5.2
      billion for the three months ended June 30, 2004, and increased $1.0 billion,
      or
      20%, to $6.1 billion for the six months ended June 30, 2005 from $5.1 billion
      for the six months ended June 30, 2004 as a result of the growth in our mortgage
      loan portfolio. Our amortization of yield adjustments increased $7.7 million,
      or
      105%, to $0.4 million net amortization for the three months ended June 30,
      2005
      from $(7.3) million net accretion for the three months ended June 30, 2004,
      and
      increased $14.8 million, or 89%, to $(1.8) million net accretion for the six
      months ended June 30, 2005 from $(16.6) million net accretion for the six months
      ended June 30, 2004. Specifically, our accretion of premium on the interest
      only
      classes of certain of our bonds decreased $15.1 million due to the repayment
      of
      such bonds, partially offset by a decrease in our amortization of bond issuance
      costs and discounts on other bonds of $0.3 million.




*Interest
      Expense Yield Analysis For the Three and Six Months Ended June 30, 2005 and
      2004*





**Three
                Months Ended June 30, 2005**
            **Three
                Months Ended June 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest
                Expense**
            **Average**
              **Yield**($
                in thousands)**Warehouse
                financing**
            $190,034
            $1,880
            3.91%
            $198,354
            $1,130
            2.25%Less
                compensating balance credits (1)
            
            (865)
            (1.80%)
            —
            (203)
            (0.40)%**Net
                warehouse financing**
            $190,034
            1,015
            2.11%
            198,354
            927
            1.85%**Repurchase
                agreements**
            248,761
            2,350
            3.74%
            386,315
            1,813
            1.86%


**Securitization
                financing:**Gross
            5,685,408
            56,608
            3.98%
            4,587,307
            37,355
            3.26%Plus
                (less) net amortization (accretion) of yield adjustments
                (2)
            —
            405
            0.03%
            —
            (7,273)
            (0.63)%**Net
                securitization financing:**
            5,685,408
            57,013
            4.01%
            4,587,307
            30,082
            2.63%**Notes
                payable**
            —
            —
            —
            25,000
            497
            8.00%**Other
                expenses**
            —
            1,109
            —
            —
            909
            —**Total
                interest-bearing liabilities**
            $6,124,203
            61,487
            4.02%
            $5,196,976
            $34,228
            2.63%







43




**Six
                Months Ended June 30, 2005**
            **Six
                Months Ended June 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**($
                in thousands)**Warehouse
                financing**
            $181,063
            $3,496
            3.84%
            $135,198
            $1,574
            2.32%Less
                compensating balance credits (1)
            —
            (1,315)
            (1.44)%
            —
            (364)
            (0.54)%**Net
                warehouse financing**
            $181,063
            $2,181
            2.40%
            $135,198
            $1,210
            1.78%**Repurchase
                agreements**
            $231,428
            $4,099
            3.52%
            $361,258
            $3,322
            1.83%**Securitization
                financing:**Gross
            5,715,750
            109,922
            3.85%
            4,566,901
            74,848
            3.28%Less
                net accretion of yield adjustments (2)
            —
            (1,828)
            (0.06)%
            —
            (16,554)
            (0.72)%**Net
                securitization financing:**
            $5,715,750
            $108,094
            3.79%
            $4,566,901
            $58,294
            2.56%**Notes
                payable**
            —
            —
            —
            25,000
            995
            8.00%**Other
                expenses**
            —
            2,104
            —
            —
            1,701
            —**Total
                interest-bearing liabilities**
            $6,128,241
            $116,478
            3.80%
            $5,088,357
            $65,522
            2.58%


________________


(1)
            Compensating
                balance credits represent the amount of credits against interest
                expense
                placed on the value of balances held by our financial
                institutions.




(2)
            Yield
                adjustments include premiums, discounts, and debt issuance costs
                related
                to our debt.




(3)
            Yield
                adjustments include accumulated other comprehensive income relating
                to
                cash flow hedging of our debt.




*Net
      Interest Margin* .
      Our net
      interest margin decreased to 3.3% for the three months ended June 30, 2005,
      from
      5.5% for the three months ended June 30, 2004, and decreased to 3.5% for the
      six
      months ended June 30, 2005, from 5.6% for the six months ended June 30, 2004.
      The decline in our net interest margin was primarily attributable to an increase
      in the cost of our borrowings due to an increase in one-month LIBOR, competitive
      pricing pressures, as well as our shift in credit mix to loans with lower
      weighted average coupons and prepayments of higher coupon loans. We use
      derivative instruments to manage our exposure to changes in interest rates.
      Changes in one-month LIBOR may have an immediate impact on our borrowing costs
      and our net interest margin, while the impact of such changes on derivative
      instruments is reflected in derivatives gains (losses), which is not a component
      of net interest margin. Over the term of the debt, we believe the derivatives
      should effectively protect our net revenues and gains.




The
      following table sets forth information about our securitized mortgage loan
      portfolio and our securitization financing as of June 30, 2005 and December
      31,
      2004.




**June
                30,**
              **2005**
            **December
                31,**
              **2004**(in
                thousands)Collateral:Fixed
            $1,882,665
            $1,960,514Arm
            3,848,816
            3,204,816Total
            $5,731,481
            $5,165,330Financing:Fixed
            $774,252
            $921,745Arm
            5,108,884
            4,212,421Total
            $5,883,136
            $5,134,166






44




*Provision
      for Mortgage Loan Losses* .
      Provision for mortgage loan losses increased $2.6 million, or 38%, to $9.4
      million for the three months ended June 30, 2005, from $6.8 million for the
      three months ended June 30, 2004, and increased $0.5 million, or 4%, to $11.7
      million for the six months ended June 30, 2005, from $11.2 million for the
      six
      months ended June 30, 2004. The increase in the provision was primarily
      attributable to an increase in delinquencies in the 30-59 day delinquent
      category of $56.7 million, or 23%. Serious delinquencies remained relatively
      constant over this time period even as the mortgage loan portfolio continues
      to
      season. Because our portfolio shifted in credit mix to a higher quality
      portfolio in 2004 and 2003, expected future losses on 2003 and 2004 production
      may decrease compared to 2001 and 2002 production. We may maintain a lower
      required future provision for mortgage loan losses as a result of the improved
      credit quality of our loan portfolio. We did not make any significant changes
      in
      our reserve methodologies or assumptions during the six months ended June 30,
      2005.




Also,
      by
      looking at the portfolio on a static pool basis, or each year’s production over
      time, we are experiencing a decrease in overall losses on our 2004 and 2003
      production as compared to our 2002 and 2001 production, as losses from
      production in the earlier years were charged-off and replaced with loans of
      higher credit quality. We saw a decrease in serious delinquency rates and loan
      loss experience in our owned portfolio in the first six months of 2005 compared
      to the first six months of 2004. We believe this decrease was the result of
      the
      improved credit quality of our portfolio.




Two
      widely accepted methodologies of reporting delinquency data are the Mortgage
      Bankers Association (MBA) and the Office of Thrift Supervision (OTS) methods.
      The MBA methodology reports delinquencies as of month-end while the OTS
      methodology reports delinquencies as of the first of the following month after
      payment is due. We believe the MBA method is more commonly used in conforming
      and jumbo mortgage markets while the OTS method is more commonly used in
      non-conforming and subprime mortgage markets. Reporting delinquencies as of
      the
      first of the month makes OTS reported loans appear one delinquency category
      better than the MBA method of reporting delinquencies as of month-end;
      therefore, we consider the MBA method to be a more conservative approach. The
      following table sets forth information about the delinquency and loss experience
      of our owned servicing portfolio using the MBA method and is followed by a
      reconciliation between securitization net losses on liquidated loans to
      charge-offs. (See footnote (4) below the table for disclosure of seriously
      delinquent data using the OTS method.)




45




*Delinquency
      and Loss Experience Of Our Owned Portfolio*




**June
                30,******
            **2005**
            **2004**Total
                Delinquencies and Loss Experience
            ($
                in thousands)Total
                outstanding principal balance (at period end)
            $6,104,889
            $5,215,050Delinquency
                (at period end):30-59
                days:Principal
                balance
            $307,766
            $251,075Delinquency
                percentage
            5.04%
            4.81%60-89
                days:Principal
                balance
            $83,148
            $59,826Delinquency
                percentage
            1.36%
            1.15%90
                days or more:Principal
                balance
            $46,542
            $36,889Delinquency
                percentage
            0.76%
            0.71%Bankruptcies
                (1):Principal
                balance
            $126,391
            $96,978Delinquency
                percentage
            2.07%
            1.86%Foreclosures:Principal
                balance
            $105,782
            $121,326Delinquency
                percentage
            1.73%
            2.33%Real
                estate owned (2):Principal
                balance
            $41,972
            $42,891Delinquency
                percentage
            0.69%
            0.82%Total
                seriously delinquent including real estate owned (3)(4)
            $367,013
            $337,301Total
                seriously delinquent including real estate owned (3)(4)
            6.01%
            6.47%Total
                seriously delinquent excluding real estate owned (4)
            $325,041
            $294,410Total
                seriously delinquent excluding real estate owned (4)
            5.32%
            5.65%Securitization
                net losses on liquidated loans - quarter ended
            $13,074
            $11,007Charge-offs
                - quarter ended (5)
            $8,861
            $9,089Percentage
                of securitization net losses on liquidated loans (6)
            0.86%
            0.84%Percentage
                of charge-offs on liquidated loans (6)
            0.58%
            0.70%Loss
                severity on liquidated loans (7)
            37.18%
            37.99%


________________




(1)
            Bankruptcies
                include both non-performing and performing loans in which the related
                borrower is in bankruptcy. Amounts included for contractually current
                bankruptcies for the owned portfolio for June 30, 2005 and 2004 are
                $29.7
                million and $15.8 million, respectively.




(2)
            When
                a loan is deemed to be uncollectible and the property is foreclosed,
                it is
                transferred to REO at net realizable value and periodically evaluated
                for
                additional impairments. Net realizable value is defined as the property’s
                fair value less estimated costs to sell. Costs of holding this real
                estate
                and related gains and losses on disposition are credited or charged
                to
                operations as incurred; and therefore, are not included as part of
                our
                allowance for loan loss.






46




(3)
            Seriously
                delinquent is defined as loans that are 60 or more days delinquent,
                foreclosed, REO, or held by a borrower who has declared bankruptcy
                and is
                60 or more days contractually
                delinquent.




(4)
            Total
                seriously delinquent including REO using the OTS method would be
                $283.4
                million, or 4.64% as of June 30, 2005 and $277.0 million, or 5.31%
                as of
                June 30, 2004. Total seriously delinquent excluding REO using the
                OTS
                method would be $241.5 million, or 3.96% as of June 30, 2005, and
                $234.1
                million, or 4.49% as of June 30,
                2004.




(5)
            Charge-offs
                represent the losses recognized in our financial statements in accordance
                with GAAP. See reconciliation of securitization net losses on liquidated
                loans to charge-offs below.




(6)
            Annualized.




(7)
            Loss
                severity is defined as the total loss amount divided by the actual
                unpaid
                principal balance at the time of liquidation. Total loss amounts
                include
                all accrued interest and interest advances, fees, principal balances,
                all
                costs of liquidating and all other servicing advances for taxes,
                property
                insurance, and other servicing costs incurred and invoiced to us
                within 90
                days following the liquidation date.






*Reconciliation
      of Securitization Net Losses On Liquidated Loans to
      Charge-offs*







**For
                the Three Months Ended June 30,******
            **2005**
            **2004**(in
                thousands)Securitization
                net losses on liquidated loans
            $13,074
            $11,007Loan
                transfers to real estate owned
            8,432
            6,473Realized
                losses on real estate owned
            (10,581)
            (8,153)Timing
                differences between liquidation and claims processing
            (338)
            (1,158)Interest
                not advanced on warehouse
            (220)
            (59)Other
            (1,506)
            979Charge-offs
                (1)
            $8,861
            $9,089


________________


(1)  Charge-offs
      represent the losses recognized in our financial statements in accordance with
      GAAP.




47




The
      table
      below shows seriously delinquent outstanding principal balances and cumulative
      charge-offs by securitization.




**June
                30, 2005**
            **June
                30, 2004**
            **June
                30, 2005**
            **June
                30, 2004**
            **June
                30, 2005**
            **June
                30, 2004******
            **Seriously
                Delinquent**
              **Outstanding
                Principal Balance (1)**
            **Seriously
                Delinquent Percentage (1)**
            **Cumulative
                Charge-Offs**($
                in thousands)2001
                Securitizations
            $59,397
            $89,725
            26.51%
            23.16%
            $49,849
            $36,6082002
                Securitizations
            96,364
            136,746
            16.25%
            12.49%
            37,389
            22,2222003
                Securitizations
            75,316
            80,610
            7.94%
            4.68%
            12,381
            2,4702004
                Securitizations
            100,223
            19,603
            4.38%
            1.90%
            3,642
            —2005
                Securitizations
            27,753
            —
            1.65%
            —
            —
            —Warehouse
            7,960
            10,617
            2.12%
            1.09%
            5,130
            4,614Total
            $367,013
            $337,301
            6.01%
            6.47%
            $108,391
            $65,914


________________


(1)
            Seriously
                delinquent is defined as loans that are 60 or more days delinquent,
                foreclosed, REO, or held by a borrower who has declared bankruptcy
                and is
                60 or more days contractually delinquent.







**  *Servicing
      Income, Net of Amortization and Impairment* .
      Servicing income, net of amortization and impairment, increased $11.9 million,
      or 225%, to $17.2 million for the three months ended June 30, 2005 from $5.3
      million for the three months ended June 30, 2004, and increased $20.9 million,
      or 211%, to $30.8 million for the six months ended June 30, 2005 from $9.9
      million for the six months ended June 30, 2004. The increase in gross servicing
      income was primarily the result of a higher average total servicing portfolio
      due to the continued growth in our owned portfolio, which generates servicing
      income in the form of ancillary fees, as well as the acquisition of additional
      third party servicing rights. This increase was offset by an increase of $5.9
      million and $10.6 million of amortization and impairment expense of MSRs for
      the
      three and six months ended June 30, 2005, compared to the three and six months
      ended June 30, 2004, respectively. This increase in MSR amortization expense
      was
      due to an increase in the third party servicing rights balance from $50.0
      million at June 30, 2004 to $135.1 million at June 30, 2005. We expect our
      servicing income to increase as we continue to grow our


48


third
      party servicing portfolio. To the extent prepayment speeds decline in the
      future, we would also anticipate a decline in our amortization expense assuming
      a constant level in our mortgage loan servicing portfolio. Information relating
      to our servicing income is shown in the table below:





*Servicing
      Income For the Three and Six Months Ended June 30, 2005 Compared to the Three
      and Six Months Ended June 30, 2004*


**Three
                  Months Ended June 30,**
              **Six
                  Months Ended June 30,******
              **2005**
              **2004**
              **Variance**
              **2005**
              **2004**
              **Variance**($
                  in thousands)Average
                  third party servicing portfolio
              $18,174,942
              $5,921,186
              207%
              $16,326,701
              $5,449,511
              200%Average
                  owned portfolio
              $6,008,245
              $4,886,467
              23%
              $5,983,996
              $4,778,034
              25%Average
                  total servicing portfolio
              $24,183,187
              $10,807,653
              124%
              $22,310,697
              $10,227,545
              118%Gross
                  servicing income
              $28,484
              $10,682
              167%
              $52,742
              $21,321
              147%Amortization
                  and impairment
              $11,261
              $5,346
              111%
              $21,953
              $11,383
              93%Servicing
                  fees - third party portfolio (1) (2)
              52
              58
              
              53
              58Amortization
                  and impairment- third party portfolio (1)
              25
              36
              
              27
              42Other
                  servicing income - total servicing
                portfolio (1)(3)
              8
              8
              
              11
              20Servicing
                  income - total servicing portfolio (1)
              47
              40
              
              47
              42


___________


(1)
            Annualized
                and in basis points.




(2)
            Includes
                master servicing fees.




(3)
            Includes
                primarily late fees, electronic processing fees, and tax service
                fee
                expense. Ancillary fees are collected and recorded within other servicing
                income for both the third party portfolio as well as the owned
                portfolio.






**Expenses**





*Payroll
      and Related Expenses* .
      Payroll
      and related expenses decreased $2.1 million, or 11%, to $16.3 million for the
      three months ended June 30, 2005 from $18.4 million for the three months ended
      June 30, 2004. Payroll and related expenses increased $3.1 million, or 9%,
      to
      $38.0 million for the six months ended June 30, 2005 from $34.9 million for
      the
      six months ended June 30, 2004. Specifically:





·
            Salary,
                bonus, and related payroll expenses decreased $0.5 million, or 3%,
                to
                $16.6 million for the three months ended June 30, 2005, from $17.1
                million
                for the three months ended June 30, 2004. This decrease resulted
                from the
                closing and divestiture of retail branches in the second quarter
                of 2005
                and the continued efforts to increase efficiencies and reduce production
                cost. Salary, bonus, and related payroll expenses increased $2.4
                million,
                or 7%, to $36.3 million for the six months ended June 30, 2005, from
                $33.9
                million for the six months ended June 30, 2004. This increase was
                primarily attributable to the increase in head count from 1,173 at
                June
                30, 2004 to 1,204 at June 30, 2005. This increase in employees was
                due
                primarily to a 44% increase in our servicing segment to support our
                servicing portfolio growth.







49


·
            Severance
                expense decreased $1.6 million, or 89%, to $0.2 million for the three
                months ended June 30, 2005, from $1.8 million for the three months
                ended
                June 30, 2004 and decreased $1.2 million, or 67%, to $0.6 million
                for the
                six months ended June 30, 2005, from $1.8 million for the six months
                ended
                June 30, 2004. The severance expense decrease primarily reflected
                the
                absence in the first two quarters of 2005 of severance expenses similar
                to
                the severance expenses we incurred in connection with the resignation
                of
                our President/Chief Operating Officer in June 2004. Severance expense
                is
                expected to increase for the third quarter of 2005 in connection
                with the
                departures of our Executive Vice President, Capital Markets and our
                Senior
                Vice President and Corporate Strategies Director in July 2005.





·
            Commission
                expense decreased $1.6 million, or 25%, to $4.8 million for the three
                months ended June 30, 2005, from $6.4 million for the three months
                ended
                June 30, 2004 and decreased $0.7 million, or 6%, to $10.6 million
                for the
                six months ended June 30, 2005, from $11.3 million for the six months
                ended June 30, 2004. The decreases in commission expense were attributable
                to the closing and/or divestiture of several of our retail branches
                during
                the first six months of 2005, and due to decreased loan production
                volume
                for the first six months of 2005 compared to the first six months
                of
                2004.





·
            Deferred
                payroll and related expenses, as they related to direct loan origination
                costs, decreased $1.5 million, or 18%, to $7.0 million for the three
                months ended June 30, 2005, from $8.5 million for the three months
                ended
                June 30, 2004 and decreased $2.0 million, or 13%, to $12.9 million
                for the
                six months ended June 30, 2005, from $14.9 million for the six months
                ended June 30, 2004. These decreases were due to lower production
                volume
                during the first six months of 2005.





*General
      and Administrative Expenses* .
      General
      and administrative expenses increased $2.8 million, or 22%, to $15.3 million
      for
      the three months ended June 30, 2005, from $12.5 million for the three months
      ended June 30, 2004. The increase was due primarily to an increase in legal,
      accounting, and consulting/outside services expense of $2.4 million as well
      as
      an increase of $0.2 million in rent expense, and an increase in computer lease
      expense of $0.2 million.





General
      and administrative expenses increased $6.9 million, or 28%, to $31.4 million
      for
      the six months ended June 30, 2005, from $24.5 million for the six months ended
      June 30, 2004. The increase was due primarily to an increase in legal,
      accounting, and consulting/outside services expense of $4.4 million as well
      as
      an increase of $0.6 million in rent expense, an increase in computer lease
      expense of $0.4 million, an increase
      of $0.3 million in investor relation expense, an increase of $0.6 million in
      printed material and appraisal fee expense, and an increase in advertising
      expense of $0.6 million.


50





*Income
      Tax Expense (Benefit)* .
      We
      recorded a $2.9 million tax expense for the three months ended June 30, 2005
      compared to a $20.9 million tax expense for the three months ended June 30,
      2004. We recorded a $0.4 million tax benefit for the six months ended June
      30,
      2005 compared to a $27.4 million tax expense for the six months ended June
      30,
      2004. These differences were the result of the impact of the structure and
      formation transactions related to our REIT conversion.





***REIT
      Taxable Income***





The
      following table is a reconciliation of GAAP net income to estimated REIT taxable
      net income for the three and six months ended June 30, 2005:





**Three
                Months Ended**
              **June
                30, 2005**
            **Six
                Months Ended**
              **J****une
                30, 2005**($
                in thousands)Consolidated
                GAAP income before taxes, including cumulative effect of change in
                accounting   principle (SFAS 123(R))
            $9,972
            $60,614Estimated
                tax adjustments:Plus:Provision
                for losses in excess of actual charge-offs
            12,537
            18,399Hedging
                income (1)
            12,370
            —Miscellaneous
            8,916
            5,205Less:Taxable
                REIT subsidiary income before taxes
            14,070
            12,441Hedging
                income (1)
            —
            9,863Estimated
                REIT taxable income
            $29,725
            $61,914


________________


(1)
            Although
                we have eliminated the use of hedge accounting under SFAS No. 133
                for
                financial purposes, we continue to account for certain of our derivative
                instruments as hedges for tax
                purposes.





The
      estimated REIT taxable income for the three and six months ended June 30, 2005
      set forth in the table above is an estimate only and is subject to change until
      we file the 2005 REIT federal tax returns.





**Business
      Segment Results**





We
      operate our business through three core business segments: portfolio, servicing,
      and mortgage loan production. All segments except the portfolio segment are
      operated by our taxable REIT subsidiaries. In this section, we discuss
      performance and results of our business segments for the three and six months
      ended June 30, 2005 and 2004. See Note 12 to our unaudited consolidated
      financial statements for additional information about the results of our
      business segments.


51


***Portfolio
      Segment***





The
      portfolio segment uses our equity capital and borrowed funds to invest in our
      mortgage loan portfolio, which produces net interest income. We evaluate the
      performance of our portfolio segment based on total net revenues. Total net
      revenues and gains for the portfolio segment decreased $53.8 million to $10.2
      million for the three months ended June 30, 2005 from $64.0 million for the
      three months ended June 30, 2004. Total net revenues and gains for the portfolio
      segment decreased $11.6 million, or 13%, to $81.1 million for the six months
      ended June 30, 2005 from $92.7 million for the six months ended June 30, 2004.
      The decrease in total net revenues was due to a decrease in net interest income
      after provision for mortgage loan losses resulting from the margin compression
      relating to intense pricing pressures and the increase in our borrowing costs
      due to the increase in one-month LIBOR.





***Servicing
      Segment***




The
      servicing segment services loans, seeking to ensure that loans are repaid in
      accordance with their terms. We evaluate the performance of our servicing
      segment based on servicing income, net of amortization and impairment; cost
      to
      service a loan; and delinquency levels as measures of the performance of the
      segment. We believe these measures assist investors by allowing them to evaluate
      the performance of our servicing segment. The following discussion highlights
      changes in our servicing segment for the periods indicated.





*Our
      Mortgage Loan Servicing Portfolio*





In
      addition to servicing mortgage loans that we originate or purchase through
      our
      taxable REIT subsidiaries and retain in our portfolio, we also service mortgage
      loans for other lenders and investors. Our loan servicing portfolio as of June
      30, 2005 is summarized below:





**Number
                of Loans**
            **Principal
                Balance**
            **Percent
                of Total**
            **Average
                Loan Balance**($
                in thousands)**Owned
                Portfolio:**Saxon
                Capital, Inc. (1)
            42,784
            $6,104,889
            25%
            $143**Third
                Party Servicing:**Greenwich
                Capital, Inc.
            63,099
            $9,534,106
            
            $151Credit
                Suisse First Boston
            36,024
            6,085,975
            
            169Barclays
                Bank, PLC.
            10,068
            1,932,084
            
            192Dominion
                Capital
            7,158
            484,538
            
            68Lehman
                Brothers
            2,731
            499,689
            
            183Fannie
                Mae
            471
            51,538
            
            109Dynex
                Capital, Inc.
            336
            30,256
            
            90Other
                investors
            284
            7,540
            
            27**Total
                third party servicing**
            120,171
            $18,625,726
            75%
            $155Total
            162,955
            $24,730,615
            
            $152 _________________


(1)
            Includes
                loans we originated and purchased since July 6, 2001.




Our
      mortgage loan servicing portfolio, including loans recorded on our consolidated
      balance sheets, increased $4.5 billion, or 22%, to $24.7 billion as of June
      30,
      2005, from $20.2 billion as of December 31, 2004. The increase was due primarily
      to the origination and purchase of $1.6 billion of mortgage loans as well as
      the
      acquisition of servicing rights related to $7.7 billion of mortgage loans owned
      by non-affiliated companies during the first six months of 2005. This increase
      was partially offset by prepayments and losses totaling $4.2 billion and
      principal payments on our securitized portfolio of $1.2 billion.







We
      believe we can continue to increase our mortgage loan servicing portfolio
      because the mortgage industry’s growth has continued to outpace the growth in
      servicers for non-conforming mortgage loans. This has resulted in an increasing
      number of asset-backed securities being issued by entities that do not perform
      servicing, which presents opportunities for us to increase the size of our
      portfolio of loans serviced for third parties.




52


*Delinquency
      and Loss Experience Of Our Total Servicing Portfolio*




We
      experienced a decline in seriously delinquent accounts for our mortgage loan
      servicing portfolio to 5.46% for the three months ended June 30, 2005 from
      7.17%
      for the three months ended June 30, 2004. This was mainly a result of the higher
      credit quality of recent production as well as the higher credit quality of
      our
      additional third party purchases. Additionally, the volume of recent third
      party
      purchases means a large portion of our mortgage loan servicing portfolio is
      unseasoned, and therefore not experiencing high delinquencies. If we had
      experienced higher delinquencies on our third party servicing portfolio, it
      would have negatively impacted our servicing income and the fair value of our
      MSRs, and caused us to pay more in servicing advances. The
      following tables set forth information about the delinquency and loss experience
      of the mortgage loans we service for the periods indicated using the MBA method.
      (See footnote (4) below the table for disclosure of seriously delinquent data
      using the OTS method.)


**June
                30,******
            **2005**
            **2004****Total
                Delinquencies and Loss Experience (1)**
            ($
                in thousands)Total
                outstanding principal balance (at period end)
            $24,730,615
            $11,364,002Delinquency
                (at period end):30-59
                days:Principal
                balance
            $1,262,124
            $536,522Delinquency
                percentage
            5.10%
            4.72%60-89
                days:Principal
                balance
            $348,432
            $142,404Delinquency
                percentage
            1.41%
            1.25%90
                days or more:Principal
                balance
            $285,741
            $94,971Delinquency
                percentage
            1.16%
            0.84%Bankruptcies
                (2):Principal
                balance
            $358,906
            $272,043Delinquency
                percentage
            1.45%
            2.39%Foreclosures:Principal
                balance
            $346,306
            $267,054Delinquency
                percentage
            1.40%
            2.35%Real
                estate owned:Principal
                balance
            $121,455
            $93,809Delinquency
                percentage
            0.49%
            0.83%Total
                seriously delinquent including real estate owned (3)(4)
            $1,351,039
            $814,810Total
                seriously delinquent including real estate owned (3)(4)
            5.46%
            7.17%


Total
                seriously delinquent excluding real estate owned (4)
            $1,229,584
            $721,001Total
                seriously delinquent excluding real estate owned (4)
            4.97%
            6.34%Securitization
                net losses on liquidated loans - quarter ended
            $27,579
            $29,396Percentage
                of securitization net losses on liquidated loans (5)
            0.45%
            0.52%Loss
                severity on liquidated loans (6)
            33.81%
            45.46%


__________


(1)
            Includes
                all loans we service.


(2)
            Bankruptcies
                include both non-performing and performing loans in which the related
                borrower is in bankruptcy. Amounts included for contractually current
                bankruptcies for the total servicing portfolio for June 30, 2005
                and 2004
                are $89.6 million and $41.0 million, respectively.


(3)
            Seriously
                delinquent is defined as loans that are 60 or more days delinquent,
                foreclosed, REO, or held by a borrower who has declared bankruptcy
                and is
                60 or more days contractually delinquent.


(4)
            Total
                seriously delinquent including REO using the OTS method would be
                $994.4
                million, or 4.02% as of June 30, 2005 and $665.8 million, or 5.86%
                as of
                June 30, 2004. Total seriously delinquent excluding REO using the
                OTS
                method would be $873.0 million, or 3.53% as of June 30, 2005, and
                $572.0
                million, or 5.03% as of June 30,
                2004.


(5)
            Annualized.


(6)
            Loss
                severity is defined as the total loss amount divided by the actual
                unpaid
                principal balance at the time of liquidation. Total loss amounts
                include
                all accrued interest and interest advances, fees, principal balances,
                all
                costs of liquidating and all other servicing advances for taxes,
                property
                insurance, and other servicing costs incurred and invoiced to us
                within 90
                days following the liquidation
                date.




53




*Delinquency
      by Year Funded* (1)(2)




**Year**
            **Original
                Balance**
            **Balance
                Outstanding**
            **Percentage
                of Original Remaining**
            **Cumulative
                Loss Percentage (3)**
            **Loss
                Severity (4) (5)**($
                in thousands)Pre-divestiture:1996
            $741,645
            $12,588
            2%
            1.93%
            31.37%1997
            $1,769,538
            $47,247
            3%
            3.23%
            38.96%1998
            $2,084,718
            $99,869
            5%
            4.08%
            39.52%1999
            $2,381,387
            $208,731
            9%
            4.97%
            41.61%2000
            $2,078,637
            $232,768
            11%
            5.35%
            43.57%2001
            $499,879
            $67,399
            13%
            3.50%
            49.93%Post-divestiture:2001
            $1,833,357
            $284,450
            16%
            3.32%
            39.58%2002
            $2,484,074
            $562,415
            23%
            1.37%
            34.81%2003
            $2,842,942
            $1,139,789
            40%
            0.28%
            23.98%2004
            $3,764,628
            $2,553,145
            68%
            0.02%
            18.98%2005
            $1,592,982
            $1,301,972
            82%
            —
            —


_________________


(1)
            Includes
                loans originated or purchased by our predecessor and
                us.




(2)
            As
                of June 30, 2005.




(3)
            Includes
                securitization losses and losses incurred from loan repurchases,
                delinquent loan sales, and unsecuritized
                loans.




(4)
            Loss
                severity is defined as the total loss amount divided by the actual
                unpaid
                principal balance at the time of liquidation. Total loss amounts
                include
                all accrued interest and interest advances, fees, principal balances,
                allcosts of liquidating and all other servicing advances for taxes,
                property insurance, and other servicing costs incurred and invoiced
                to us
                within 90 days following the liquidation
                date.




(5)
            Loss
                severity amounts are cumulative for each respective funded
                year.







***Mortgage
      Loan Production Segment***




We
      evaluate the performance of our mortgage loan production segment based on
      production levels. We believe the characteristics and level of mortgage loan
      production assists investors by allowing them to evaluate performance of our
      mortgage loan production segment. Our mortgage loan production segment is
      composed of our wholesale, correspondent and retail business channels, and
      it
      purchases and originates non-conforming residential mortgage loans through
      relationships with various mortgage companies, mortgage brokers, and
      correspondent lenders, and directly to borrowers through its retail branch
      offices. The mortgage loan production segment records interest income, interest
      expense, and provision for mortgage loan losses on the mortgage loans it holds
      prior to selling its loans to the portfolio segment. It also collects revenues,
      such as origination and underwriting fees and certain other non-refundable
      fees,
      which are deferred and recognized over the life of the loan as an adjustment
      to
      interest income recorded in the portfolio segment. With our continued investment
      in technology in our mortgage loan production segment, as well as the
      reorganization of our wholesale and retail back-end operations and branch
      locations, we expect to see continued improvements in our loan production
      efficiency during the remainder of 2005.





54


Mortgage
        loan production was $787.8 million for the three months ended June 30, 2005,
        which represents a 17% decrease from the three months ended June 30, 2004
        production of $944.0 million. Mortgage loan production was $1.6 billion for
        the
        six months ended June 30, 2005, which represents a 6% decrease from the six
        months ended June 30, 2004 production of $1.7 billion, which includes $136.3
        million in called loans. We did not exercise any clean-up call options during
        the first six months of 2005. Our wholesale mortgage loan production was
        $376.8
        million for the three months ended June 30, 2005, a decrease of 11% from
        the
        three months ended June 30, 2004. Our wholesale mortgage loan production
        was
        $719.3 million during the first six months of 2005, a decrease of 1% from
        the
        first six months of 2004. Our retail channel loan production was $178.4 million
        for the three months ended June 30, 2005, a decrease of 33% from the three
        months ended June 30, 2004. Our retail channel loan production was $380.4
        million during the first six months of 2005, a decrease of 18% from the first
        six months of 2004. Our correspondent flow mortgage loan production was $199.5
        million for the three months ended June 30, 2005, a decrease of 4% from the
        three months ended June 30, 2004. Our correspondent flow mortgage loan
        production was $422.2 million during the first six months of 2005, an increase
        of 32% from the first six months of 2004. Our correspondent bulk mortgage
        loan
        production was $33.2 million for the three months ended June 30, 2005, a
        decrease of 27% from the three months ended June 30, 2004. Our correspondent
        bulk mortgage loan production was $71.1 million during the first six months
        of
        2005, a decrease of 9% from the first six months of 2004. In our correspondent
        channel, we continue to focus on growing the flow business while pursuing
        the
        bulk business when we consider market conditions to be advantageous.


**Financial
      Condition**




*June
      30, 2005 Compared to December 31, 2004*





*Net
      Mortgage Loan Portfolio.* Our
      net
      mortgage loan portfolio increased $0.1 billion, or 2%, to $6.1 billion as of
      June 30, 2005 from $6.0 billion as of December 31, 2004. This increase was
      the
      result of the origination and purchase of $1.6 billion of mortgage loans offset
      by principal payments of $1.2 billion and loan sales of $0.2 million. We expect
      that our mortgage loan portfolio will continue to grow as we continue to
      originate and purchase mortgage loans. However, we anticipate the growth rate
      will be slower than historical growth rates as our portfolio ages, more seasoned
      mortgage loans are paid off, and as competition in our industry remains intense.





*Allowance
      for Loan Losses.* The
      allowance for loan losses decreased $0.5 million, or 2%, to $24.4 million as
      of
      June 30, 2005 from $24.9 million as of December 31, 2004. Although an additional
      $11.7 million of loan losses were provided for during the six months ended
      June
      30, 2005, this amount was offset by charge-offs primarily relating to our 2001
      and 2002 securitizations, which were provided for in previous periods. We have
      experienced a decrease in the percentage of seriously delinquent accounts since
      December 31, 2004; however, we expect our allowance for loan loss may increase
      in the future as our portfolio continues to grow.




*Mortgage
        servicing rights, net.* Mortgage
        servicing rights (MSRs), net increased $30.0 million, or 30%, to $129.0 million
        as of June 30, 2005 from $99.0 million as of December 31, 2004. This increase
        was primarily due to purchases of $52.0 million of rights to service $7.7
        billion of mortgage loans during the first six months of 2005. The increase
        in
        MSRs was partially offset by amortization of servicing rights of $20.5 million
        during the first six months of 2005. Also, our valuation allowance increased
        $1.4 million as the result of actual prepayment speeds being greater than
        projected during the first six months of 2005 on certain aged third party
        servicing pools. We have sought to strategically position ourselves to take
        advantage of the increased supply of servicing assets in the marketplace
        and
        have been able to purchase servicing assets at what we believe to be favorable
        prices. We anticipate that the demand for non-conforming servicing will continue
        and that we will continue to purchase servicing rights in the future, which
        would increase our net servicing income. We are committed to purchase third
        party servicing rights for an additional $5.2 billion of mortgage loans during
        the third quarter of 2005, of which $2.0 billion have been purchased in July
        2005 for approximately $13.3 million.


55




*Servicing
      Related Advances.* Servicing related advances increased $24.0 million, or 22%, to $133.8 million
      as
      of June 30, 2005 from $109.8 million as of December 31, 2004. The increase
      was
      primarily due to the increase in our third party servicing balances and an
      increase in delinquencies.




*Trustee
      Receivable.* Trustee
      receivable increased $23.3 million, or 21%, to $135.4 million as of June 30,
      2005 from $112.1 million as of December 31, 2004. The increase was primarily
      due
      to the completion of two securitizations during the first six months of 2005,
      as
      well as increased collections after the applicable trust cut-off date as a
      result of higher prepayment activity. On each payment date, the trust
      distributes securitization loan payments to their related bondholders. These
      loan payments are collected by the trust before the cut-off date, which is
      typically the 17 th of each
      month. Therefore, all principal payments received after the cut- off
      date
      are recorded as a trustee receivable and reduce our mortgage loan portfolio
      on
      our consolidated balance sheet. The trustee retains these principal payments
      until the following payment date. As we continue to securitize mortgage loans,
      we anticipate our trustee receivable balance to increase.







*Other
      Assets.* Other
      assets decreased $29.4 million, or 35%, to $54.5 million as of June 30, 2005
      from $83.9 million as of December 31, 2004. The decrease in other assets is
      primarily the result of a decrease in our current tax receivable balance due
      to
      a partial refund of $29.7 million. Additionally, we had decreases of $2.0
      million in prepaid expenses and $3.4 million in our required cash margin account
      on derivative instruments offset by increases in fixed assets of $2.9 million
      and increases in deferred issuance costs of $1.5 million.





*Warehouse
      Financing.* Warehouse financing decreased $339.5 million, or 57%, to $261.1 million as
      of
      June 30, 2005 from $600.6 million as of December 31, 2004. We expect our
      warehouse financing to continue to fluctuate from one reporting period to the
      next as a result of the timing of our securitizations and mortgage loan
      production.





*Securitization
      Financing.* Securitization financing increased $0.7 billion, or 13%, to $6.0 billion as
      of
      June 30, 2005 from $5.3 billion as of December 31, 2004. This increase resulted
      primarily from the execution of two asset-backed securitizations, which resulted
      in debt being issued in the amount of $1.0 billion during the first quarter
      of
      2005 and $1.0 billion during the second quarter of 2005. This increase was
      partially offset by debt and certificate payments of $1.2 billion. In general,
      we expect increases in our securitization financing as we experience increased
      mortgage loan production and continue to securitize our mortgage loans.





*Shareholders’
      Equity.* Shareholders’
      equity increased $35.6 million, or 6%, to $622.7 million as of June 30, 2005,
      from $587.1 million as of December 31, 2004. The increase in shareholders’
equity was due primarily to net income of $61.0 million partially offset by
      the
      declaration of $27.9 million in dividends.





**Liquidity
      and Capital Resources**




Cash
      decreased by $1.9 million during the six months ended June 30, 2005 and
      increased by $2.1 million during the six months ended June 30, 2004. The overall
      change in cash was comprised of the following:


56





**Six
                Months Ended June 30,******
            **2005**
            **2004**($
                in thousands)Cash
                provided by operating activities
            $73,514
            $68,455Cash
                used by investing activities
            (444,997)
            (632,138)Cash
                provided by financing activities
            369,581
            565,758Increase
                (decrease) in cash
            $(1,902)
            $2,075





*Operating
      Activities* .
      Cash
      provided by operating activities for the six months ended June 30, 2005 was
      $73.5 million, reflecting an increase of $5.0 million, or 7%, compared to the
      first six months of 2004. This change was primarily the result of an overall
      increase in net income adjusted for non-cash items such as depreciation and
      amortization, deferred income taxes, provision for mortgage loan losses, and
      increases in our income tax receivable as a result of the REIT conversion.
      Our
      net income increased primarily because the growth of our servicing income,
      which
      was due to increases in our third party servicing acquisitions, was higher
      than
      the decline in our net interest margin, which was due to an increase in the
      cost
      of our borrowings. Further details are discussed in “Consolidated Results.”





*Investing
      Activities* .
      Cash
      used for investing activities was $445.0 million for the six months ended June
      30, 2005. Investing activities consist principally of the origination and
      purchase of mortgage loans as well as the acquisition of MSRs. The origination
      and purchase of mortgage loans including basis adjustments totaled $1.6 billion
      for the six months ended June 30, 2005. In addition, MSRs were purchased
      totaling $52.0 million. These decreases to cash were partially offset by cash
      received from principal payments on our mortgage loan portfolio totaling $1.2
      billion and proceeds from the sale of mortgage loans and REO which totaled
      $216.4 million and $29.1 million, respectively.





Restricted
      cash increased $203.3 million to $204.8 million at June 30, 2005 due to the
      timing of the receipt of cash related to prefunded securitizations. Prefunded
      amounts are held in a trust account and made available once all required
      mortgage loans have been included in the securitization. During the second
      quarter of 2005, the SAST 2005-2 securitization was closed requiring a
      prefunding settlement. Because settlement had not occurred as of June 30, 2005,
      restricted cash increased.




Capital
      expenditures during the six months ended June 30, 2005 were $5.9 million and
      were primarily related to leasehold improvements necessary as a result of the
      growth in our servicing segment as well as various information technology
      enhancements.





*Financing
      Activities* .
      Cash
      provided by financing activities during the six months ended June 30, 2005
      was
      $369.6 million and was the result of proceeds from the issuance of
      securitization financing of $2.0 billion partially offset by principal payments
      on securitization financings of $1.2 billion, net repayment of warehouse
      financing of $339.5 million, payment of dividends of $56.8 million, and debt
      issuance costs of $6.3 million relating to the completion of two securitizations
      during the first six months of 2005. Fluctuations in warehouse and
      securitization financing period over period can occur due to
      the
      timing of securitizations and the related repayment of the warehouse financing
      facilities.


57




*Dividends.* We
      declared a dividend of $0.55 per common share payable on August 11, 2005 to
      stockholders of record as of the close of business on July 29, 2005. Due to
      our
      election to be treated as a REIT, we expect to continue making quarterly
      distributions to shareholders, the amount and timing of which will be determined
      by our Board of Directors.





*Trends.* At
      this
      time, we see no material negative trends that we believe would affect our access
      to long-term borrowings, short-term borrowings or bank credit lines sufficient
      to maintain our current operations or that would likely cause us to be in danger
      of any debt covenant default.





***Working
      Capital***




We
      intend
      to maintain sufficient working capital to fund the cash flow needs of our
      operations in the event we are unable to generate sufficient cash flows from
      operations to cover our operating requirements. Using our definition of working
      capital, we calculated our working capital as of June 30, 2005 to be
      approximately $178.6 million. Under the commonly defined working capital
      definition, we calculated our working capital as of June 30, 2005 to be $313.2
      million. A reconciliation between our working capital calculation and the common
      definition of working capital is provided below. Management focuses on our
      internally defined calculations of working capital rather than the commonly
      used
      definition of working capital because management believes our definition
      provides a better indication of how much liquidity we have available to conduct
      business at the time of the calculation.







**Working
                Capital Reconciliation - June 30, 2005**
            **Saxon
                Defined**
              **Working
                Capital**
            **Commonly
                Defined Working Capital**($
                in thousands)Unrestricted
                cash
            $10,950
            $10,950Borrowing
                availability
            72,264
            —Trustee
                receivable
            —
            135,424Accrued
                interest receivable
            —
            38,253Current
                tax receivable
            —
            5,452Accrued
                interest payable
            —
            (6,909)Other
                current liabilities
            —
            (17,596)Unsecuritized
                mortgage loans - payments less than one year
            350,093
            355,652Warehouse
                financing facility - payments less than one year
            (254,695)
            (261,105)Servicing
                advances
            —
            133,787Financed
                advances - payments less than one year
            —
            (48,272)Securitized
                loans - payments less than one year
            —
            1,990,419Securitized
                financing - payments less than one year
            —
            (2,022,869)Total
            $178,612
            $313,186





***Financing
      Facilities***




We
        need
        to borrow substantial sums of money each quarter to originate and purchase
        mortgage loans. We rely upon several counterparties to provide us with financing
        facilities to fund our loan originations and purchases, as well as fund a
        portion of our servicing advances and servicing rights. Our ability to fund
        current operations and accumulate loans for securitization depends to a large
        extent upon our ability to secure short-term financing on acceptable terms.


58





To
      accumulate loans for securitization, we borrow money on a short-term basis
      through committed secured warehouse lines of credit and committed repurchase
      agreements. In addition to funding loans prior to securitization, some of our
      committed facilities allow us to finance advances that are required by our
      mortgage servicing contracts, mortgage bonds and mortgage servicing
      rights.





*Committed
      Facilities* .
      There
      were several changes to our financing facilities during the second quarter
      of
      2005:





·
            Our
                $300.0 million repurchase facility with Credit Suisse First Boston
                Mortgage Capital, LLC was amended on April 29, 2005, extending the
                termination date of the facility to April 28,
                2006.





·
            Our
                $300.0 million repurchase facility with Bank of America, N.A. was
                amended
                effective June 23, 2005 extending the termination date of the facility
                to
                June 22, 2006.





·
            Our
                $400.0 million repurchase facility with Merrill Lynch Mortgage Capital,
                Inc. was terminated in the second quarter. We entered into a new
                $400.0
                million repurchase facility with Merrill Lynch Bank USA effective
                May 13,
                2005 which provides us with the ability to borrow against first or
                second
                lien mortgage loans and also provides a sub-limit for wet collateral.
                The
                facility contains a termination date of November 21, 2005.





·
            Our
                $150.0 million repurchase facility with Greenwich Capital Financial
                Products, Inc. was amended on June 22, 2005 to change the termination
                date
                of the facility to August 29, 2005. We intend to combine the two
                Greenwich
                Capital repurchase facilities into a single combined facility prior
                to the
                termination dates.





As
      of
      June 30, 2005 we had committed revolving warehouse and repurchase facilities
      in
      the amount of approximately $1.7 billion. The table below summarizes our
      facilities and their expiration dates as of June 30, 2005. We believe this
      level
      of committed financing will allow us flexibility to execute our asset-backed
      securitizations in accordance with our business plans.





**Counterparty
                Committed Lines**
            **Facility
                Amount**
            **Expiration
                Date**($
                in thousands)JP
                Morgan Chase Bank
            $
                375,000
            March
                29, 2006Greenwich
                Capital Financial Products, Inc.
            175,000
            August
                29, 2005


Greenwich
                Capital Financial Products, Inc.
            150,000
            August
                29, 2005Bank
                of America, N.A.
            300,000
            June
                22, 2006CS
                First Boston Mortgage Capital, LLC
            300,000
            April
                28, 2006Merrill
                Lynch Bank USA
            400,000
            November
                21, 2005Total
                committed facilities
            $1,700,000





The
      amount we have outstanding on our committed facilities at any quarter end
      generally is a function of the pace of mortgage loan purchases and originations
      relative to the timing of our securitizations. Although we expect to issue
      asset-backed securities on a quarterly basis, our intention is to maintain
      committed financing facilities equal to approximately six months of mortgage
      production to provide us with flexibility in timing our securitizations.





We
      had
      $261.1 million of warehouse borrowings collateralized by residential mortgages
      outstanding as of June 30, 2005. As we complete securitization transactions,
      a
      portion of the proceeds from the long-term debt issued in the securitization
      will be used to pay down our short-term borrowings. Therefore, the amount of
      short-term borrowings will fluctuate from quarter to quarter, and could be
      significantly higher or lower than the $261.1 million we held as of June 30,
      2005, as our mortgage production and securitization programs continue.




Our
      financing facilities require us to comply with various customary operating
      and
      financial covenants, including tests relating to our tangible net worth,
      liquidity, and leverage requirements. In addition, some of the facilities may
      subject us to cross default features. We do not believe that these existing
      financial covenants will restrict our operations or growth. To the extent that
      we fail to comply with the covenants contained in our financing agreements
      or
      are otherwise found to be in default under the terms of such agreements, we
      could be restricted from paying dividends or from engaging in other transactions
      that are necessary for us to maintain our REIT status. Our failure to qualify
      as
      a REIT could reduce materially the value of our common stock. We were in
      compliance with all covenants under the agreements as of and for the three
      and
      six months ended June 30, 2005.





59


***Securitization
      Financing***





*Mortgage
      Loan Securitization Facilities.* We have
      historically financed, and expect to continue to finance, our mortgage loan
      portfolio on a long-term basis by issuing asset-backed securities. We believe
      that issuing asset backed securities provides us a low cost method of financing
      our mortgage loan portfolio. In addition, it allows us to reduce our interest
      rate risk on our fixed rate loans by securitizing them. Our ability to issue
      asset backed securities depends on the overall performance of our assets, as
      well as the continued general demand for securities backed by non-conforming
      mortgage loans and home equity loans.





We
      are
      not legally obligated to make payments to the holders of the asset-backed
      securities issued as part of our securitizations. Instead, the holders of the
      asset-backed securities
      can look for repayment from the cash flows from the real estate specifically
      collateralizing the debt.





*Servicing
      Advance Facility.* As of
      June 30, 2005 we had $140.5 million of borrowings outstanding under a facility
      which allows for the issuance of notes to finance principal, interest and other
      servicing advances that we are required to make for our owned portfolio as
      well
      as those related to certain third party servicing contracts.





Our
      servicing advance facility requires us to comply with various customary
      operating covenants and performance tests on the underlying receivables related
      to payment rates and minimum balance. In the event of a breach, the Notes issued
      by the servicing advance facility may begin to amortize earlier than scheduled.
      We do not believe that these existing covenants and performance tests will
      restrict our operations or growth. We were in compliance with all covenants
      and
      performance tests under the servicing advance facility as of and for the three
      and six months ended June 30, 2005.





As
      of
      June 30, 2005, securitization financing related to mortgage loans and servicing
      advances on our consolidated balance sheet was approximately $6.0 billion.





**Off
      Balance Sheet Items and Contractual
      Obligations**





***Off
      Balance Sheet Items***





In
      connection with mortgage loans securitized in off balance sheet transactions
      from May 1996 to July 5, 2001, of which $484.5 million were still outstanding
      as
      of June 30, 2005, and in connection with the sales of mortgage loans to
      nonaffiliated parties, our subsidiaries made representations and warranties
      about certain characteristics of the loans, the borrowers, and the underlying
      properties. In the event of a breach of these representations and warranties,
      our subsidiaries may be required to remove loans from a securitization and
      replace them with cash or substitute loans, and to indemnify parties for any
      losses related to such breach. As of June 30, 2005 our subsidiaries neither
      had
      nor expected to incur any material obligation to remove any such loans, or
      to
      provide any such indemnification.





Our
      subsidiaries had commitments to fund mortgage loans with agreed upon rates
      of
      approximately $197.4 million and $240.3 million as of June 30, 2005 and December
      31, 2004, respectively. Commitments do not necessarily represent future cash
      requirements, as some portion of the commitments are likely to expire without
      being drawn upon or may be subsequently declined for credit or other
      reasons.





***Contractual
      Obligations and Commitments***





Our
      subsidiaries are obligated under non-cancelable operating leases for property
      and equipment. Future minimum rental payments for all of our operating leases
      increased to $40.0 million as of June 30, 2005 from $22.7 million as of December
      31, 2004. Future minimum rental payments as of June 30, 2005 include $20.3
      million in payments
      on the lease for our new mortgage loan origination headquarters which began
      in
      July 2005.


60





We
      are
      committed to purchase third party servicing rights for an additional $5.2
      billion of mortgage loans during the third quarter of 2005, of which $2.0
      billion were purchased during July 2005 for approximately $13.3 million.




As
      of
      June 30, 2005, we did not have any other material changes in our contractual
      obligations and commitments as presented in our annual report on Form 10-K
      for
      the year ended December 31, 2004 other than those described above.





**Other
      Matters**





***Impact
      of New Accounting Standards*** ****





In
      May
      2005, the Financial Accounting Standards Board issued Statement No. 154, *Accounting
      Changes and Error Corrections,* which
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement replaces APB Opinion No. 20, *Accounting
      Changes,* and
      FASB
      Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements,* and
      applies to all voluntary changes in accounting principle as well as changes
      required by an accounting pronouncement in the rare instance that a new
      pronouncement does not include specific transition provisions. APB Opinion
      No.
      20 previously required that the cumulative effect of a voluntary change to
      a new
      accounting pronouncement be recognized in net income for the period of the
      change. FASB Statement No. 154 now requires retrospective application of a
      voluntary change in accounting principle to prior periods’ financial statements
      unless it is impracticable to determine either the period-specific effects
      or
      the cumulative effect of the change. Additionally, this Statement redefines
      the
      term “restatement” as the revising of previously issued financial statements to
      reflect the correction of an error. Reporting the correction of an error in
      previously issued financial statements and a change in accounting estimate
      is
      carried forward from the guidance provided in APB Opinion 20. FASB Statement
      No.
      154 is effective for accounting changes and corrections of errors made in fiscal
      years beginning after December 15, 2005. The adoption of FASB 154 is not
      expected to have a material impact on our financial position, results of
      operations, or cash flows.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**




We
      define
      market risk as the sensitivity of income to changes in interest rates. Changes
      in prevailing market interest rates may have two general effects on our
      business. First, any general increase in mortgage loan interest rates may tend
      to reduce customer demand for new mortgage loans, which can negatively impact
      our future production volume and our projected income. Second, increases or
      decreases in interest rates can cause changes in the interest income on the
      mortgage loans that we own or are committed to fund, and as a result, cause
      changes in our net income. We refer to this second type of risk as our “managed
      interest rate risk”. Substantially all of our managed interest rate risk arises
      from debt related to the financing of our mortgage loan portfolio. Interest
      rate




risk
      is
      managed within an overall asset/liability management framework. The principal
      objective of asset/liability management is to manage the sensitivity of net
      income to changing interest rates.






61


Since
      December 31, 2004 there have been many market changes with respect to interest
      rate outlooks. Our framework for measuring the potential impact on our exposure
      to market risk from changing interest rates has remained constant while
      potential scenarios have been modified in response to economic developments
      and
      their impact on interest rate outlooks. For further information on our interest
      rate risk profile and our types of managed interest rate risks, refer to Item
      7A, “Quantitative and Qualitative Disclosures about Market Risk”, contained in
      our 2004 Form 10-K.






***Maturity
      and Repricing Information*** **






As
      shown
      in the tables below from December 31, 2004 to June 30, 2005, there was an
      increase in our hedging activity due to additional existing and forecasted
      debt
      and the belief that interest rates may rise in the future. The following tables
      summarize the notional amounts, expected maturities and weighted average strike
      rates for interest rate floors, caps, swaps, options and futures that we held
      as
      of June 30, 2005 and December 31, 2004.




**As
                of June 30, 2005******
            **2005**
            **2006**
            **2007**
            **2008**
            **2009**
            **Thereafter**($
                in thousands)Caps
                bought - notional:
            $883,372
            $1,186,583
            $18,167
            —
            —
            —Weighted
                average rate
            3.96%
            3.86%
            3.25%
            —
            —
            —Caps
                sold - notional:
            $860,372
            $1,186,583
            $18,167
            —
            —
            —Weighted
                average rate
            5.17%
            4.69%
            5.00%
            —
            —
            —Futures
                sold - notional:
            —
            $595,000
            $270,000
            $8,750
            $6,250
            —Weighted
                average rate
            —
            4.20%
            4.36%
            5.14%
            5.45%
            —Swaps
                bought - notional:
            $2,500,000
            $1,650,000
            $600,000
            —
            —
            —Weighted
                average rate
            3.28%
            3.77%
            4.17%
            —
            —
            —Puts
                bought - notional:
            $6,250,000
            $250,000
            —
            —
            —
            —Weighted
                average rate
            4.44%
            4.50%
            —
            —
            —
            —Puts
                sold - notional:
            —
            $375,000
            —
            —
            —
            —Weighted
                average rate
            —
            4.58%
            —
            —
            —
            —Calls
                bought - notional:
            —
            $300,000
            —
            —
            —
            —Weighted
                average rate
            —
            3.75%
            —
            —
            —
            —Calls
                sold - notional:
            —
            $300,000
            —
            —
            —
            —Weighted
                average rate
            —
            3.25%
            —
            —
            —
            —Total
                notional:
            $10,493,744
            $5,843,166
            $906,334
            $8,750
            $6,250
            $—









62




**As
                of December 31, 2004******
            **2005**
            **2006**
            **2007**
            **2008**
            **2009**
            **Thereafter**($
                in thousands)Caps
                bought - notional:
            $898,216
            $686,583
            $18,167
            —
            —
            —Weighted
                average rate
            3.92%
            3.39%
            3.25%
            —
            —
            —Caps
                sold - notional:
            $865,966
            $686,583
            $18,167
            —
            —
            —Weighted
                average rate
            5.13%
            4.46%
            5.00%
            —
            —
            —Futures
                sold - notional:
            225,000
            $695,000
            $570,000
            $12,500
            $6
            —Weighted
                average rate
            3.57%
            3.99%
            4.33%
            5.08%
            5.45%
            —Swaps
                bought - notional:
            500,000
            $700,000
            $200,000
            —
            —
            —Weighted
                average rate
            2.31%
            3.53%
            3.91%
            —
            —
            —Puts
                bought - notional:
            50,000
            —
            —
            —
            —
            —Weighted
                average rate
            2.25%
            —
            —
            —
            —
            —Puts
                sold - notional:
            $112,500
            $250,000
            —
            —
            —
            —Weighted
                average rate
            4.11%
            3.75%
            —
            —
            —
            —Total
                notional:
            $2,651,682
            $3,018,166
            $806,334
            $12,500
            $6
            $—






*Analyzing
      Rate Shifts*




In
      our
      method of analyzing the potential effect of interest rate changes, we study
      the
      published forward yield curves for applicable interest rates and instruments,
      and we then develop various interest rate scenarios for those yield curves
      based
      on assumptions concerning economic growth rates, market conditions, and
      inflation rates, as well as the timing, duration, and amount of corresponding
      Federal Reserve Board, or FRB, responses, in order to determine hypothetical
      impacts on relevant interest rates. We use this method of analysis as a means
      of
      valuation to manage our interest rate risk on our mortgage loan financing over
      long periods of time. The table below represents the change in our interest
      expense as determined by changes in our debt costs and offsetting values of
      derivative instruments under the four different analysis scenarios that we
      used
      as of June 30, 2005 and the four scenarios that we used as of December 31,
      2004.
      The change from December 31, 2004 to June 30, 2005 represents our change in
      assumptions for each scenario as described below.






**Effect
                on Interest Expense of Assumed Changes in Interest Rates Over a Three
                Year
                Period******
            **June
                30, 2005**
            **December
                31, 2004******
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**($
                in thousands)Change
                in interest expense
            $58,034
            $14,730
            $(12,526)
            $(38,054)
            $65,786
            $40,758
            $(219)
            $(40,701)Impact
                from derivative instruments:Futures
            (6,391)
            (1,324)
            1,036
            5,223
            (12,302)
            (11,698)
            (1,322)
            5,834Swaps
            (21,189)
            (7,073)
            3,840
            10,896
            (11,753)
            (7,866)
            (276)
            6,766Puts
            (2,534)
            (441)
            75
            119
            1,702
            1,178
            (19)
            (310)Calls
            263
            90
            (60)
            (458)
            —
            —
            —
            —Caps
            (3,293)
            (1,033)
            881
            464
            (6,885)
            (3,967)
            168
            661Total
                impact from derivative instruments
            $(33,144)
            $(9,781)
            $5,772
            $16,244
            $(29,238)
            $(22,353)
            $(1,449)
            $12,951Net
                change
            $24,890
            $4,949
            $(6,754)
            $(21,810)
            $36,548
            $18,405
            $(1,668)
            $(27,750)




63




Scenario
      1 - Under this scenario we show mortgage loan and derivative valuations based
      upon an assumed aggressive response from the Board of Governors of the FRB,
      with
      the assumption that the economy is growing at a pace inconsistent with the
      FRB
      desire to maintain a stable or declining inflation environment. Under this
      scenario, we assume a hypothetical interest rate increase of approximately
      150
      basis points over a fifteen-month period. Such an increase provides us with
      a
      view of the interest expense changes assuming a comparable rise in financing
      rates. Making these assumptions as of June 30, 2005, we estimate that our
      interest expense would increase by $58.0 million. However, we estimate that
      this
      amount would be partially offset by a decrease in our derivative instruments
      of
      $33.1 million. The net effect of this scenario would be a potential decrease
      of
      $24.9 million in our net revenues and gains. At December 31, 2004, assuming
      a
      hypothetical interest rate increase of approximately 225 basis points over
      a
      twelve-month period, we estimated at that time that our net revenues and gains
      would decrease by approximately $36.5 million.




Scenario
      2 - In this scenario we assume a slightly less severe hypothetical rise in
      interest rates compared to Scenario 1, but a relatively aggressive rise over
      the
      next six months. Under this scenario, we assume that interest rates have the
      potential to rise approximately 75 basis points over a six month period. Making
      these assumptions as of June 30, 2005, we estimate that our interest expense
      would increase by $14.7 million. However, we estimate that this amount would
      be
      partially offset by a decrease in our derivative instruments of $9.8 million.
      The net effect of this scenario would be a potential decrease of $4.9 million
      in
      our net revenues and gains. At December 31, 2004, assuming interest rates had
      the potential to rise approximately 250 basis points over a two year period,
      we
      estimated at that time that our net revenues and gains would decrease by
      approximately $18.4 million.






Scenario
      3 - In this scenario we assume relatively stable hypothetical short-term rates.
      This scenario assumes that the FRB temporarily stops raising interest rates
      to
      assess any lag in the impact of previous rate increases on the domestic and
      global economy. Given these assumptions as of June 30, 2005, we estimate that
      our interest expense from changes in borrowing costs would decrease by $12.5
      million. However, we estimate that this amount would be partially offset by
      an
      increase in our derivative instruments of $5.8 million. The net effect of this
      scenario would be a potential increase in net revenues and gains of $6.7
      million. At December 31, 2004, assuming interest rates increased another 100
      basis points over a 12 month period, we estimated at that time that our net
      revenues and gains would increase by approximately $1.7 million.






Scenario
      4 -This scenario assumes that the FRB increases rates another 50 basis points
      and then becomes concerned about the future prospects of economic growth and
      by
      mid 2006 reduces rates by 75 basis points to stimulate economic growth again.
      Given these assumptions as of June 30, 2005, we estimate that our interest
      expense would decrease by approximately $38.0 million, which would partially
      be
      offset by an estimated increase in our derivative instruments of approximately
      $16.2 million, for a total potential increase in net revenues and gains of
      approximately $21.8 million. At December 31, 2004, assuming interest rates
      remained steady for one year and then increased 150 basis points over a two
      year
      period, we estimated at that time that our net revenues and gains could increase
      by approximately $27.8 million.




64




The
      hypothetical yield curve data for each scenario at June 30, 2005 and December
      31, 2004 are as follows:




**June
                30, 2005****Month**
            **Current
                Market (1)**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**Sep-05
            3.85
            4.40
            4.15
            3.64
            3.86Dec-05
            3.97
            4.41
            4.15
            3.90
            3.90Mar-06
            3.99
            4.43
            4.16
            3.90
            3.90Jun-06
            4.01
            4.69
            4.17
            3.91
            3.41Sep-06
            4.02
            4.95
            4.18
            3.91
            3.16Dec-06
            4.05
            4.96
            4.19
            3.92
            3.17Mar-07
            4.06
            4.97
            4.19
            3.92
            3.17Jun-07
            4.08
            4.98
            4.20
            3.93
            3.18Sept-07
            4.10
            5.00
            4.21
            3.93
            3.18Dec-07
            4.14
            5.01
            4.22
            3.94
            3.19Mar-08
            4.15
            5.02
            4.23
            3.94
            3.19Jun-08
            4.18
            5.03
            4.24
            3.95
            3.70Sep-08
            4.22
            5.04
            4.24
            3.95
            3.70





**December
                31, 2004****Month**
            **Current
                Market (1)**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**Jan-05
            2.39
            2.89
            2.61
            2.63
            2.35Mar-05
            2.91
            3.40
            2.89
            2.89
            2.36Jun-05
            3.18
            3.91
            3.40
            2.89
            2.39Sep-05
            3.39
            4.43
            3.65
            3.15
            2.40Dec-05
            3.56
            4.69
            3.91
            3.40
            2.65Mar-06
            3.68
            4.70
            4.41
            3.65
            3.15Jun-06
            3.78
            4.71
            4.67
            3.91
            3.66Sep-06
            3.87
            4.72
            4.92
            4.16
            3.66Dec-06
            3.97
            4.73
            4.93
            4.17
            3.67Mar-07
            4.05
            4.75
            4.93
            4.17
            3.67Jun-07
            4.13
            4.76
            4.94
            4.18
            3.68Sept-07
            4.22
            4.77
            4.94
            4.43
            4.18Dec-07
            4.31
            4.78
            4.95
            4.43
            4.18


________________


(1)  Current
      market is depicted using the forward Eurodollar Futures Curve. The Eurodollar
      Future curve is the series of benchmark rates of Libor with a 3-month maturity.
      The series of 3 month rates depicted represent the current market expectations
      of Libor spot rates in the future based on expectations of economic activity.







These
      scenarios are provided for illustrative purposes only and are intended to assist
      in the understanding of our sensitivity to changes in interest rates. While
      these scenarios are developed based on current economic and market conditions,
      we cannot make any assurances as to the predictive nature of assumptions made
      in
      this analysis.





65


**Item
      4. Controls and Procedures**





We
      carried out an evaluation, as required by Exchange Act Rule 13a-5(b), under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      design and operation
      of our disclosure controls and procedures as of the end of the period covered
      by
      this report, which included consideration of the restatements. On March 14,
      2006, we concluded that the designation of our derivative instruments as cash
      flows hedges for the previously reported periods from October 1, 2002 to
      September 30, 2005 did not meet the requirements of SFAS 133 with regard to
      documentation and effectiveness testing. We also concluded that the designation
      of our derivative instruments as fair value hedges for the period July 6, 2001
      to September 30, 2002 had not met the requirements of SFAS 133 regarding the
      hedging of similar assets. We concluded, therefore, that the above derivative
      instruments did not qualify for cash flow or fair value hedge accounting
      treatment. We have restated our consolidated balance sheet as of June 30, 2005
      and December 31, 2004, and the related consolidated statements of operations,
      shareholders’ equity, and cash flows for the three and six months ended June 30,
      2005 and 2004 to account for the derivative instruments as undesignated
      derivatives. Accordingly, all changes in the fair value of the derivative
      instruments are now recognized in our statement of operations, along with the
      related tax effects. Previously, changes in the fair value of the derivative
      instruments were recorded in other comprehensive income, net of income taxes
      on
      our consolidated balance sheets, for cash flow hedges. Previous fair value
      hedging activity had been recorded as basis adjustments on mortgage loans which
      were amortized into earnings through interest income as a yield adjustment
      of
      the previously hedged loans. Management has concluded that the controls in
      place
      relating to hedging documentation were not properly designed to provide
      reasonable assurance that these derivative instruments would be properly
      recorded and disclosed in the financial statements, and that this is a material
      weakness in internal control over financial reporting. Solely as a result of
      this material weakness, management, including the Chief Executive Officer and
      Chief Financial Officer, concluded that our disclosure controls and procedures
      were not effective as of June 30, 2005.




*Remediation
      of Material Weakness*




Subsequent
      to the end of the period covered by this report, we have remediated the material
      weakness relating to derivative documentation and hedge accounting treatment
      that is described above. Our remediation action consisted of changing policies
      and procedures to redesignate all current derivative instruments as trading,
      as
      well as to consider them undesignated in the future. These new policies and
      procedures ensure that all derivative instruments are accounted for as
      undesignated instruments and are recorded in the consolidated statements of
      operations. These were the only changes in our internal control over financial
      reporting subsequent to the most recently completed fiscal quarter.




***Changes
        in Internal Control over Financial Reporting***




There
      have been no changes in our internal control over financial reporting during
      the
      most recently completed fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting during the period covered by this report. Moreover, there have been
      no
      significant changes subsequent to the date of evaluation discussed above, other
      than the changes related to the remediation of the material
      weakness.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.




66




**PART
      II**




**Item
      1. Legal Proceedings**





Because
      we are subject to many laws and regulations, including but not limited to
      federal and state consumer protection laws, we are regularly involved in
      numerous lawsuits filed against us, some of which seek certification as class
      action lawsuits on behalf of similarly situated individuals. If class actions
      are certified and there is an adverse outcome or we do not otherwise prevail
      in
      the following matters, we could suffer material losses, although we intend
      to
      vigorously defend these lawsuits.





Margarita
      Barbosa, et al. v. Saxon Mortgage Services, Inc. (f/k/a Meritech Mortgage
      Services, Inc.) et al .
      is a
      matter previously described in Part I, Item 3 of our 2004 Form 10-K. During
      the
      second quarter of 2005, the Company made the final payment of $17.8 thousand
      owed pursuant to the settlement agreement, and consequently has fully performed
      its obligations under the settlement agreement.





Bauer,
      et al., v. Dean Morris, L.L.P., et al., and Patterson,
      et al., v. Dean Morris, et al., are
      successor matters to Bauer, et al., v. Saxon Mortgage Services, Inc., et al.,
      previously described in Part I, Item 3 of our 2004 Form 10-K. On January 26,
      2005, the plaintiffs in Bauer, et al., v. Saxon Mortgage Services, Inc., et
      al.
      filed a motion to dismiss the case without prejudice, and the court entered
      an
      order dismissing the case on January 31, 2005. On February 17, 2005, the
      plaintiffs re-filed the case as two separate class action lawsuits, Bauer,
      et
      al., vs. Dean Morris, et al., filed as Case No. 05-2173 in the Civil District
      Court for the Parish of Orleans, State of Louisiana, and Patterson el al.,
      v.
      Dean Morris, et al., filed as Case No. 05-2174 in the Civil District Court
      for
      the Parish of Orleans, State of Louisiana. There were no material developments
      in this legal proceeding during the quarter ended June 30, 2005.





We
      are
      subject to other legal proceedings arising in the normal course of our business.
      In the opinion of management, the resolution of these other proceedings is
      not
      expected to have a material adverse effect on our financial position or our
      results of operations.





**Item
      2.Unregistered Sales of Equity Securities and Use of
      Proceeds**




None.




**Item
      3. Defaults Upon Senior Securities**




None.




**Item
      4. Submission of Matters to a Vote of Security
      Holders**




On
      June
      21, 2005, we held our annual stockholders’ meeting. There were 49,884,038 shares
      of common stock outstanding entitled to vote, and a total of 46,661,546 (94%)
      were represented at the meeting in person or by proxy. The following summarizes
      vote results of proposals submitted to our stockholders:





1.
            Proposal
                to elect five directors for one-year
                terms.





NAME
            FOR
            WITHHELDRichard
                A. Kraemer
            45,687,118
            974,428Louis
                C. Fornetti
            45,684,778
            976,768Michael
                L. Sawyer
            45,691,118
            970,428Thomas
                J. Wageman
            45,682,648
            978,898David
                D. Wesselink
            45,649,961
            1,011,585





2.
            Ratification
                of the appointment by the Audit Committee of Deloitte & Touche LLP, as
                independent registered public accounting firm of the Company for
                the
                fiscal year ending December 31,
                2005.





FOR
            AGAINST
            ABSTAIN
            BROKER
                NON-VOTES46,433,208
            214,889
            13,449
            —





67


**Item
      5. Other Information**




(a)
            None.




(b)
            None.


**Item
      6. Exhibits**





3.1
            Amended
                and Restated Certificate of Incorporation of Saxon Capital, Inc.
                (1)




3.2
            Amended
                and Restated Bylaws of Saxon Capital, Inc.
                (2)




4.1
            Form
                of Common Stock Certificate of Saxon Capital, Inc.
                (3)




4.2
            Certain
                instruments defining the rights of the holders of long-term debt
                of the
                Company and certain of its subsidiaries, none of which authorize
                a total
                amount of indebtedness in excess of 10% of the total assets of the
                Company
                and its subsidiaries on a consolidated basis, have not been filed
                as
                Exhibits. The Company hereby agrees to furnish a copy of any of these
                agreements to the Securities and Exchange Commission upon
                request.




10.1
            Severance
                Agreement and General Release between Mark D. Rogers and SCI Services,
                Inc., and its affiliates, subsidiaries, parent, predecessors, successors,
                and assigns, dated as of July 15, 2005.
                (4)*




10.2
            Sale
                and Servicing Agreement, dated as of May 1, 2005, among Saxon Asset
                Securities Trust 2005-2, as issuer, Saxon Asset Securities Company,
                as
                depositor, Saxon Funding Management, Inc., as master servicer, Saxon
                Mortgage Services, Inc., as servicer and Deutsche Bank Trust Company
                Americas, as trustee. (5)




31.1
            Certification
                of Chief Executive Officer pursuant to Section
                302




31.2
            Certification
                of Chief Financial Officer pursuant to Section
                302




32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906




___________________




(1)  Incorporated
      herein by reference to our Annual Report on Form 10-K for the year ended
      December 31, 2004, filed with the Securities and Exchange Commission on March
      16, 2005.




(2)  Incorporated
      herein by reference to our Current Report on Form 8-K filed with the Securities
      and Exchange Commission on March 4, 2005.




(3)  Incorporated
      herein by reference to Amendment No. 3 to our registration statement on Form
      S-4
      (No. 333-112834) filed with the Securities and Exchange Commission on June
      18,
      2004.




(4)  Incorporated
      herein by reference to our Current Report on Form 8-K filed with the Securities
      and Exchange Commission on July 15, 2005.




(5)  Incorporated
      herein by reference to Saxon Asset Securities Company’s Current Report on Form
      8-K dated June 7, 2005.




*
      Executive Compensation Plan or Agreement.




68


**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.





SAXON
                CAPITAL, INC.Dated:
                July 14, 2006
            By:/s/
                Michael L.
                SawyerName:
                Michael L. SawyerTitle:
                Chief Executive Officer (authorizedofficer
                of registrant)Dated:
                July 14, 2006
            By:/s/
                Robert B.
                EastepName:
                Robert B. EastepTitle:
                Chief Financial Officer (principalfinancial
                officer)







69