**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





_____________________





**FORM
10-Q**





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


For the
Quarterly Period Ended March 31, 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
April 29, 2005 there were 49,884,038 shares of our common stock, par value $0.01
per share, outstanding.

















**TABLE OF CONTENTS**Page**Part
      I**
    **Financial
Information**Item
      1.
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets at March
      31, 2005 and December 31, 2004
    1Unaudited Condensed Consolidated Statements of Operations
      for the three months ended March 31, 2005 and March 31,
      2004
    2Unaudited Condensed Consolidated Statement of Shareholders’
      Equity for the three months ended March 31, 2005
    3Unaudited Condensed Consolidated Statements of Cash Flows for
      the three months ended March 31, 2005 and March 31,
    2004
    4Notes to Unaudited Condensed Consolidated Financial
      Statements
    5Item
      2.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    17Item
      3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    52Item
      4.
    Controls and Procedures
    56**Part
      II**
    **Other Information**Item
      1.
    Legal Proceedings
    57Item
      2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    58Item
      3.
    Defaults Upon Senior Securities
    58Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    58Item
      5.
    Other Information
    58Item
      6.
    Exhibits
    58








Table of Contents





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


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





**Saxon Capital, Inc.****Condensed
      Consolidated Balance Sheets****($
      in thousands, except per share data)****(unaudited)****March
      31, 2005**
    **December
      31, 2004****Assets:**Cash
    $16,674
    $12,852Accrued
      interest receivable
    55,618
    56,132Trustee
      receivable
    116,922
    112,062Mortgage
      loan portfolio
    6,112,766
    6,027,620Allowance
      for loan loss
    (33,580)
    (37,310)Net
      mortgage loan portfolio
    6,079,186
    5,990,310Restricted
      cash
    1,100
    1,495Servicing
      related advances
    117,242
    113,129Mortgage
      servicing rights, net
    110,100
    98,995Real
      estate owned
    25,432
    24,860Derivative
      assets
    27,738
    11,801Deferred
      tax asset
    34,149
    27,825Other
      assets
    78,988
    89,670Total
      assets
    $6,663,149
    $6,539,131**Liabilities
      and shareholders’ equity:****Liabilities:**Accrued
      interest payable
    $8,210
    $8,045Dividends
      payable
    —
    28,909Warehouse
      financing
    269,069
    600,646Securitization
      financing
    5,690,070
    5,258,344Derivative
      liabilities
    4,228
    1,809Other
      liabilities
    17,680
    22,449Total
      liabilities
    5,989,257
    5,920,202Commitments
      and contingencies - Note 9**Shareholders’
      equity:**Common
      stock, $0.01 par value per share, 100,000,000 shares authorized; shares
      issued and outstanding: 49,884,038 and 49,849,386 as of March 31, 2005 and
      December 31, 2004, respectively
    499
    498Additional
      paid-in capital
    626,266
    625,123Accumulated
      other comprehensive income (loss), net of tax effect of $2,652 and
      $2,446
    18,242
    (3,842)Net
      retained earnings (accumulated deficit):Cumulative
      dividends declared
    (114,641)
    (114,641)Retained
      earnings
    143,526
    111,791Net
      retained earnings (accumulated deficit):
    28,885
    (2,850)Total
      shareholders’ equity
    673,892
    618,929Total
      liabilities and shareholders’ equity
    $6,663,149
    $6,539,131





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







1
 Table of Contents








**Saxon Capital, Inc.****Condensed
      Consolidated Statements of Operations****(in
      thousands, except per share data)****(unaudited)****Three
      Months Ended March 31,****2005**
    **2004****Revenues:**Interest
      income
    $114,063
    $90,999Interest
      expense
    (55,172)
    (33,167)Net
      interest income
    58,891
    57,832Provision
      for mortgage loan losses
    (5,699)
    (3,878)Net
      interest income after provision
      for
      mortgage loan losses
    53,192
    53,954Servicing
      income, net of amortization and impairment
    13,566
    4,892Gain
      on sale of mortgage assets
    1,701
    2,551Total
      net revenues
    68,459
    61,397**Expenses:**Payroll
      and related expenses
    21,751
    16,415General
      and administrative expenses
    16,020
    11,987Depreciation
    1,507
    1,494Other
      expense
    1,411
    1,143Total
      operating expenses
    40,689
    31,039Income
      before taxes
    27,770
    30,358Income
      tax (benefit) expense
    (3,965)
    10,666**Net
      income**
    $31,735
    $19,692**Earnings
      per common share:**Average
      common shares - basic
    49,850
    28,671Average
      common shares - diluted
    50,463
    31,406Basic
      earnings per common share
    $0.64
    $0.69Diluted
      earnings per common share
    $0.63
    $0.63







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







2
 Table of Contents








**Saxon Capital, Inc.****Condensed
      Consolidated Statement of Shareholders’ Equity****($
      in thousands)****(unaudited)****Common
      Shares Outstanding**
    **Common**
      **Stock**
    **Additional**
      **Paid-in
      Capital**
    **Accumulated**
      **Other**
      **Comprehensive**
      **Income**
    **Cumulative
      Dividends Declared**
    **Retained**
      **Earnings**
    **Total****Balance
      as of January 1, 2005**
    49,849,386
    $498
    $625,123
    $(3,842)
    $(114,641)
    $111,791
    $618,929Issuance
      of common stock
    34,652
    1
    483
    —
    —
    —
    484Compensation
      expense on restricted stock units
    —
    —
    657
    —
    —
    —
    657Stock
      option exercise tax benefit
    —
    —
    3
    —
    —
    —
    3**Comprehensive
      income:**
      Net
      income
    —
    —
    —
    —
    —
    31,735Mortgage
      bonds:Change
      in unrealized loss
    —
    —
    —
    (124)
    —
    —Reclassification
      adjustment
    —
    —
    —
    138
    —
    —Tax
      effect
    —
    —
    —
    (6)
    —
    —Cash
      flow hedging instruments:Change
      in unrealized gain
    —
    —
    —
    22,119
    —
    —Reclassification
      adjustment
    —
    —
    —
    (255)
    —
    —Tax
      effect
    —
    —
    —
    212
    —
    —**Total
      comprehensive income**
    —
    —
    —
    22,084
    —
    31,735
    53,819**Balance
      as of March 31, 2005**
    49,884,038
    $499
    $626,266
    $18,242
    $(114,641)
    $143,526
    $673,892







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







3
 Table of Contents








**Saxon Capital, Inc.****Condensed
      Consolidated Statements of Cash Flows****($
      in thousands)****(unaudited)****Three
      Months Ended March 31,****2005**
    **2004****Operating
      Activities:**Net
      income from operations
    $31,735
    $19,692Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
    18,688
    9,989Deferred
      income taxes
    (6,324)
    1,254Impairment
      of assets
    1,090
    3,715Gain
      from sale of assets
    (1,701)
    (2,551)Provision
      for loan losses
    5,699
    3,878Recovery
      of provision for advanced interest losses
    (536)
    (60)(Increase)
      decrease in servicing related advances
    (4,113)
    7,799Decrease
      in accrued interest receivable
    514
    1,337Increase
      in accrued interest payable
    165
    974Increase
      in trustee receivable
    (4,860)
    (15,183)Net
      change in other assets and other liabilities
    5,562
    22,109Net
      cash provided by operating activities
    45,919
    52,953**Investing
      Activities:**Purchase
      and origination of mortgage loans
    (814,261)
    (795,543)Principal
      payments received on mortgage loan portfolio
    536,250
    424,978Proceeds
      from the sale of mortgage loans
    165,957
    111,665Proceeds
      from the sale of real estate owned
    12,114
    14,057Decrease
      (increase) in restricted cash
    395
    (469,043)Principal
      payments received on mortgage bonds
    —
    3,584Acquisition
      of mortgage servicing rights
    (21,798)
    (3,824)Capital
      expenditures
    (1,977)
    (1,944)Net
      cash used in investing activities
    (123,320)
    (716,070)**Financing
      Activities:**Proceeds
      from issuance of securitization financing
    1,000,000
    1,115,475Bond
      issuance costs
    (3,441)
    (4,121)Principal
      payments on securitization financing
    (563,811)
    (443,400)Repayment
      of warehouse financing, net
    (331,577)
    (1,601)Proceeds
      from (purchases of) derivative instruments
    8,477
    (2,013)Proceeds
      received from issuance of stock
    484
    327Payment
      of dividends
    (28,909)
    —Net
      cash provided by financing activities
    81,223
    664,667Net
      increase in cash
    3,822
    1,550Cash
      at beginning of period
    12,852
    5,245Cash
      at end of period
    $16,674
    $6,795**Supplemental
      Cash Flow Information:**Cash
      paid for interest
    $(55,121)
    $(39,587)Cash
      received for taxes
    $5,074
    $725**Non-Cash
      Financing Activities:**Transfer
      of mortgage loans to real estate owned
    $19,784
    $26,903





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





4
 Table of Contents





**Notes to Unaudited Condensed Consolidated Financial Statements**





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




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




The
accompanying unaudited condensed 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 condensed 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 months ended March 31, 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. The unaudited condensed consolidated
financial statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto included in
Saxon Capital, Inc.’s Annual Report on Form 10-K for the year ended December 31,
2004, filed with the Securities and Exchange Commission. Use of the term
“Company” throughout these Notes to Unaudited Condensed Consolidated Financial
Statements shall be deemed to refer to or include the applicable subsidiaries of
the Company.  The
unaudited condensed 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.





**(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 net interest income,
the allowance for loan loss, valuation of servicing rights, hedging activities,
deferral of certain direct loan origination costs, and income
taxes.




****  **(c)**  **Stock
Based Compensation**




The
Company has elected to follow the intrinsic value method in accounting for its
stock based compensation issued to employees and non-employee directors.
Accordingly, the Company did not recognize compensation expense upon the
issuance of its stock options because the option terms were fixed and the
exercise price equaled the market price of the underlying stock on the grant
date. 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.




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




Certain amounts
for 2004 have been reclassified to conform to presentations adopted in
2005.




**(e)**  **Recently
Issued Accounting Standards**




The
Accounting Standards Executive Committee issued a Statement of Position (SOP),
“ *Accounting
for Certain Loans or Debt Securities Acquired in a Transfer* ” (SOP
03-3). This SOP addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor’s initial
investment in loans or loans acquired in a transfer if those differences are
attributable, at least in part, to credit quality. Among other things, the SOP
requires that the excess of contractual cash flows over cash flows expected to
be collected (nonaccretable difference) not be recognized as an adjustment of
yield, loss accrual, or valuation allowance. In addition, the SOP requires
certain footnote disclosures and prohibits investors from displaying accretable
yield and nonaccretable difference on the face of the balance sheet. This SOP is
effective for loans acquired in fiscal years beginning after December 15, 2004.
The Company acquires loans through its correspondent channel and through the
exercise of clean-up call options. Because the Company acquires newly originated
loans within its correspondent channel which do not show evidence of having
deteriorated in terms of credit quality, the adoption of SOP 03-3 did
not have a material effect on the Company's financial condition,
results of operations, or liquidity within respect to these loans. For loans
acquired through the exercise of clean-up call options, there was no impact as a
result of the adoption of SOP 03-3 as no clean-up calls were exercised during
the first quarter of 2005.




At the
March 17-18, 2004 EITF meeting, the EITF reached a consensus on Issue No. 03-1, *The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments* . Issue
03-1 provides guidance for determining when an investment is
other-than-temporarily impaired and disclosure requirements regarding
impairments that have not been recognized as other-than-temporary. An impairment
exists when the carrying amount of an asset exceeds its fair value and is
determined to be other-than-temporary. In September 2004, the FASB delayed the
effective date of paragraphs 10-20 of this issue. These paragraphs give guidance
on how to evaluate and recognize an impairment loss that is
other-than-temporary. The delay does not suspend the requirements to
recognize other than temporary impairments as required by existing authoritative
literature. The disclosure requirements were effective for reporting periods
beginning after June 15, 2004. The adoption of EITF 03-1 did not have a
material effect on the Company's financial condition or results of
operation, as the Company does not currently have securities subject to this
guidance.




5
 Table of Contents


****


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




During
April 2005, the Company purchased $1.7 billion in third party servicing rights
for approximately $11.6 million.




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





On April
29, 2005, the Company’s $300 million repurchase facility with Credit Suisse
First Boston Mortgage Capital, LLC was amended, extending the termination date
of the facility to April 28, 2006.




In an
effort to improve productivity levels and increase efficiency in its retail
operations, the Company has implemented strategic initiatives, resulting in
closing and/or selling several of its retail branch operations in various
locations. These activities have taken place during and subsequent to the first
quarter of 2005. For more information on retail branch closings during the first
quarter of 2005, please read Note (11) to the unaudited condensed financial
statements included herein.
 
 Subsequent
to the first quarter of 2005, the Company closed operations in its
Denver, Colorado retail branch as of April 27, 2005. The Company expects to
incur $0.1 million of expense during the second quarter of 2005 in connection
with this branch closing.
 
 The
Company also closed its operations in the Pittsburgh, Pennsylvania and New
Orleans, Louisiana retail branches, and reduced its staff and ceased loan
origination activities in its Las Vegas, Nevada retail branch as of May 4, 2005.
The Company expects to incur no more than $0.4 million of expense during the
second quarter of 2005 in connection with these branch closings.
 
 The
Company also announced on May 4, 2005 that its subsidiary, America’s MoneyLine,
has 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, which is conditioned upon customary closing conditions, Bravo
Credit Corporation will acquire five branches located in Connecticut, Maryland,
North Carolina, New Jersey, and Texas, and offer employment to all America’s
MoneyLine employees at the five retail branches as well as the Tampa, Florida
retail branch. Because Bravo Credit Corporation will assume all lease and
associated costs of the five divested branches, the Company does not expect to
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
Tampa, Florida branch, the Company also does not expect to incur any material
severance costs with respect to these six branches.
 ****
 6


****


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




Basic
earnings per share is based on the weighted average number of common 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 common 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 March 31,****2005**
    **2004**(in
      thousands, except per share data)**Basic:**Net
      income
    $31,735
    $19,692Weighted
      average common shares outstanding
    49,850
    28,671Earnings
      per share
    $0.64
    $0.69**Diluted:**Net
      income
    $31,735
    $19,692Weighted
      average common shares outstanding
    49,850
    28,671Dilutive
      effect of stock options, warrants and restricted stock
    units
    613
    2,735Weighted
      average common shares outstanding - diluted
    50,463
    31,406Earnings
      per share
    $0.63
    $0.63




7
 Table of Contents





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





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





**March
      31, 2005**
    **December
      31, 2004**($
      in thousands)Securitized
      mortgage loans - principal balance
    $5,570,468
    $5,123,071Unsecuritized
      mortgage loans - principal balance
    419,010
    782,716Premiums,
      net of discounts
    78,895
    75,562Hedge
      basis adjustments
    28,895
    30,245Deferred
      origination costs, net of deferred fees
    11,060
    11,288Fair
      value adjustments
    4,438
    4,738Total
    $6,112,766
    $6,027,620





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 March 31,****2005**
    **2004**($
      in thousands)Performing
      mortgage loans sold:Non
      conforming first lien mortgages
    $98,786
    $69,274Conforming
      first lien mortgages (1)
    19,487
    3⁄4Second
      lien mortgages
    43,406
    15,696Delinquent
      mortgage loans (2)
    3⁄4
    24,465Total
      mortgage loans sold
    161,679
    109,435Basis
      adjustments
    2,577
    (290)Cash
      received
    165,957
    111,665Gain
      on sale of mortgage loans (2)(3)
    $1,701
    $2,520


___________


(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 mortgage assets of $2.6 million on the condensed
      consolidated statements of operations for the three months ended March 31,
      2004 includes the gain recognized on sale of other
  assets.





**(5)**  **Allowance
for Loan Loss**




The
Company is exposed to risk of loss from its mortgage loan portfolio and
establishes the allowance for loan loss taking into account a variety of
criteria including the contractual delinquency status and historical loss
experience. The allowance for loan loss is evaluated monthly and adjusted based
on this evaluation.





Activity
related to the allowance for loan loss for the mortgage loan portfolio for the
three months ended March 31, 2005 and 2004 is as follows:





8
 Table of Contents








**Three
      Months Ended March 31,****2005**
    **2004**($
      in thousands)Beginning
      balance
    $37,310
    $43,369Provision
      for loan losses (1)
    5,163
    3,818Charge-offs
    (8,893)
    (13,350)Ending
      balance
    $33,580
    $33,837
 ________________


(1)
    Includes
      $(536) thousand and $(60) thousand for the three months ended March 31,
      2005 and 2004, respectively, related to the recovery of the allowance for
      advanced interest paid to securitization trusts. This amount is included
      as a component of interest income in the condensed consolidated statements
      of operations.





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





As of
March 31, 2005, the fair value of the mortgage servicing rights in total was
$166.7 million, compared to $155.1 million as of December 31, 2004. The
following table summarizes activity in mortgage servicing rights for the three
months ended March 31, 2005 and 2004:





**Three
      Months Ended March 31,****2005**
    **2004**($
      in thousands)Balance,
      beginning of period
    $98,995
    $41,255Purchased
    21,798
    3,824Amortization
    (9,188)
    (3,255)Valuation
      allowance
    (1,505)
    (2,782)Balance,
      end of period
    $110,100
    $39,042








The Company
recognized a permanent impairment during the first quarter of 2005 due to
significant prepayment experience in certain underlying loans. The following
table summarizes the activity of our valuation allowance:





**For
      the Three Months Ended March 31,****2005**
    **2004**($
      in thousands)Balance,
      beginning of period
    $(7,624)
    $(687)Valuation
      allowance
    (1,505)
    (2,782)Permanent
      impairment
    1,184
    3⁄4Balance,
      end of period
    $(7,945)
    (3,469)





As of
March 31, 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:





9
 Table of Contents








**Years
      Ending December 31,**($
      in thousands)April
      2005 through December 2005
    $30,8282006
    29,4472007
    19,1312008
    12,7542009
    8,525Thereafter
    17,360Total
    $118,045




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




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





**March
      31, 2005**
    **December
      31, 2004**($
      in thousands)**Debt
      Outstanding**Warehouse
      financing - loans and servicing advances
    $187,405
    $282,092Repurchase
      agreements - loans (1)
    80,646
    317,500Repurchase
      agreements - mortgage bonds (1) (2)
    1,018
    1,054Securitization
      financing - servicing advances
    126,668
    117,988Securitization
      financing - loans and real estate owned
    5,556,325
    5,125,572Securitization
      financing - net interest margin
    7,077
    14,784Total
    $5,959,139
    $5,858,990


___________________


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


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





The
following table summarizes our contractual obligations with respect to these
facilities as of March 31, 2005:





**As
      of March 31, 2005**
    **Total**
    **Less
      than 1 year**
    **1-3
      years**
    **3-5
      years**
    **After
      5 years**($
      in thousands)Warehouse
      financing - loans and servicing advances
    $187,405
    $187,405
    $—
    $—
    $—Repurchase
      agreements - loans (1)
    80,646
    52,743
    27,903
    —
    —Repurchase
      agreements - mortgage bonds (1)
    1,018
    —
    1,018
    —
    —Securitization
      financing - servicing advances (2)
    126,668
    44,564
    49,471
    11,530
    21,103Securitization
      financing - loans and real estate owned (3)
    5,556,325
    1,965,752
    2,159,559
    505,593
    925,421Securitization
      financing - net interest margin (3)
    7,077
    7,077
    —
    —
    —Total
      contractual cash obligations
    $5,959,139
    $2,257,541
    $2,237,951
    $517,123
    $946,524




10
 Table of Contents





________________


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




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




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




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





**Three
      Months Ended March 31,****2005**
    **2004**($
      in thousands)**Interest
      Expense**Warehouse
      financing
    $1,166
    $283Repurchase
      agreements
    1,749
    1,510Securitization
      financing
    51,262
    30,085Note
      payable
    —
    497Other
    995
    792Total
    $55,172
    $33,167**Weighted
      Average Cost of Funds**Warehouse
      financing
    2.65%
    1.56%Repurchase
      agreements
    3.20%
    1.78%Securitization
      financing
    3.57%
    2.65%Note
      payable
    —
    8.00%Total
    3.60%
    2.66%








During
the three months ended March 31, 2005, the Company completed one securitization
of mortgage loans, totaling $1.0 billion in principal balances and $12.3 million
in unamortized basis adjustments.





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 March 31, 2005, the Company was in compliance
with all covenants under the respective borrowing agreements.





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





The
Company accounts for the majority of its existing derivative financial
instruments as cash flow hedges, which hedge the Company’s variable rate debt.
As of







11
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March 31,
2005 and December 31, 2004, the fair value of the Company’s derivatives totaled
$23.5 million and $10.0 million, respectively. As of March 31, 2005 and December
31, 2004, the mark to market adjustment on effective hedges recorded in
accumulated other comprehensive income (loss) was $16.1 million with a tax
benefit of $2.5 million and $(5.8) million with a tax benefit of $2.3 million,
respectively. Accumulated other comprehensive income (loss) related to cash flow
hedging is accreted (amortized) into earnings through interest expense as the
hedged item affects earnings. The effect of accretion of the accumulated
other comprehensive income on earnings for the next twelve months is expected to
be $5.5 million of reduction in interest expense, depending on future repayment
of debt. The maximum term over which the Company is hedging its exposure for
forecasted transactions is 54 months. Hedge ineffectiveness resulted in $126.2
thousand of expense and $36.7 thousand of expense for the three months ended
March 31, 2005 and 2004, respectively. These ineffective portions are included
as part of other expense on the condensed consolidated statements of operations.
In addition, as of March 31, 2005, the Company had twelve derivative contracts
in the amount of $0.3 million that did not qualify for hedge treatment. These
contracts were no longer deemed necessary to hedge our forecasted variable rate
debt. The aggregate change in fair value of these contracts had no impact on the
statement of operations.




As of
March 31, 2005 and December 31, 2004, the Company had $28.9 million and $30.2
million, respectively, of basis adjustments on mortgage loans related to
previous fair value hedging activity. These basis adjustments are amortized into
earnings through interest income as a yield adjustment of the previously hedged
loans.




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




*Mortgage
Loans*




As of
March 31, 2005 and December 31, 2004, the Company’s subsidiaries had commitments
to fund mortgage loans with agreed-upon rates of approximately $243.4 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 $540.7 million of mortgage loans securitized
in off-balance sheet transactions from May 1996 to July 5, 2001 which are still
outstanding as of March 31, 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 March 31, 2005 those
subsidiaries neither had nor expect to incur any material obligation to remove
any such loans, or to provide any such indemnification.





12
 Table of Contents





*Mortgage
Servicing Rights*





The
Company anticipates purchasing third party servicing rights for an additional
$6.2 billion of mortgage loans during the remainder of 2005, of which $1.7
billion have been purchased during April 2005 for approximately $11.6 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.





Josephine
Coleman v. America’s MoneyLine, Inc. is a
matter previously described in the notes to the Company’s audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2004. In January 2005, the parties entered into a
settlement agreement pursuant to which America’s MoneyLine agreed to pay an
immaterial amount comprised of a payment to Ms. Coleman and an agreed-upon
amount of her attorneys’ fees in exchange for dismissal of the suit. The Court
entered an order dismissing the suit with prejudice as to Ms. Coleman on January
21, 2005.





Margarita
Barbosa, et al. v. Saxon Mortgage Services, Inc. (f/k/a Meritech Mortgage
Services, Inc.) et al . is a
matter previously described in the notes to the Company’s audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2004. There were no material developments in this
legal proceeding during the quarter ended March 31, 2005.




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





13
 Table of Contents








**(10)**  **Stock
Based Compensation**




All
options granted were expensed as a result of the Company’s conversion to a REIT
in the third quarter of 2004. The Company has not granted any additional options
in 2005. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value method to options granted to
employees using the Black-Scholes option pricing model.




**Three
      Months Ended March 31,****2005**
    **2004**($
      in thousands, except per share data)Net
      income, as reported
    $31,735
    $19,692Deduct:
      total stock-based compensation expense determined under fair value based
      method for all awards,
      net of
      related tax effects
    —
    (638)Pro
      forma net income
    $31,735
    $19,054Earnings
      per share:Basic
      - as reported
    $0.64
    $0.69Basic
      - pro forma
    $0.64
    $0.67Diluted
      - as reported
    $0.63
    $0.63Diluted
      - pro forma
    $0.63
    $0.61







On
January 27, 2005, the Company granted 789,500 restricted stock units to some of
the Company’s employees, including each executive officer. The restricted stock
units will vest on the fifth anniversary of the date of grant. In addition, on
January 27, 2005, the Company granted 20,000 restricted stock units to each of
the Company’s three non-employee directors, and on March 23, 2005, the Company
granted 20,000 restricted stock units to its newly appointed non-employee
director. The restricted stock units related to the non-employee directors will
vest in four equal annual installments on each of the four anniversaries of the
date of grant. The grantees of the restricted stock units will be 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
incurred $0.7 million of expense related to amortization of these restricted
stock units during the first quarter of 2005.




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




During
the first quarter of 2005, the Company closed operations in the Indianapolis,
Indiana; Omaha, Nebraska; Buffalo, New York; and Walnut Creek, California retail
branches. The closing of these retail branches is expected to reduce the
Company’s fixed cost structure of its branch network. During the first quarter
of 2005, the Company recognized $0.1 million, $0.1 million, and $0.1 million for
termination benefits, contract termination costs, and other associated costs,
respectively. These costs are included in the condensed







14
 Table of Contents





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. The Company does
not expect to recognize a material amount of expense relating to contract
termination costs and other associated costs for these branch closings in the
future and therefore, no liability for such contract termination costs was
recorded as of March 31, 2005. Please refer to Note (2) Subsequent Events for
information on additional branch closings and divestitures during April and May
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 months ended March
31, 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
servicing segment services loans, seeking to ensure that loans are repaid in
accordance with their terms. 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 21 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.





The
mortgage loan production segment collects revenues, such as origination and
underwriting fees and other certain nonrefundable fees, that are deferred and
recognized over the life of the loan as an adjustment to interest income
recorded in the portfolio segment.





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.





15
 Table of Contents








**Three
      Months Ended March 31, 2005****Qualified
      REIT Subsidiary**
    **Taxable
      REIT Subsidiary**
    **Taxable
      REIT Subsidiary****Portfolio**
    **Mortgage
      Loan**
      **Production**
    **Servicing**
    **Eliminations**
    **Total**($
      in thousands)Interest
      income
    $112,458
    $5,943
    $872
    $(5,210)
    $114,063Interest
      expense
    (56,186)
    (3,242)
    (369)
    4,625
    (55,172)Net interest
      income
    56,272
    2,701
    503
    (585)
    58,891Provision
      for mortgage loan losses
    (5,046)
    (653)
    —
    —
    (5,699)Net interest income
      after  provision for mortgage loan losses
    51,226
    2,048
    503
    (585)
    53,192Servicing
      income, net of amortization and impairment
    —
    —
    18,775
    (5,209)
    13,566Gain
      (loss) on sale of mortgage assets
    —
    17,428
    (3,242)
    (12,485)
    1,701Total
      net revenues
    51,226
    19,476
    16,036
    (18,279)
    68,459Operating
      expenses
    6,116
    23,518
    11,576
    (1,932)
    39,278Other
      expense
    912
    379
    120
    —
    1,411Income
      (loss) before taxes
    44,198
    (4,421)
    4,340
    (16,347)
    27,770Income
      tax (benefit) expense
    (6,311)
    631
    (619)
    2,334
    (3,965)**Net
      income (loss)**
    $50,509
    $(5,052)
    $4,959
    $(18,681)
    $31,735











**Three
      Months Ended March 31, 2004****Portfolio**
    **Mortgage
      Loan**
      **Production**
    **Servicing**
    **Eliminations**
    **Total**($
      in thousands)Interest
      income
    $77,881
    $9,185
    $1,325
    $2,608
    $90,999Interest
      expense
    (31,476)
    (3,259)
    (896)
    2,464
    (33,167)Net
      interest income
    46,405
    5,926
    429
    5,072
    57,832Provision
      for mortgage loan losses
    (5,310)
    1,432
    —
    —
    (3,878)Net
      interest income after provision for mortgage loan losses
    41,095
    7,358
    429
    5,072
    53,954Servicing
      income, net of amortization and impairment
    —
    —
    9,518
    (4,626)
    4,892Gain
      on sale of mortgage assets
    —
    10,595
    31
    (8,075)
    2,551Total
      net revenues
    41,095
    17,953
    9,978
    (7,629)
    61,397Operating
      expenses
    (1,924)
    21,085
    7,391
    3,344
    29,896Other
      expense
    267
    557
    319
    —
    1,143Income
      (loss) before taxes
    42,752
    (3,689)
    2,268
    (10,973)
    30,358Income
      tax expense (benefit)
    15,020
    (1,295)
    796
    (3,855)
    10,666**Net
      income (loss)**
    $27,732
    $(2,394)
    $1,472
    $(7,118)
    $19,692








16
 Table of Contents








**March
      31, 2005**
    **December
      31, 2004****Segment
      Assets:**Portfolio
    $6,278,258
    $6,184,859Servicing
    227,342
    212,124Total
      segment assets
    $6,505,600
    $6,396,983Corporate
      assets
    157,549
    142,148Total
      assets
    $6,663,149
    $6,539,131





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




This
discussion should be read in conjunction with the unaudited condensed
consolidated financial statements, notes and tables included elsewhere in this
report and in the Saxon Capital, Inc. Annual Report on Form 10-K for the year
ended December 31, 2004, or the 2004 Form 10-K, filed with the Securities and
Exchange Commission. 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,” “will,” “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 unanticipated changes in interest
      rates;





·
    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;





17
 Table of Contents








·
    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.





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







18
 Table of Contents










**Table
      of Contents**
    **Page**Executive Summary
    19Description of Other Data
    222005 Outlook
    23Critical Accounting Policies
    23Consolidated Results
    29Business Segment Results
    40Financial Condition
    44Liquidity and Capital Resources
    46Off Balance Sheet Items and Contractual
      Obligations
    50Other Matters
    51







**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. To a much lesser extent, 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.





19
 Table of Contents





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 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 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. We would also expect to incur higher
expenses in years where we open additional retail branches or new production
centers, which would result in increased office rent, equipment rent and
insurance costs. 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 March 31, 2005 and 2004 we originated, purchased, or called
approximately $805.2 million and $778.7 million, respectively, and securitized
approximately $1.0 billion and $647.7 million of residential mortgage loans,
respectively. Called loans occur upon exercise of the clean-up call option by
our taxable REIT subsidiaries, as servicer or master servicer, of the
securitized pools of our predecessor for which Dominion Capital, Inc. retained
residual interests. 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. In
some cases, the rights to exercise the call
option, as well as the pool of called loans, may be owned by an unaffiliated
third party. We did not exercise any clean-up call options during the first
quarter of 2005.


20
 Table of Contents







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 on
a recourse basis. These loans are subsequently financed using asset-backed
securities issued through securitization trusts. From May 1996 to March 31,
2005, we securitized approximately $20.0 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 condensed
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 April 14, 2005,
lenders in the United States originated $2.7 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 April 14, 2005, lenders in the United States
are expected to originate approximately $2.5 trillion in single-family mortgage
loans in 2005. Generally, we believe sub-prime borrowers are not solely
motivated by fluctuations in interest rates. Thus, we do not expect the same
level of decline in the non-conforming market. We experienced an increase of
$162.8 million, or 25%, in our production volume to $805.2 million for the first
quarter of 2005 compared to $642.4 million for the first quarter of 2004,
excluding called loans.




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
lenders controlled a combined 31% of the mortgage origination market as of
December 31, 2004, 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.





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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. 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.




*Reconciliation
of trust losses and charge-offs.* We
present a reconciliation of securitization trust losses and charge-offs because
management believes that it is meaningful to show both measures of losses since
it is a widely accepted industry practice to evaluate losses on a trust level
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 a trust does not recognize a loss on REO until
the loan is sold. This causes a timing difference between charge-offs and trust
losses. In addition, the trust losses exclude losses resulting from delinquent
loan sales.





22
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*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.




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







**2005 Outlook**




*Revenue
Growth and Increased Expenses*




In the
first quarter of 2005, we experienced an increase in short-term borrowing
interest rates and a marked increase in competitive pricing pressures, and we
anticipate this trend to continue throughout the year. In addition, because of
our intent to focus to some extent on higher interest rates, lower credit grade
products, the credit quality characteristics of our mortgage loan production for
2005 may be slightly lower in credit grade than we experienced in 2004. As a
result, we expect to earn higher interest rates on the loans we originate in
2005 than the interest rates earned on loans we originated in 2004. However, we
may also experience more delinquencies and defaults, the risk of which is
typically greater with lower credit grade loans over time.




In 2005,
compared to 2004 and 2003, we expect our taxable REIT subsidiaries to continue
to increase the percentage of their contribution to our consolidated income,
while the growth of our portfolio slows as we sell lower-margin loans in whole
loan sales rather than retaining them in our portfolio. During the first quarter
of 2005, we sold approximately 12% of our first quarter mortgage loan production
in whole loan sales, and depending on market conditions, we may continue making
whole loan sales throughout the remainder of 2005. We also anticipate that the
REIT will fund more of its mortgage loans in its own name, which we expect will
be more efficient than acquiring these loans from our taxable REIT subsidiaries.
We began closing loans in certain states in our retail unit in the REIT’s name
on April 1, 2005 and expect to begin achieving those efficiencies in the second
quarter of 2005.




In
addition, we intend to continue to grow our mortgage loan portfolio and
servicing portfolio, which will produce higher levels of net interest income,
increase our provision for mortgage loan losses, and produce higher levels of
servicing income. With our
expected increase in our mortgage loan portfolio and servicing portfolio in
2005, we expect to incur higher levels of payroll and related expenses and
general and administrative expenses compared to 2004 and 2003.







23
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**Critical Accounting Policies**




Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our condensed consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these condensed
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 condensed
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 are believed 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:





·
    accounting
      for net interest income;




·
    allowance
      for loan loss;




·
    mortgage
      servicing rights;




·
    accounting
      for hedging activities;




·
    deferral
      of direct loan origination costs; and




·
    accounting
      for income taxes.





*Accounting
for 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
effects of estimated prepayments. Management does not currently use the payment
terms required by 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







24
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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.




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 and by purchasing and
originating mortgage loans with prepayment penalties. Those penalties typically
expire two to three years from origination. As of March 31, 2005,
approximately 76% 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. The constant prepayment rate, or CPR, currently used to
project cash flows is 34 percent over twelve months. Actual prepayment penalty
income is recorded based on 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, bond 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 using the interest method adjusted for the effects of estimated payments on
the debt.







*Allowance
for Loan Loss*





The
allowance for loan loss is established through the provision for mortgage loan
losses, which is charged to earnings on a monthly basis. The accounting estimate
of the allowance for loan loss 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
loss and our results of operations. The assumptions used by management regarding
these key estimates are highly uncertain and involve a great deal of judgment.





25
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Provisions
are made to the allowance for loan loss 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 real estate owned (REO) status. The allowance
for loan loss 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. An internally
developed roll rate analysis, static pool analysis and historical losses are the
primary tools used in analyzing our allowance for loan loss. 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 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 may be
required to 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. In
general, during periods of declining interest rates, the value of MSRs decline
due to increasing prepayments attributable to increased mortgage refinancing
activity.





The
carrying values of the MSRs are amortized in proportion to, and over the period
of, the anticipated net servicing income on a discounted basis. 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.





Due to
subsequent changes in economic and other relevant conditions, the actual rates
of prepayments and defaults and the value of collateral generally differ from
our initial estimates, and these differences are sometimes material. If actual
prepayment and





26
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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,
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
permanent, we reclassify the impairment from temporary to permanent beginning
the first day of the following quarter.





*Accounting
for Hedging Activities*




We
incorporate the use of derivative instruments to manage certain risks. We have
qualified certain derivative instruments to be accounted for as cash flow
hedges. A key element to qualify for hedge accounting is the maintenance of
adequate documentation of the hedging relationship and our risk management
objective and strategy for undertaking the hedge. To qualify, on the date a
derivative instrument agreement is entered into, we designate the derivative as
a hedge of a forecasted transaction or as a hedge of the variability of cash
flows to be paid related to a recognized liability. Our forecasted transaction
is an asset-backed securitization, an essential element in our business model.
Historically, we have completed an asset-backed securitization approximately
three to four times a year. The asset-backed market utilizes the swap curve as
base interest rates when pricing the type of debt securities we issue. As a
result, we utilize swaps or instruments that emulate swaps to minimize the
interest rate risk over the life of the mortgage financing cycle.





To
qualify for hedge accounting, we must demonstrate initially, and on an ongoing
basis, that our derivative instruments are expected and have demonstrated to be
highly effective at offsetting the designated risk. The determination of
effectiveness is the primary assumption and estimate used in accounting for our
hedge transactions. We consider the swap rate and Eurodollar prices used in our
assessment and measurement of effectiveness to be the most appropriate data
points to use given the characteristics of the derivative and hedged item. In
instances where we use swaps as a hedge, the swap rate is fixed and compared
monthly to the one-month London Inter-Bank Offered Rate, or LIBOR, index. The
payment of interest on our bonds issued in a securitization transaction is also
based on one-month LIBOR. Since our swaps and bond payments are based upon the
same index on the same reset day, the change in the cash flows of the swaps are
assumed by us to equal the change in cash flows of the hedged item. Likewise,
when we use options as a hedge, such as caps and floors, the change in the cash
flows of the options are assumed to equal the change in cash flows of the hedged
item because these options are based on the LIBOR index. In the case where we
may use Eurodollar futures, the correlation calculation is calculated by
capturing historic swap rates and the corresponding Eurodollar prices, and then
calculating a





27
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financing
rate, for the maturity deemed necessary. The impact of market changes on the
hedged item and the derivative are recorded over the relevant hedging periods
and correlation statistics are evaluated by performing a regression analysis on
a quarterly basis. Quarterly data points are selected and used in the regression
analysis to determine a correlation percentage. The difference between a 100%
correlation result (slope) and our actual correlation percentage is used to
calculate the ineffective portion related to the Eurodollar futures, which is
recorded primarily as expense in the Statement of Operations.





If we had
been unable to qualify certain of our interest rate risk management activities
for hedge accounting, then the change in fair value of the associated derivative
financial instruments would have been reflected in current period earnings, but
the impact from the change in anticipated cash flows of the related liability
would not have, which would have created an earnings mismatch. During the first
quarter of 2005, certain of our derivative instruments were deemed no longer
necessary to hedge our forecasted variable rate debt. The aggregate change in
fair value of these contracts had no impact on the statement of
operations.





*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 months
ended March 31, 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.








28
 Table of Contents








*Accounting
for Income Taxes*





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 March 31, 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
three months ended March 31, 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 on our critical accounting policies, refer to our 2004 Form
10-K.





**Consolidated Results**





*Three
Months Ended March 31, 2005 versus Three Months Ended March 31,
2004*





*Overview.* Net
income increased $12.0 million, or 61%, to $31.7 million for the three months
ended March 31, 2005 from $19.7 million for the three months ended March 31,
2004.







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The
increase was primarily the result of an increase in interest income, an increase
in our servicing income, and the impact of our REIT status on our income taxes.
This increase was partially offset by 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 interest rates
continue to rise in 2005, we would expect an increase in the interest rates we
charge on the mortgage loans we originate, decreases in our loan prepayments,
increases in our servicing income, and further increases in our borrowing costs.
In addition, because of our intent to focus to some extent on higher interest
rate, lower credit grade products, the credit quality characteristics of our
mortgage loan production may be slightly lower than we experienced in 2004. As a
result, we expect to charge higher interest rates on the loans we originate in
the remainder of 2005 than the interest rates earned on loans we originated in
2004. However, we may also experience more delinquencies and defaults over time,
the risk typically associated with lower credit grade loans.




**Revenues**





*Total
Net Revenues.* Total
net revenues increased $7.1 million, or 12%, to $68.5 million for the three
months ended March 31, 2005 from $61.4 million for the three months ended March
31, 2004. The increase in total net revenues was due primarily to an increase in
our servicing income, net of amortization and impairment, which grew 178% for
the three months ended March 31, 2005 compared to the three months ended March
31, 2004, primarily as a result of our third party servicing acquisitions
throughout 2004 and the first quarter of 2005.


**


*Interest
Income* .
Interest income increased $23.1 million, or 25%, to $114.1 million for the three
months ended March 31, 2005, from $91.0 million for the three months ended March
31, 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; (2) a decrease
in the amortization of our yield adjustments; (3) a decrease in the amortization
of fair value hedges; and (4) a decrease in prepayment penalty income. The WAC
on our production for the first quarter of 2005, which represents 13% of our
owned portfolio, was negatively impacted by the intense pricing competition
currently existing in the marketplace. This competition has resulted in lower
WAC on our mortgage loans compared to the first quarter of 2004 despite the
rising interest rate environment experienced in the first quarter of 2005. The
components of these decreases are discussed in more detail below.





*Rate/Volume
Table For the Three Months Ended March 31, 2005 Compared to the Three Months
Ended March 31, 2004*





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 Table of Contents








As shown
in the table below, for the three months ended March 31, 2005 compared to the
three months ended March 31, 2004, our interest income increased $23.2 million
due to an increase in the size of our mortgage loan portfolio, and increased
$1.1 million due to a decrease in the amortization of our yield adjustments on
our mortgage loan portfolio.







**Three
      Months Ended March 31, 2005 Compared to**
      **Three
      Months Ended March 31, 2004****Change
      in Rate**
    **Change
      in Volume**
    **Total
      Change in Interest Income**(in
      thousands)Securitized
      loans
    $421
    $22,623
    $23,044Warehouse
      loans
    537
    477
    1,014Mortgage
      bonds
    93
    53
    146Other
    —
    6
    6Total
    $1,051
    $23,159
    $24,210Prepayment
      penalty income
    —
    —
    (1,146)$23,064








*Interest
Income Yield Analysis For the Three Months Ended March 31, 2005 and
2004*




The
following table presents the average yield on our interest-earning assets for
the three months ended March 31, 2005 and 2004.







**Three
      Months Ended March 31, 2005**
    **Three
      Months Ended March 31, 2004******
    **Average**
      **Balance**
    **Interest**
      **Income**
    **Average**
      **Yield**
    **Average**
      **Balance**
    **Interest**
      **Income**
    **Average**
      **Yield**($
      in thousands)Gross
    $6,025,904
    $113,250
    7.52%
    $4,726,335
    $95,647
    8.09%Less
      amortization of yield adjustments (1)
    —
    (4,600)
    (0.31)%
    —
    (7,000)
    (0.59)%Less
      amortization of fair value hedges
    —
    (1,350)
    (0.09)%
    —
    (5,557)
    (0.47)%$6,025,904
    $107,300
    7.12%
    $4,726,335
    $83,090
    7.03%Add
      prepayment penalty income
    —
    6,763
    0.45%
    —
    7,909
    0.67%**Total
      interest-earning assets**
    $6,025,904
    $114,063
    7.57%
    $4,726,335
    $90,999
    7.70%


_______________


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





The
increase in gross interest income is consistent with the growth of our mortgage
loan portfolio. Our mortgage loan portfolio increased $1.2 billion, or 24%, to
$6.1 billion as of March 31, 2005 from $4.9 billion as of March 31, 2004.
However, this growth was offset partially by the 57 basis point decrease
in gross WAC rate 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, which we believe enabled us to remain
competitive in the face of intense pricing competition in our industry. The
weighted-average credit score on our portfolio





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increased to
616 as of March 31, 2005, from 611 as of March 31, 2004. We anticipate that our
gross interest income in dollars will continue to grow as our mortgage loan
portfolio grows. We also expect that our interest income may increase in 2005 if
interest rates rise and if we originate or purchase lower credit grade loans
that typically yield higher interest.





Amortization
expense of yield adjustments decreased $2.4 million, or 34%, to $4.6 million for
the three months ended March 31, 2005 from $7.0 million for the three months
ended March 31, 2004. This decrease was predominantly caused by a decrease of 57
basis points in our premiums paid on loans compared to the first
quarter of 2003. This decrease in premiums was mainly due to recent increases in
the credit quality of our borrowers as borrowers with higher credit scores tend
to obtain loans at a lower premium than do borrowers with lower credit scores.
To the extent we experience rising interest rates in the future and focus more
on lower credit quality loan production, we anticipate that our amortization of
premiums may increase. However, a rising interest rate environment may also
result in a decline in prepayment speeds, thus offsetting an increase in
amortization of premiums paid.





The
amortization expense of fair value hedges decreased $4.2 million, or 75%, to
$1.4 million for the three months ended March 31, 2005 from $5.6 million for the
three months ended March 31, 2004. The balance of our fair value hedges as of
March 31, 2004 was $40.5 million compared to our existing balance of $28.9
million as of March 31, 2005. Amortization of fair value hedges should continue
to decline in future years as we now use cash flow hedging for all hedging
transactions that qualify for hedge accounting.





Prepayment
penalty income decreased $1.1 million, or 14%, to $6.8 million for the three
months ended March 31, 2005 from $7.9 million for the three months ended March
31, 2004. We expect that prepayment penalty income may continue to decrease in
2005 as borrowers continue to be less attracted to refinancing as interest rates
begin to rise. However, we also expect to generate higher interest income on the
loans we originate during a rising interest rate environment to offset this
decline. Effective July 1, 2003, government regulations related to the
Alternative Mortgage Transactions Parity Act were amended to restrict the
ability of state-chartered mortgage lenders to charge prepayment penalties on
certain types of mortgage loans. Management expects that these amendments also
could 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 our origination of higher
credit grade mortgage loans from 2001 through the first quarter of 2005. We
expect our average credit scores may decline slightly as we continue to focus on
originating lower credit grade mortgage loans and if interest rates continue to
rise. If this occurs, we expect the WAC on our loans to rise.





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The
following tables set forth information about our securitized mortgage loan
portfolio as of March 31, 2005 and December 31, 2004.





**Issue
      Date**
    **Original
      Loan**
      **Principal
      Balance**
    **Current
      Loan**
      **Principal
      Balance**
    **Percentage
      of Portfolio**
    **Percentage
      of Original Remaining**
    **Remaining**
      **WAC
      Fixed**
    **Remaining**
      **WAC
      Arm**($
      in thousands)March
      31, 2005SAST
      2001-2
    8/2/2001
    $650,410
    $128,689
    2%
    20%
    9.37%
    9.99%SAST
      2001-3
    10/11/2001
    $699,999
    $125,944
    2%
    18%
    9.96%
    9.69%SAST
      2002-1
    3/14/2002
    $899,995
    $217,054
    4%
    24%
    8.87%
    9.10%SAST
      2002-2
    7/10/2002
    $605,000
    $172,700
    3%
    29%
    8.86%
    9.15%SAST
      2002-3
    11/8/2002
    $999,999
    $313,429
    6%
    31%
    8.35%
    8.42%SAST
      2003-1
    3/6/2003
    $749,996
    $294,144
    5%
    39%
    7.43%
    8.29%SAST
      2003-2
    5/29/2003
    $599,989
    $289,045
    5%
    48%
    7.29%
    7.46%SAST
      2003-3
    9/16/2003
    $1,000,000
    $561,951
    10%
    56%
    7.21%
    7.51%SAST
      2004-1
    2/19/2004
    $1,099,999
    $754,456
    13%
    69%
    7.84%
    7.38%SAST
      2004-2
    7/27/2004
    $1,199,994
    $1,033,959
    18%
    86%
    7.00%
    6.72%SAST
      2004-3
    10/27/2004
    $899,956
    $835,311
    15%
    93%
    7.84%
    7.09%SAST
      2005-1
    1/25/2005
    $999,972
    $982,127
    17%
    98%
    7.40%
    6.83%Total
    
    $10,405,309
    $5,708,809December
      31, 2004SAST
      2001-2
    8/2/2001
    $650,410
    $144,211
    3%
    22%
    9.36%
    9.83%SAST
      2001-3
    10/11/2001
    $699,999
    $143,788
    3%
    21%
    10.01%
    9.60%SAST
      2002-1
    3/14/2002
    $899,995
    $253,942
    5%
    28%
    8.88%
    8.99%SAST
      2002-2
    7/10/2002
    $605,000
    $196,468
    4%
    32%
    8.87%
    9.16%SAST
      2002-3
    11/8/2002
    $999,999
    $363,438
    7%
    36%
    8.35%
    8.31%SAST
      2003-1
    3/6/2003
    $749,996
    $352,543
    7%
    47%
    7.45%
    8.08%SAST
      2003-2
    5/29/2003
    $599,989
    $323,092
    6%
    54%
    7.30%
    7.41%SAST
      2003-3
    9/16/2003
    $1,000,000
    $630,271
    12%
    63%
    7.23%
    7.51%SAST
      2004-1
    2/19/2004
    $1,099,999
    $851,286
    16%
    77%
    7.85%
    7.40%SAST
      2004-2
    7/27/2004
    $1,199,994
    $1,113,932
    21%
    93%
    7.02%
    6.74%SAST
      2004-3
    10/27/2004
    $899,956
    $885,484
    17%
    98%
    7.51%
    6.99%Total
    
    $9,405,337
    $5,258,455








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 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 slower prepayments of our mortgage loans during the first quarter of
2005 compared to first quarter of 2004. This was primarily due to refinancing
activity slowing down as we experienced a rising interest rate environment in
the first quarter of 2005. We expect our prepayment speeds to continue to slow
down in future





33
 Table of Contents






periods
if market interest rates continue to increase, which would positively impact
interest income.





**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**March
      31, 2005SAST
      2001-2
    8/2/2001
    46.71%
    37.50%
    52.40%
    30.92%
    42.86%SAST
      2001-3
    10/11/2001
    24.49%
    39.08%
    49.48%
    35.46%
    42.96%SAST
      2002-1
    3/14/2002
    44.47%
    34.05%
    50.33%
    31.58%
    42.32%SAST
      2002-2
    7/10/2002
    58.36%
    34.49%
    49.68%
    32.26%
    40.63%SAST
      2002-3
    11/8/2002
    46.80%
    36.02%
    53.40%
    30.84%
    42.10%SAST
      2003-1
    3/6/2003
    57.00%
    34.95%
    57.02%
    27.16%
    44.62%SAST
      2003-2
    5/29/2003
    71.82%
    33.55%
    47.24%
    25.91%
    37.73%SAST
      2003-3
    9/16/2003
    58.80%
    28.83%
    45.19%
    21.43%
    36.41%SAST
      2004-1
    2/19/2004
    49.60%
    24.05%
    37.31%
    20.60%
    33.72%SAST
      2004-2
    7/27/2004
    56.92%
    —
    —
    15.26%
    26.06%SAST
      2004-3
    10/27/2004
    48.91%
    —
    —
    6.35%
    20.48%SAST
      2005-1
    1/25/2005
    55.93%
    —
    —
    7.42%
    24.76%December
      31, 2004SAST
      2001-2
    8/2/2001
    46.19%
    36.11%
    52.36%
    30.75%
    42.96%SAST
      2001-3
    10/11/2001
    23.07%
    41.45%
    50.46%
    35.79%
    42.73%SAST
      2002-1
    3/14/2002
    64.85%
    34.12%
    49.03%
    31.29%
    40.97%SAST
      2002-2
    7/10/2002
    57.27%
    36.03%
    47.77%
    32.90%
    39.90%SAST
      2002-3
    11/8/2002
    53.38%
    38.17%
    51.72%
    30.56%
    41.09%SAST
      2003-1
    3/6/2003
    69.48%
    34.98%
    49.58%
    26.83%
    40.17%SAST
      2003-2
    5/29/2003
    71.64%
    31.87%
    44.93%
    25.88%
    37.15%SAST
      2003-3
    9/16/2003
    58.69%
    24.44%
    41.52%
    20.23%
    35.48%SAST
      2004-1
    2/19/2004
    50.32%
    —
    —
    18.89%
    30.77%SAST
      2004-2
    7/27/2004
    56.27%
    —
    —
    12.37%
    22.62%SAST
      2004-3
    10/27/2004
    51.66%
    —
    —
    1.77%
    21.59%





*Interest
Expense* .
Interest expense increased $22.0 million, or 66%, to $55.2 million for the three
months ended March 31, 2005 from $33.2 million for the three months ended March
31, 2004. The table below presents the total change in interest expense from the
three months ended March 31, 2005 to the three months ended March 31, 2004, and
the amount of the total change that is attributable to increasing interest rates
and an increase in our outstanding debt related to an increase in our loan
production. Our interest expense increased $13.0 million as a result of higher
interest rates on our interest bearing liabilities and increased $9.0 million
due to an increase in our borrowings relating to an increase in our mortgage
loan production.





*Rate/Volume
Table For the Three Months Ended March 31, 2005 Compared to the Three Months
Ended March 31, 2004*







34
 Table of Contents







**Three
      Months Ended March 31, 2005 Compared to**
      **Three
      Months Ended March 31, 2004******
    **Change
      in Rate**
    **Change
      in Volume**
    **Total
      Change in Interest Expense**(in
      thousands)Securitization
      financing
    $12,048
    $9,129
    $21,177Warehouse
      financing:Lines
      of credit
    321
    851
    1,172Repurchase
      agreements
    925
    (686)
    239Other
    (249)
    (334)
    (583)Total
    $13,045
    $8,960
    $22,005







*Interest
Expense Yield Analysis For the Three Months Ended March 31, 2005 and
2004*





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 94 basis
points. One-month LIBOR rates increased approximately 180 basis points
from March 31, 2004 to March 31, 2005.  Our average balance of
borrowings increased $1.1 billion, or 22%, to $6.1 billion for the three months
ended March 31, 2005 from $5.0 billion for the three months ended March 31,
2004, as a result of the growth in our mortgage loan portfolio. Our amortization
of yield adjustments increased $7.6 million, or 101%, to $0.1 million net
amortization for the three months ended March 31, 2005 from $(7.5) million net
accretion for the three months ended March 31, 2004.  Specifically,
our amortization of bond issuance costs increased $0.8 million due to the
issuance of new securitization debt in January 2005. In addition, the accretion
of bond premium on our interest only bonds decreased $6.9 million due to the
repayment of such bonds, partially offset by a decrease of $0.1 million in our
amortization of bond discount.In the
current market, we are no longer able to issue bonds with interest only premium,
and therefore we are not able to lower our gross cost with this
accretion.





**Three
      Months Ended March 31, 2005**
    **Three
      Months Ended March 31, 2004******
    **Average**
      **Balance**
    **Interest**
      **Expense**
    **Average**
      **Yield**
    **Average**
      **Balance**
    **Interest**
      **Expense**
    **Average**
      **Yield**($
      in thousands)**Warehouse
      financing**
    $172,091
    $1,616
    3.67%
    $72,042
    $444
    2.44%Less
      compensating balance credits (1)
    —
    (450)
    (1.02)%
    —
    (161)
    (0.88)%**Net
      warehouse financing**
    $172,091
    $1,166
    2.65%
    $72,042
    $283
    1.56%**Repurchase
      agreements**
    214,096
    1,749
    3.20%
    336,200
    1,510
    1.78%**Securitization
      financing:**Gross
    5,746,093
    51,376
    3.58%
    4,546,495
    37,478
    3.30%Plus
      (Less) net amortization (accretion) of yield adjustments
    (2)
    —
    141
    0.01%
    —
    (7,465)
    (0.66)%Plus
      (Less) amortization (accretion) of cash flow hedges (3)
    —
    (255)
    (0.02)%
    —
    72
    0.01%**Net
      securitization financing:**
    5,746,093
    51,262
    3.57%
    4,546,495
    30,085
    2.65%**Notes
      payable**
    —
    —
    —%
    25,000
    497
    8.00%**Other
      expenses**
    —
    995
    —
    —
    792
    —**Total
      interest-bearing liabilities**
    $6,132,280
    $55,172
    3.60%
    $4,979,737
    $33,167
    2.66%


______________


(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 bond issuance costs related
      to our bonds.




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







35
 Table of Contents







*Net
Interest Margin* . Our net
interest margin decreased to 3.9% for the three months ended March 31, 2005,
from 4.9% for the three months ended March 31, 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, as well as our shift in credit
mix to loans with lower weighted average coupons and prepayments of higher
coupon loans. While there may be an immediate impact on our net interest margin
due to changes in one-month LIBOR, the impact of the anticipated changes in cash
flows from our hedges is included in other comprehensive income in shareholders’
equity on our condensed consolidated balance sheets and is recognized into
earnings over the expected life of the variable rate bonds. This may result in
short-term mismatches between the changes in our borrowing costs and the effect
of our hedges, but over the term of the debt, we believe the hedges should
effectively protect the interest margin. In the first quarter of 2005, our net
interest margin was positively impacted by our hedges by three basis points. We
expect this positive impact to continue throughout 2005.




*Provision
for Mortgage Loan Losses* .
Provision for mortgage loan losses increased $1.8 million, or 46%, to $5.7
million for the three months ended March 31, 2005, from $3.9 million for the
three months ended March 31, 2004. The increase in the provision was primarily
attributable to an increase in delinquencies in the 30-59 day delinquent
category by $28.8 million, or 14%. Serious delinquencies remained 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 three months ended March 31,
2005 and 2004.




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. Loss severities have been increasing, which is expected
as aged REO properties begin to liquidate, even though property values are
presumed to increase. Because loss severities typically increase as the
portfolio ages and refinance activity is expected to decrease, management
expects our average loss severities may also increase.







36
 Table of Contents





We saw a
decrease in delinquency rates and loan loss experience in our owned servicing
portfolio in the first quarter of 2005 compared to the first quarter of 2004. We
believe this decrease was the result of the credit mix of the loans we
originated or purchased from 2002 through first quarter of 2005 as loans to
borrowers with higher credit scores typically have lower frequency of
foreclosure and loss. Our weighted average median credit score on our mortgage
loan portfolio increased to 616 as of March 31, 2005 from 611 as of March 31,
2004.




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 trust losses and charge-offs. (See footnote (4) below the
table for disclosure of seriously delinquent data using the OTS
method.)




*Delinquency
and Loss Experience Of Our Owned Portfolio*




**March
      31,******
    **2005**
    **2004****Total
      Delinquencies and Loss Experience**
    ($
      in thousands)Total
      outstanding principal balance (at period end)
    $6,035,444
    $4,918,253Delinquency
      (at period end):30-59
      days:Principal
      balance
    $237,332
    $208,495Delinquency
      percentage
    3.93%
    4.24%60-89
      days:Principal
      balance
    $49,412
    $56,428Delinquency
      percentage
    0.82%
    1.15%90
      days or more:Principal
      balance
    $51,861
    $46,754Delinquency
      percentage
    0.86%
    0.95%Bankruptcies
      (1):Principal
      balance
    $107,565
    $107,873Delinquency
      percentage
    1.78%
    2.19%Foreclosures:Principal
      balance
    $111,241
    $113,423Delinquency
      percentage
    1.84%
    2.31%Real
      estate owned (2):Principal
      balance
    $46,248
    $45,233Delinquency
      percentage
    0.77%
    0.92%Total
      seriously delinquent including real estate owned (3)(4)
    $344,652
    $343,305Total
      seriously delinquent including real estate owned (3)(4)
    5.71%
    6.98%Total
      seriously delinquent excluding real estate owned (4)
    $298,404
    $298,073Total
      seriously delinquent excluding real estate owned (4)
    4.94%
    6.06%Net
      losses on liquidated loans - trust basis (5)
    $11,273
    $10,381Percentage
      of trust basis losses on liquidated loans (6)
    0.75%
    0.84%Loss
      severity on liquidated loans (7)
    41.84%
    38.53%Charge-offs
      (8)
    $8,893
    $13,350Percentage
      of charge-offs on liquidated loans (6)
    0.59%
    1.09%





37
 Table of Contents





________________


(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 March 31, 2005 and 2004 are $17.6
      million and $22.4 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.




(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 $293.4
      million, or 4.86% as of March 31, 2005 and $285.9 million, or 4.70% as of
      March 31, 2004. Total seriously delinquent excluding REO using the OTS
      method would be $247.2 million, or 4.10% as of March 31, 2005, and $240.6
      million, or 3.95% as of March 31, 2004.




(5)
    Net
      losses on liquidated loans for our portfolio exclude losses of $5.9
      million relating to sales of delinquent called loans purchased at a
      discount and certain recoveries during the first quarter of 2004. There
      were no delinquent called loans sold during the first quarter of
      2005.




(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.




(8)
    Charge-offs
      represent the losses recognized in our financial statements in accordance
      with GAAP. See reconciliation of trust losses to charge-offs
      below.




*Reconciliation
of Trust Losses and Charge-offs*






**For
      the Three Months Ended March 31,******
    **2005**
    **2004**(in
      thousands)Losses
      - trust basis
    $11,273
    $10,381Loan
      transfers to real estate owned
    6,854
    10,963Realized
      losses on real estate owned
    (8,597)
    (9,013)Timing
      differences between liquidation and claims processing
    (198)
    294Loss
      from delinquent loan sale applied to reserve
    —
    359Interest
      not advanced on warehouse
    (75)
    (43)Other
    (364)
    409Charge-offs
      (1)
    $8,893
    $13,350


________________


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




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







38
 Table of Contents







**March
      31, 2005**
    ****
      **March
      31,2004**
    ****
      **March
      31, 2005**
    ****
      **March
      31, 2004******
    **Seriously
      Delinquent Outstanding**
      **Principal
      Balance (1)**
    **Cumulative
      Charge-Offs**($ in
      thousands)2001
      Securitizations
    $62,934
    $102,709
    $47,941
    $31,9242002
      Securitizations
    101,194
    151,180
    34,576
    18,4452003
      Securitizations
    79,956
    72,646
    10,165
    1,5952004
      Securitizations
    78,353
    4,826
    1,953
    —2005
      Securitizations
    7,168
    —
    —
    —Warehouse
    15,047
    11,944
    4,721
    4,426Total
    $344,652
    $343,305
    $99,356
    $56,390


_________________


(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 $8.7 million, or
178%, to $13.6 million for the three months ended March 31, 2005 from $4.9
million for the three months ended March 31, 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 of amortization expense of MSRs for the three months ended March
31, 2005, compared to the three months ended March 31, 2004. This increase in
MSR amortization expense was due primarily to increased servicing acquisitions.
Specifically, we were amortizing a third party servicing rights balance of $42.5
million as of March 31, 2004 compared to third party servicing rights balance of
$118.0 million as of March 31, 2005. We expect our servicing income to increase
as we grow our 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 Months Ended March 31, 2005 Compared to the Three Months
Ended March 31, 2004*




**Three
      Months Ended March 31,******
    **2005**
    **2004**
    **Variance**($
      in thousands)Average
      third party servicing portfolio
    $14,474,027
    $5,221,358
    177%Average
      owned portfolio
    $5,959,432
    $4,792,012
    24%Average
      total servicing portfolio
    $20,433,459
    $10,013,370
    104%Gross
      servicing income
    $24,258
    $10,929
    122%Amortization
      and impairment
    $10,692
    $
      6,037
    77%Servicing
      fees - third party portfolio (1) (2)
    55
    57Amortization
      and impairment- third party portfolio (1)
    29
    46Other
      servicing income - total servicing portfolio (1)(3)
    9
    14Servicing
      income - total servicing portfolio (1)
    47
    44









39
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___________


(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 increased $5.4 million, or 33%, to $21.8 million for the
three months ended March 31, 2005 from $16.4 million for the three months ended
March 31, 2004. Specifically:





·
    Executive
      compensation expense increased $0.4 million primarily due to the issuance
      of additional restricted stock units during the first quarter of 2005, the
      costs of which are amortized over their vesting
period.


·
    Salary,
      bonus, and related payroll expenses increased $2.8 million, primarily due
      to an increase in head count from 1,176 at March 31, 2004 to 1,248 at
      March 31, 2005. This increase in employees was due primarily to increased
      staffing necessary for our servicing portfolio
growth.


·
    Severance
      expense increased $0.3 million partially due to our closing of four retail
      branches during the first quarter of 2005.


·
    Commission
      expenses increased $0.9 million, primarily due to loan production volume
      increasing to $805.2 million for the three months ended March 31, 2005
      from $642.4 million for the three months ended March 31, 2004, excluding
      called loans.


·
    Deferred
      payroll and related expenses, as they related to direct loan origination
      costs, decreased $0.6 million due to a change in our per unit deferral
      estimate resulting from slightly lower compensation costs at the upper
      sales management level.





*General
and Administrative Expenses* . General
and administrative expenses increased $4.0 million, or 33%, to $16.0 million for
the three months ended March 31, 2005, from $12.0 million for the three months
ended March 31, 2004. The increase was due primarily to an increase in
advertising expenses of $0.8 million as well as an increase of $1.7 million in
outsourced services used in our servicing business, an increase in rental and
lease expense of $0.6, an increase in investors relations expense of $0.3
million, and an increase in auditing fees of $0.3 million.





*Income
Tax Benefit* . We
recorded a $4.0 million tax benefit for the three months ended March 31, 2005
compared to a $10.7 million tax expense for the three months ended March 31,
2004. This difference was the result of the impact of the structure and
formation transactions related to our REIT conversion.





40
 Table of Contents








**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 months ended
March 31, 2005 and 2004. See Note 12 to our unaudited condensed consolidated
financial statements for additional information about the results of our
business segments.





***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 for the portfolio segment increased $10.1 million, or 25%, to $51.2
million for the three months ended March 31, 2005 from $41.1 million for the
three months ended March 31, 2004. The increase in total net revenues was due to
an increase in net interest income after provision for mortgage loan losses
resulting from the continued growth of our owned portfolio.





***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*





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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. For the three months ended March 31,
2005, we purchased the rights to service $3.1 billion of mortgage loans.





Our loan
servicing portfolio as of March 31, 2005 is summarized below:





**Number
      of Loans**
    **Principal
      Balance**
    **Percent
      of**
      **Total**
    **Average
      Loan Balance**($
      in thousands)**Owned
      Portfolio:**Saxon
      Capital, Inc.(1)
    42,742
    $6,035,444
    28%
    $141,206**Third
      Party Servicing:**Greenwich
      Capital, Inc.
    56,632
    8,918,266
    
    157,478Credit
      Suisse First Boston
    27,863
    4,751,546
    
    170,532Barclays
      Bank, PLC.
    5,941
    1,200,858
    
    202,131Dominion
      Capital
    7,844
    540,659
    
    68,926Fannie
      Mae
    353
    32,254
    
    91,371Dynex
      Capital, Inc.
    348
    31,379
    
    90,170Other
      investors
    289
    8,013
    
    27,727**Total
      third party servicing**
    99,270
    15,482,975
    72%
    155,968Total
    142,012
    $21,518,419
    
    $151,525


_________________


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




Our
mortgage loan servicing portfolio, including loans recorded on our condensed
consolidated balance sheets, increased $1.3 billion, or 6%, to $21.5 billion as
of March 31, 2005, from $20.2 billion as of December 31, 2004. The increase was
due primarily to the origination and purchase of $805.2 million of mortgage
loans as well as the acquisition of servicing rights related to $3.1 billion of
mortgage loans owned by non-affiliated companies during the first quarter of
2005. This increase was partially offset by prepayments and losses totaling $1.8
billion and principal payments on our securitized portfolio of $550.6
million.





We
believe we can continue to increase our servicing portfolio because competition
in the non-conforming mortgage loan industry has been adversely affected by
limited access to capital, lower than anticipated performance of seasoned
portfolios, and industry consolidation. Competitors with limited access to
capital have shifted their operations to selling loans, along with the related
servicing rights, or have entered into strategic alliances with investment banks
to increase their liquidity and access to the capital markets. 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.  We anticipate
purchasing third party servicing rights for an additional $6.2 billion of
mortgage loans during the remainder of 2005, of which $1.7 billion were
purchased during April 2005 for approximately $11.6 million.


42
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We
include all costs to service mortgage loans in our owned portfolio and our third
party servicing portfolio within the servicing segment. We reduced our cost to
service to 20 basis points for the three months ended March 31, 2005, from 26
basis points for the three months ended March 31, 2004 due to an increase in our
overall servicing portfolio and credit quality of the owned portfolio, as well
as a continued focus on operating efficiencies. We expect to see further
reductions in our cost to service as we continue to grow our mortgage loan
servicing portfolio in 2005.





*Our
Delinquency and Loss Experience - Total Servicing Portfolio*





We
experienced a decline in seriously delinquent accounts for our total servicing
portfolio to 4.95% for the three months ended March 31, 2005 from 7.93% for the
three months ended March 31, 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 total 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.)





43
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**March
      31,******
    **2005**
    **2004****Total
      Delinquencies and Loss Experience (1)**
    ($
      in thousands)Total
      outstanding principal balance (at period end)
    $21,518,419
    $10,127,216Delinquency
      (at period end):30-59
      days:Principal
      balance
    $798,637
    $434,921Delinquency
      percentage
    3.71%
    4.29%60-89
      days:Principal
      balance
    $210,306
    $112,050Delinquency
      percentage
    0.98%
    1.11%90
      days or more:Principal
      balance
    $201,445
    $90,360Delinquency
      percentage
    0.94%
    0.89%Bankruptcies
      (2):Principal
      balance
    $275,956
    $304,437Delinquency
      percentage
    1.28%
    3.01%Foreclosures:Principal
      balance
    $318,440
    $257,228Delinquency
      percentage
    1.48%
    2.54%Real
      estate owned:Principal
      balance
    $109,700
    $105,559Delinquency
      percentage
    0.51%
    1.04%Total
      seriously delinquent including real estate owned (3)(4)
    $1,064,924
    $802,840Total
      seriously delinquent including real estate owned (3)(4)
    4.95%
    7.93%Total
      seriously delinquent excluding real estate owned (4)
    $955,224
    $697,281Total
      seriously delinquent excluding real estate owned (4)
    4.44%
    6.89%Net
      losses on liquidated loans - trust basis (5)
    $21,817
    $26,982Percentage
      of trust basis losses on liquidated loans (6)
    0.41%
    1.07%Loss
      severity on liquidated loans (7)
    42.51%
    45.64%


__________


(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 March 31, 2005 and 2004
      are $39.2 million and $53.1 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 $847.7
      million, or 3.94% as of March 31, 2005 and $683.8 million, or 3.17% as of
      March 31, 2004. Total seriously delinquent excluding REO using the OTS
      method would be $738.0 million, or 3.43% as of March 31, 2005, and $578.2
      million, or 2.68% as of March 31, 2004.




(5)
    Net
      losses on liquidated loans exclude losses of $5.9 million relating to
      sales of delinquent called loans purchased at a discount and certain
      recoveries during the first quarter of 2004. There were no delinquent
      called loans sold during the first quarter of 2005.




(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.







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*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
    $13,382
    2%
    1.93%
    31.34%1997
    $1,769,538
    $53,074
    3%
    3.23%
    38.95%1998
    $2,084,718
    $114,938
    6%
    4.03%
    39.42%1999
    $2,381,387
    $232,721
    10%
    4.89%
    41.47%2000
    $2,078,637
    $262,087
    13%
    5.19%
    43.43%2001
    $499,879
    $76,370
    15%
    3.22%
    54.42%Post-divestiture:2001
    $1,833,357
    $319,052
    17%
    3.10%
    38.89%2002
    $2,484,074
    $651,863
    26%
    1.17%
    34.58%2003
    $2,842,942
    $1,339,514
    47%
    0.20%
    23.57%2004
    $3,764,628
    $2,846,638
    76%
    0.01%
    20.22%2005
    $805,151
    $577,122
    72%
    —
    —
_________________


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




(2)
    As
      of March 31, 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, 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.




(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 21 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, that
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, we expect to see continued improvements in our loan
production efficiency during the remainder of 2005.





45
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Mortgage
loan production was $805.2 million for the three months ended March 31, 2005,
which represents a 3% increase over the three months ended March 31, 2004
production of $778.7 million, which includes $136.3 million in called loans. We
did not exercise any clean-up call options during the first quarter of 2005. Our
wholesale mortgage loan production was $342.5 million during the first quarter
of 2005, an increase of 14% over the first quarter of 2004. Our retail channel
loan production was $202.0 million during the first quarter of 2005, an increase
of 2% over the first quarter of 2004. Our correspondent flow mortgage loan
production was $222.8 million during the first quarter of 2005, an increase of
101% over the first quarter of 2004. Our correspondent bulk mortgage loan
production was $37.9 million during the first quarter of 2005, an increase of
16% from the first quarter 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**




*March
31, 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
March 31, 2005 from $6.0 billion as of December 31, 2004. This increase was the
result of the origination and purchase of $805.2 million of mortgage loans
partially offset by principal payments of $562.5 million and loan sales of
$164.3 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 and more seasoned mortgage loans are paid off. In addition, based on market
conditions we may sell for cash a portion of our mortgage loans not to exceed
15% of our quarterly production.





*Allowance
for Loan Loss.* The
allowance for loan loss decreased $3.7 million, or 10%, to $33.6 million as of
March 31, 2005 from $37.3 million as of December 31, 2004. This decrease was due
to charge-offs of $8.9 million from primarily our 2001 and 2002 securitizations,
which were provided for in previous periods, offset by additional provision of
$5.2 million. The decrease in the allowance for loan loss was also due to the
higher credit quality loans produced in 2004 and 2003 compared to 2002 and 2001,
as evidenced by a $98 million decrease in delinquencies as of March 31, 2005 as
compared to December 31, 2004. We expect our allowance for loan loss may
increase in the future as our portfolio continues to grow and if we shift our
focus to higher yielding, lower credit grade mortgage loan products.





*Mortgage
servicing rights, net.* Mortgage
servicing rights (MSRs), net increased $11.1 million, or 11%, to $110.1 million
as of March 31, 2005 from $99.0 million as of December 31, 2004. This increase
was primarily due to purchases of $21.8 million of rights to service $3.1
billion of mortgage loans during the first quarter of 2005. The increase in MSRs
was partially offset by amortization of servicing rights of $9.2 million during
the first quarter of 2005. Also, our valuation allowance increased $1.5 million
as the result of actual prepayment







46
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speeds
being greater than projected during the first quarter 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 anticipate
purchasing third party servicing rights for an additional $6.2 billion of
mortgage loans during the remainder of 2005, of which $1.7 billion have been
purchased in April 2005 for approximately $11.6 million.





*Servicing
Related Advances.* Servicing related advances increased $4.1 million, or 4%, to $117.2 million as
of March 31, 2005 from $113.1 million as of December 31, 2004. The increase was
primarily due to the increase in our third party servicing balances.





*Trustee
Receivable.* Trustee
receivable increased $4.8 million, or 4%, to $116.9 million as of March 31, 2005
from $112.1 million as of December 31, 2004. The increase was primarily due to
the completion of one securitization during the first quarter of 2005. Our
trustee receivable balance increased at a greater rate than our mortgage loan
portfolio balance during the first quarter of 2005, primarily because more loans
were paid as scheduled as shown by our lower delinquency rates. 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
condensed 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 $10.7 million, or 12%, to $79.0 million as of March 31, 2005
from $89.7 million as of December 31, 2004. The decrease in other assets is
primarily the result of a decrease in our current tax receivable balance of $5.9
million as we received a partial refund. Additionally, we had decreases of $2.0
million in prepaid expenses, $1.2 million in capitalized bond and certificate
issuance costs, and $1.1 million in miscellaneous receivables.





*Warehouse
Financing.* Warehouse financing decreased $331.5 million, or 55%, to $269.1 million as of
March 31, 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 to generally increase
in proportion to our mortgage loan production.





*Securitization
Financing.* Securitization financing increased $0.4 billion, or 8%, to $5.7 billion as of
March 31, 2005 from $5.3 billion as of December 31, 2004. This increase resulted
primarily from the execution of one asset-backed securitization which resulted
in bonds being issued in the amount of $1.0 billion during the first quarter of
2005. This increase was partially offset by bond and certificate payments of
$0.6 billion. In general, we expect increases in our securitization financing as
we experience increased mortgage loan production and continue to securitize our
mortgage loans.


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 Table of Contents







*Shareholders’
Equity.* Shareholders’
equity increased $55.0 million, or 9%, to $673.9 million as of March 31, 2005,
from $618.9 million as of December 31, 2004. The increase in shareholders’
equity was due primarily to net income of $31.7 million for the year ended
December 31, 2004, and by an increase in accumulated other comprehensive income
of $22.1 million.





**Liquidity and Capital Resources**




Cash
increased by $3.8 million during the three months ended March 31, 2005. The
overall change in cash was comprised of the following:


**Three
      Months Ended March 31,******
    **2005**
    **2004**($
      in thousands)Cash
      provided by operations
    $45,919
    $52,953Cash
      used by investing activities
    (123,320)
    (716,070)Cash
      provided by financing activities
    81,223
    664,667Increase
      (decrease) in cash
    $3,822
    $1,550





*Operating
Activities* . Cash
provided by operations for the three months ended March 31, 2005 was $45.9
million, reflecting a decrease of $7.1 million, or 13%, compared to the first
quarter of 2004. This change was the result of an overall decrease in net
interest margin primarily attributable to an increase in the cost of our
borrowings adjusted for non-cash items such as depreciation and amortization,
deferred income taxes, provision for mortgage loan losses, and the change in
fair value of our derivative instruments. Our earnings are primarily from net
interest income and servicing income, offset by general and administrative
expenses as well as tax expense. Further details are discussed in “Consolidated
Results.”





*Investing
Activities* . Cash
used for investing activities was $123.3 million for the three months ended
March 31, 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 $814.3
million for the three months ended March 31, 2005. In addition, MSRs were
purchased totaling $21.8 million. These decreases to cash were partially offset
by cash received from principal payments on our mortgage loan portfolio totaling
$536.3 million and proceeds
from the sale of mortgage loans and REO which totaled $166.0 million and $12.1
million, respectively.

Capital
expenditures during the three months ended March 31, 2005 were $2.0 million and
related primarily to various information technology enhancements.





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*Financing
Activities* . Cash
provided by financing activities during the three months ended March 31, 2005
was $81.2 million and was the result of proceeds from the issuance of
securitization financing of $1.0 billion partially offset by principal payments
on securitization financings of $563.8 million, net repayment of warehouse
financing of $331.6 million, and bond issuance costs of $3.4 million relating to
the completion of one securitization during the first quarter 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.





Derivative
financial instrument transactions during the three months ended March 31, 2005
used primarily as cash flow hedges with the objective of hedging interest rate
risk related to our financing activities resulted in a increase in cash of $8.5
million.





Additional
decreases in cash provided by financing activities for the three months ended
March 31, 2005 were the result of $28.9 million paid as dividends.





*Dividends.* We
declared a dividend of $0.55 per common share payable on May 11, 2005 to
stockholders of record as of the close of business on April 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 March 31, 2005 to be
approximately $208.6 million. Under the commonly defined working capital
definition, we calculated our working capital as of March 31, 2005 to be $409.6
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.





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**Working
      Capital Reconciliation - March 31, 2005**
    ****
      **Saxon
      Defined**
      **Working
      Capital**
    **Commonly
      Defined Working Capital**($
      in thousands)Unrestricted
      cash
    $16,674
    $16,674Borrowing
      availability
    65,600
    —Trustee
      receivable
    —
    116,922Accrued
      interest receivable
    —
    55,618Accrued
      interest payable
    —
    (8,210)Unsecuritized
      mortgage loans - payments less than one year
    313,747
    313,747Warehouse
      financing facility - payments less than one year
    (187,405)
    (187,405)Servicing
      advances
    —
    117,242Financed
      advances - payments less than one year
    —
    (44,564)Securitized
      loans - payments less than one year
    —
    2,002,371Securitized
      financing - payments less than one year
    —
    (1,972,828)Total
    $208,616
    $409,567





***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.





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* . Changes
to our financing facilities during the first quarter of 2005 include the
execution of an amendment to the $300 million syndicated warehouse facility with
JPMorgan Chase Bank effective March 30, 2005. The amendment increased the total
committed amount of the facility to $375 million, increased the sub-limit for
servicing rights to 25% of the total facility amount and extended the
termination date of the facility to March 29, 2006.





As of
March 31, 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 March 31, 2005. We believe this
level of committed financing will allow us flexibility to execute our
asset-backed securitizations in accordance with our business plans.





50
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**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, 2005Greenwich
      Capital Financial Products, Inc.
    150,000
    June
      26, 2006Bank
      of America, N.A.
    300,000
    June
      23, 2005CS
      First Boston Mortgage Capital, LLC
    300,000
    April
      30, 2005Merrill
      Lynch Mortgage Capital, Inc.
    400,000
    November
      18, 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
$269.1 million of warehouse borrowings collateralized by residential mortgages
outstanding as of March 31, 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 $269.1 million we held as of March 31,
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. In the event of default, we may be
prohibited from paying dividends and making distributions under certain of our
financing facilities without the prior approval of our lenders. 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 months ended March 31, 2005.





Our
Credit Suisse First Boston Mortgage Capital, LLC $300 million repurchase
facility was amended on April 29, 2005, extending the termination date of the
facility to April 28, 2006.








51
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******


***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
March 31, 2005 we had $126.7 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
months ended March 31, 2005.





As of
March 31, 2005, securitization financing related to mortgage loans and servicing
advances on our condensed consolidated balance sheet was approximately $5.7
billion.





**Off Balance Sheet Items and Contractual
Obligations**





***Off
Balance Sheet Items***





In
connection with the approximately $540.7 million of mortgage loans securitized
in off balance sheet transactions from May 1996 to July 5, 2001, and which were
still outstanding as of March 31, 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 March 31, 2005 our
subsidiaries neither had nor expected to incur any material obligation to remove
any such loans, or to provide any such indemnification.





52
 Table of Contents






Our
subsidiaries had commitments to fund mortgage loans with agreed upon rates of
approximately $243.4 million and $240.3 million as of March 31, 2005 and
December 31, 2004, respectively. This does 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 $39.7 million as of March 31, 2005 from $22.7 million as of
December 31, 2004. Future minimum rental payments as of March 31, 2005 include
payments on the lease for our new mortgage loan origination headquarters
expected to begin in July 2005.





We
anticipate purchasing third party servicing rights for an additional $6.2
billion of mortgage loans during the remainder of 2005, of which $1.7 billion
were purchased during April 2005 for approximately $11.6 million.





As of
March 31, 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**





***Related
Party Transactions***





As of
March 31, 2005 and December 31, 2004, we had $9.0 million and $9.0 million,
respectively, of unpaid principal balances within our mortgage loan portfolio
related to mortgage loans originated for our officers and employees. These
mortgage loans were underwritten to our underwriting guidelines. When making
loans to our officers and employees, we waive loan origination fees that
otherwise would be paid to us by the borrower, and reduce the interest rate by
25 to 50 basis points from the market rate. Effective December 1, 2002, we no
longer renew or make any new loans to our executive officers or directors. We
have never made loans to any of our outside directors.





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





The
Accounting Standards Executive Committee issued a Statement of Position (SOP),
“ *Accounting
for Certain Loans or Debt Securities Acquired in a Transfer* ” (SOP
03-3). This SOP addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor’s initial
investment in loans or acquired
in a transfer if those differences are attributable, at least in part, to credit
quality. Among other things, the SOP requires that the excess of contractual
cash flows over cash flows expected to be collected (nonaccretable difference)
not be recognized as an adjustment of yield, loss accrual, or valuation
allowance. In addition, the SOP requires certain footnote disclosures and
prohibits investors from displaying accretable yield and nonaccretable
difference on the face of the balance sheet. This SOP is effective for loans
acquired in fiscal years beginning after December 15, 2004. The Company acquires
loans through its correspondent channel and through the exercise of clean-up
call options. Because the Company acquires newly originated loans within its
correspondent channel which do not show evidence of having deteriorated in terms
of credit quality, the adoption of SOP 03-3 did not have a material
effect on the Company's financial condition, results of operations, or
liquidity within respect to these loans. For loans acquired through the exercise
of clean-up call options, there was no impact as a result of the adoption of SOP
03-3 as no clean-up calls were exercised during the first quarter of 2005.







53
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At the
March 17-18, 2004 EITF meeting, the EITF reached a consensus on Issue No. 03-1, *The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments* . Issue
03-1 provides guidance for determining when an investment is
other-than-temporarily impaired and disclosure requirements regarding
impairments that have not been recognized as other-than-temporary. An impairment
exists when the carrying amount of an asset exceeds its fair value and is
determined to be other-than-temporary. In September 2004, the FASB delayed the
effective date of paragraphs 10-20 of this issue. These paragraphs give guidance
on how to evaluate and recognize an impairment loss that is
other-than-temporary. The delay does not suspend the requirements to recognize
other than temporary impairments as required by existing authoritative
literature. The disclosure requirements were effective for reporting periods
beginning after June 15, 2004. The adoption of EITF 03-1 did not have
a material effect on our financial condition or our results of operation, as we
do not currently have securities subject to this guidance.




**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.




There
have not been any significant changes in our interest rate risk profile and our
types of managed interest rate risks from December 31, 2004 to March 31, 2005.
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.


54
 Table of Contents







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




As shown
in the tables below from December 31, 2004 to March 31, 2005, there was an
increase in our hedging activity due to additional existing and forecasted debt
and the belief that interest rates may increase 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 March 31, 2005 and December 31, 2004.





**As
      of March 31, 2005******
    **2005**
    **2006**
    **2007**
    **2008**
    **2009**
    **Thereafter******
    ($
      in thousands)Caps
      bought - notional:
    $910,683
    $1,186,583
    $18,167
    —
    —
    —Weighted
      average rate
    3.88%
    3.86%
    3.25%
    —
    —
    —Caps
      sold - notional:
    $882,572
    $1,186,583
    $18,167
    —
    —
    —Weighted
      average rate
    5.11%
    4.69%
    5.00%
    —
    —
    —Futures
      sold - notional:
    $108,333
    $295,000
    $570,000
    $12,500
    $6,250
    —Weighted
      average rate
    3.78%
    4.28%
    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:
    $7,500,000
    $250,000
    —
    —
    —
    —Weighted
      average rate
    3.99%
    4.50
    —
    —
    —
    —Puts
      sold - notional:
    $83,333
    $500,000
    —
    —
    —
    —Weighted
      average rate
    5.00%
    4.38%
    —
    —
    —
    —Total
      notional:
    $9,984,921
    $4,118,166
    $806,334
    $12,500
    $6,250
    $—










**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







55
 Table of Contents







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 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 March 31, 2005 and
December 31, 2004.







**Effect
      on Interest Expense of Assumed Changes in Interest Rates Over a Three Year
      Period******
    **March
      31, 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
    $23,017
    $3,994
    $(43,264)
    $(84,981)
    $65,786
    $40,758
    $(219)
    $(40,701)Change
      in interest expense from hedging instruments:Futures
    (965)
    (1,729)
    5,042
    9,370
    (12,302)
    (11,698)
    (1,322)
    5,834Swaps
    (3,616)
    (675)
    6,747
    13,137
    (11,753)
    (7,866)
    (276)
    6,766Puts
    (12,703)
    2,237
    2,197
    2,019
    1,702
    1,178
    (19)
    (310)Caps
    (2,849)
    (408)
    4,432
    6,316
    (6,885)
    (3,967)
    168
    661Total
      change in interest expense from hedging instruments
    $(20,133)
    $(575)
    $18,418
    $30,842
    $(29,238)
    $(22,353)
    $(1,449)
    $12,951Net
      change in interest expense
    $2,884
    $3,419
    $(24,846)
    $(54,139)
    $36,548
    $18,405
    $(1,668)
    $(27,750)








Each
scenario is more fully discussed below, and tables of the hypothetical yield
curves are included below.





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 Federal
Reserve System, or 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 175 basis points over a twelve-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 March 31,
2005, we estimate that our interest expense would increase by $23.0 million.
However, we estimate that this amount would be partially offset by a decline in
interest expense from our hedging instruments of $20.1 million. The net effect
of this scenario would be a potential increase of $2.9 million in our interest
expense. As of December 31, 2004, we estimated that our interest expense could
increase by approximately $36.5 million under this scenario.




Scenario
2 - In this scenario we assume a slightly less severe hypothetical rise in
interest rates compared to Scenario 1, but longer in duration. Under this
scenario, we assume that interest rates have the potential to rise approximately
200 basis points over a two year period. Making these assumptions as of March
31, 2005, we estimate that our interest expense would increase by $4.0 million.
However, we estimate that this amount would be partially offset by a decline in
interest expense from our hedging instruments of $0.6
million. The net effect of this scenario would be a potential increase of $3.4
million in our interest expense. As of December 31, 2004, we estimated that our
interest expense could increase by approximately $18.4 million under this
scenario.







56
 Table of Contents






Scenario
3 - In this scenario we assume relatively stable hypothetical short-term rates.
This scenario assumes that the FRB pauses their increasing rate scenario to
assess the lagging impact of previous rate increases on the domestic and global
economy. After a six to nine month pause, the FRB increases rates another 100
basis points over the next 12 months. Given these assumptions as of March 31,
2005, we estimate that our interest expense from changes in borrowing costs
would decrease by $43.3 million. However, we estimate that this amount would be
partially offset by an increase in interest expense from our hedging instruments
of $18.4 million. The net effect of this scenario would be a potential decline
in interest expense of $24.9 million. As of December 31, 2004, we estimated that
our interest expense could decline by approximately $1.7 million under this
scenario.




Scenario
4 -This scenario assumes that the FRB becomes concerned about the future
prospects of economic growth and holds rates steady for one year and then
returns to an increasing rate cycle. Over the subsequent 24 months the FRB
raises rates 150 basis points. Given these assumptions at March 31, 2005, we
estimate that our interest expense would decline by approximately $85.0 million,
which would partially be offset by an estimated increase in interest expense
from hedging instruments of approximately $30.9 million, for a total potential
decline in interest expense of approximately $54.1 million. At December 31,
2004, we estimated that our interest expense could decline by approximately
$27.8 million under this scenario.




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




**March
      31, 2005****Month**
    **Current
      Market (1)**
    **Scenario
      1**
    **Scenario
      2**
    **Scenario
      3**
    **Scenario
      4**Apr-05
    2.87
    3.39
    3.14
    3.14
    2.61Jun-05
    3.52
    3.90
    3.40
    3.14
    2.61Sep-05
    3.97
    4.41
    3.65
    3.15
    2.65Dec-05
    4.24
    4.68
    3.91
    3.40
    2.65Mar-06
    4.38
    4.69
    4.42
    3.66
    3.16Jun-06
    4.49
    4.70
    4.68
    3.91
    3.66Sep-06
    4.58
    4.71
    4.94
    4.17
    3.67Dec-06
    4.66
    4.72
    4.94
    4.17
    3.67Mar-07
    4.69
    4.73
    4.95
    4.18
    3.68Jun-07
    4.72
    4.75
    4.96
    4.18
    3.68Sept-07
    4.77
    4.76
    4.97
    4.44
    4.19Dec-07
    4.82
    4.77
    4.98
    4.44
    4.19Mar-08
    4.85
    4.78
    4.99
    4.45
    4.20


________________


(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.





57
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**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.





**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. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the date of
such evaluation, our disclosure controls and procedures are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and in timely alerting them to material
information relating to us (including our consolidated subsidiaries) required to
be included in the periodic reports we are required to file and submit to the
Securities and Exchange Commission under the Exchange Act. There have been no
significant changes in our internal controls or other factors that could
significantly affect those controls subsequent to the date of such evaluation.




There
were no changes in our internal controls over financial reporting during the
first quarter of 2005 that have materially affected, or are reasonably likely to
materially
affect,
our internal control over financial reporting.







58
 Table of Contents






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.




**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.





Josephine
Coleman v. America’s MoneyLine, Inc. is a
matter previously described in Part 1, Item 3 of our 2004 Form 10-K. In January
2005, the parties entered into a settlement agreement pursuant to which
America’s MoneyLine agreed to pay an immaterial amount comprised of a payment to
Ms. Coleman and an agreed-upon amount of her attorneys’ fees in exchange for
dismissal of the suit. The Court entered an order dismissing the suit with
prejudice as to Ms. Coleman on January 21, 2005.





Margarita
Barbosa, et al. v. Saxon Mortgage Services, Inc. (f/k/a Meritech Mortgage
Services, Inc.) et al . is a
matter previously described Part 1, Item 3 of in our 2004 Form 10-K. There were
no material developments in this legal proceeding during the quarter ended March
31, 2005.





Shirley
Hagan, et al. v. Concept Mortgage Corp., Saxon Mortgage, Inc. and
others is a
matter previously described in Part 1, Item 3 of our 2004 Form 10-K. There were
no material developments in this legal proceeding during the quarter ended March
31, 2005.





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 March 31, 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.





59
 Table of Contents





**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**




None.




**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*
    Form
      of Notice of Restricted Stock Unit Grant for Non-Employee Directors (4)




10.2
    Offer Letter between America's
      MoneyLine, Inc. and Bravo Credit Corporation, dated May 3,
      2005




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 January 31,
2005.


*
Executive Compensation Plan or Agreement.







60
 Table of Contents





**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:
      May 6, 2005
    By:/s/
      Michael L.
      SawyerName:
      Michael L. SawyerTitle:
      Chief Executive Officer (authorized officer
      of registrant)Dated:
      May 6, 2005
    By:/s/
      Robert B.
      EastepName:
      Robert B. EastepTitle:
      Chief Financial Officer (principal financial
      officer)













61