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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 September 30, 2004

OR

[ ]    TRANSITION REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition
 Period from ____________ to ______________

Commission File Number: 000-50945



SAXON CAPITAL, INC.(Exact name of Registrant as specified in its charter)

|Maryland (State or other jurisdiction of incorporation or                      organization) |  | 30-0228584             (IRS Employer Identification No.)
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------------------

4860 COX ROAD, SUITE 300GLEN ALLEN, VIRGINIA(Address of principal
 executive offices)

23060(Zip Code)

(804) 967-7400(Registrants telephone number, including area code)

Indicate by check mark whether the
Registrant (1) has filed all documents and 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
 No
X

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes
X
     No

As of November 1, 2004 there were
49,843,921 shares of our common stock, par value $0.01 per share, outstanding.

---

# SAXON CAPITAL, INC.

Table of Contents

|                                                                                 | Page
|-------------------------------------------------------------------------------- | ----
|
|PART I - Financial Information                                                   |     
|Item 1. Financial Statements (1)                                                
|Unaudited Condensed Consolidated Balance Sheets at September 30, 2004 and       
|December 31, 2003                                                                | 1   
|Unaudited Condensed Consolidated Statements of Operations for the three and nine
|months ended September 30, 2004 and September 30, 2003                           | 2   
|Unaudited Condensed Consolidated Statement of Stockholders ́ Equity for the nine 
|months ended September 30, 2004                                                  | 3   
|Unaudited Condensed Consolidated Statements of Cash Flows for the nine months   
|ended September 30, 2004 and September 30, 2003                                  | 4   
|Notes to Unaudited Condensed Consolidated Financial Statements                   | 5   
|Item 2. Management ́s Discussion and Analysis of Financial Condition and Results 
|of Operations                                                                    | 18  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk               | 74  
|Item 4. Controls and Procedures                                                  | 79  
|PART II - Other Information                                                     
|Item 1. Legal Proceedings                                                        | 79  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds              | 80  
|Item 3. Defaults Upon Senior Securities                                          | 81  
|Item 4. Submission of Matters to a Vote of Security Holders                      | 81  
|Item 5. Other Information                                                        | 82  
|Item 6. Exhibits                                                                 | 82  

(1)On September 24, 2004, the Company completed its conversion to a real estate
          investment trust, or REIT. The transaction was structured as a merger of Saxon
          Capital, Inc. with and into a wholly-owned subsidiary of Saxon REIT, Inc. and
          was accounted for as a purchase of Saxon Capital, Inc. by Saxon REIT, Inc. using
          the purchase method of accounting. Immediately following the merger, Saxon REIT,
          Inc., changed its name to Saxon Capital, Inc. Accordingly, the consolidated
          balance sheet as of September 30, 2004 includes the effect of the merger and
          Saxons application of the purchase method of accounting. The condensed
          consolidated statements of operations, shareholders equity, and cash flows
          for the nine months ended September 30, 2004 include six days effects of
          the merger. See Note 1(a) to the Unaudited Condensed Consolidated Financial
          Statements.

---

# Part I. Financial
Information

# Item 1. Financial Statements

# Saxon Capital, Inc.
Condensed Consolidated Balance Sheets(dollars in thousands, except per share data) 
(unaudited)

|                                                              | September 30,
2004 | December 31, 2003
|------------------------------------------------------------- | ------------------ | -----------------
|
|
|Assets:                                                       |                    |                  
|Cash                                                          |                    |                  
|Accrued interest receivable                                   |                    |                  
|Trustee receivable                                            |                    |                  
|Mortgage loan portfolio                                       |                    |                  
|Allowance for loan loss                                       |                    |                  
|                                                              |                    |                  
|Net mortgage loan portfolio                                   |                    |                  
|Restricted cash                                               |                    |                  
|Servicing related advances                                    |                    |                  
|Mortgage servicing rights, net                                |                    |                  
|Real estate owned                                             |                    |                  
|Deferred tax asset                                            |                    |                  
|Other assets                                                  |                    |                  
|                                                              |                    |                  
|Total assets                                                  |                    |                  
|Liabilities and shareholders' equity:                         |                    |                  
|Liabilities:                                                  |                    |                  
|Accrued interest payable                                      |                    |                  
|Warehouse financing                                           |                    |                  
|Securitization financing                                      |                    |                  
|Note payable                                                  |                    |                  
|Deferred tax liability                                        |                    |                  
|Other liabilities                                             |                    |                  
|                                                              |                    |                  
|Total liabilities                                             |                    |                  
|Commitments and contingencies - Note 11                       |                    |                  
|Shareholders' equity:                                         |                    |                  
|Common stock, $0.01 par value per share, 100,000,000 shares   |                    |                  
|authorized; shares issued and outstanding: 49,843,921 as of   |                    |                  
|September 30, 2004 and 28,661,757 as of December 31, 2003     |                    |                  
|Additional paid-in capital                                    |                    |                  
|Other comprehensive loss, net of tax of $(5,268) and $(3,500) |                    |                  
|Retained earnings                                             |                    |                  
|                                                              |                    |                  
|Total shareholders' equity                                    |                    |                  
|                                                              |                    |                  
|Total liabilities and shareholders' equity                    |                    |                  
|                                                              |                    |                  

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

---

# Saxon Capital, Inc.
Condensed Consolidated
Statements of Operations  (dollars in thousands,
except per share data)(unaudited)

|                                          | Three Months Ended September 30, | Nine Months Ended September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|
|Revenues:                                 |                                  |                                
|Interest income                           |                                  |                                
|Interest expense                          |                                  |                                
|                                          |                                  |                                
|Net interest income                       |                                  |                                
|Provision for mortgage loan losses        |                                  |                                
|                                          |                                  |                                
|Net interest income after provision for   |                                  |                                
|mortgage loan losses                      |                                  |                                
|Servicing income, net of amortization and |                                  |                                
|impairment                                |                                  |                                
|Gain on sale of mortgage assets           |                                  |                                
|                                          |                                  |                                
|Total net revenues                        |                                  |                                
|Expenses:                                 |                                  |                                
|Payroll and related expenses              |                                  |                                
|General and administrative expenses       |                                  |                                
|Depreciation                              |                                  |                                
|Other (expense) income                    |                                  |                                
|                                          |                                  |                                
|Total operating expenses                  |                                  |                                
|Income before taxes                       |                                  |                                
|Income tax benefit (expense)              |                                  |                                
|                                          |                                  |                                
|Net income                                |                                  |                                
|                                          |                                  |                                
|Earnings per common share:                |                                  |                                
|Average common shares - basic             |                                  |                                
|Average common shares - diluted           |                                  |                                
|Basic earnings per common share           |                                  |                                
|Diluted earnings per common share         |                                  |                                

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

---

# Saxon Capital, Inc.
Condensed Consolidated
Statement of Shareholders Equity  (dollars in thousands) (unaudited)

|                                   | Common
Shares
Outstanding | Common
Stock | Additional
Paid-in Capital | Accumulated
Other
Comprehensive
(Loss) Income | Retained
Earnings | Total
|---------------------------------- | ------------------------- | ------------ | -------------------------- | --------------------------------------------- | ----------------- | -----
|
|
|Balance at January 1, 2004         |                           |              |                            | 28,661,757                                    |                   | $    
|Issuance of common stock           |                           |              |                            | 21,182,164                                    |                   |      
|Costs associated with REIT         |                           |             
|conversion and stock issuance      |                           |              |                            |                                              |                   |      
|Compensation expense on restricted |                           |             
|stock units                        |                           |              |                            |                                              |                   |      
|Stock option exercise tax benefit  |                           |              |                            |                                              |                   |      
|REIT conversion merger             |                           |             
|consideration                      |                           |              |                            |                                              |                   |      
|Comprehensive income:              |                           |             
|Net income                         |                           |              |                            |                                              |                   |      
|Add:  change in unrealized         |                           |             
|loss on mortgage securities        |                           |              |                            |                                              |                   |      
|Add:  reclassification             |                           |             
|adjustment for unrealized          |                           |             
|loss on mortgage securities        |                           |              |                            |                                              |                   |      
|Less:  tax effect of above         |                           |             
|unrealized loss on mortgage        |                           |             
|securities                         |                           |              |                            |                                              |                   |      
|Less:  loss on cash flow           |                           |             
|hedging instruments                |                           |              |                            |                                              |                   |      
|Less:  reclassification            |                           |             
|adjustment for loss on cash        |                           |             
|flow hedging instruments           |                           |              |                            |                                              |                   |      
|Add:  tax effect of loss on        |                           |             
|cash flow hedging                  |                           |             
|instruments                        |                           |              |                            |                                              |                   |      
|                                   |                           |              |                            |                                               |                   |      
|Other comprehensive (loss) income  |                           |              |                            |                                              |                   |      
|                                   |                           |              |                            |                                               |                   |      
|Total comprehensive income         |                           |              |                            |                                              |                   |      
|                                   |                           |              |                            |                                               |                   |      
|Balance at September 30, 2004      |                           |              |                            | 49,843,921                                    |                   | $    
|                                   |                           |              |                            |                                               |                   |      

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

---

# Saxon Capital, Inc.Condensed Consolidated
Statements of Cash Flows  (dollars in thousands)(unaudited)

|                                                         | Nine Months Ended September 30,
|-------------------------------------------------------- | -------------------------------
|
|
|Operating Activities:                                    |                                
|Net income from operations                               |                                
|Adjustments to reconcile net income to net cash provided |                                
|by operating activities:                                 |                                
|Depreciation and amortization                            |                                
|Deferred income taxes                                    |                                
|Impairment of assets                                     |                                
|Gain from sale of assets                                 |                                
|Provision for loan losses                                |                                
|(Recovery) provision for advanced interest losses        |                                
|(Increase) decrease in servicing related advances        |                                
|Increase in accrued interest receivable                  |                                
|Increase in accrued interest payable                     |                                
|Increase in trustee receivable                           |                                
|Net change in other assets and other liabilities         |                                
|                                                         |                                
|Net cash provided by operating activities                |                                
|                                                         |                                
|Investing Activities:                                    |                                
|Purchase and origination of mortgage loans               |                                
|Principal payments on mortgage loan portfolio            |                                
|Proceeds from the sale of mortgage loans                 |                                
|Proceeds from the sale of real estate owned              |                                
|Decrease in restricted cash                              |                                
|Purchase of mortgage bonds                               |                                
|Principal payments received on mortgage bonds            |                                
|Acquisition of mortgage servicing rights                 |                                
|Net capital expenditures                                 |                                
|                                                         |                                
|Net cash used in investing activities                    |                                
|                                                         |                                
|Financing Activities:                                    |                                
|Proceeds from issuance of securitization financing       |                                
|Bond issuance costs                                      |                                
|Principal payments on securitization financing           |                                
|Proceeds from (repayment of) warehouse financing, net    |                                
|Purchases of derivative instruments                      |                                
|Proceeds received from issuance of stock                 |                                
|Payment of expenses related to REIT conversion and stock |                                
|issuance                                                 |                                
|Payment of merger consideration                          |                                
|Repayment of note payable                                |                                
|                                                         |                                
|Net cash provided by financing activities                |                                
|                                                         |                                
|Net increase (decrease) in cash                          |                                
|Cash at beginning of period                              |                                
|                                                         |                                
|Cash at end of period                                    |                                
|                                                         |                                
|Supplemental Cash Flow Information:                      |                                
|Cash paid for interest                                   |                                
|Cash paid for taxes                                      |                                
|Non-Cash Financing Activities:                           |                                
|Transfer of mortgage loans to real estate owned          |                                

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

---

# 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 and nine
months ended September 30, 2004 are not necessarily indicative of the results that may be
expected for any other interim periods or the entire year ending December 31, 2004. 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, as amended for the year
ended December 31, 2003. 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. 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), was formed on February 5, 2004 for the
purpose of effecting Old Saxons conversion to a real estate investment trust, or
REIT. At a meeting of the shareholders of Old Saxon held on September 13, 2004,
shareholders approved the merger of Old Saxon into New Saxon. By written consent of the
sole shareholder of New Saxon on February 5, 2004, the shareholder approved the merger of
Old Saxon into New Saxon and at a meeting of its Board of Directors held on September 20,
2004 the Board of New Saxon approved the merger. The merger, which was completed on
September 24, 2004,had no effect on the condensed consolidated financial statements, as
this was a merger of companies under common control. The condensed consolidated statements
of operations, shareholders equity, and cash flows for the nine months ended
September 30, 2004 include six days of operations under this new structure.

Pursuant
to the merger agreement, Old Saxon merged with and into Saxon Capital Holdings, Inc., a
wholly-owned subsidiary of New Saxon, and New Saxon succeeded to and continued the
operations of Old Saxon, changing its name to Saxon Capital, Inc. At the
effective time of the merger, each outstanding share of Old Saxon common stock was
converted into the right to receive one share of New Saxon common stock and a cash payment
of $4.00. The Companys common stock trades on Nasdaq under the symbol
SAXN. New Saxon issued 17.0 million shares of its common stock in a public
offering, which resulted in $386.8 million in gross proceeds, which was partly used to pay
the cash portion of the merger consideration.

The
Company will apply REIT rules for federal income tax and accounting purposes beginning as
of the effective time of the merger. To qualify for tax treatment as a REIT, the parent
company must meet certain income and asset tests and distribution requirements. Generally,
the Company will not be subject to federal income tax at the corporate level to the extent
it distributes 90% of its taxable income to its shareholders and complies with certain
other requirements.

| | (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 direct loan origination fees and costs, and income taxes.

| | (c)   Stock Options
| | -------------------

The
Company has elected to follow the intrinsic value method in accounting for its stock
options 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. Effective September 13, 2004, upon approval by Old Saxons
shareholders of the merger agreement required in connection with the REIT conversion, all
outstanding stock options and restricted stock units immediately vested and were expensed
at that time. See Note 9 for further discussion.

---

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 September
30, | Nine Months Ended September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|
|Net income, as reported                   |                                  |                                
|Add: stock-based compensation expense     |                                  |                                
|included in reported net income, net of   |                                  |                                
|related tax effects                       |                                  |                                
|Deduct:  total stock-based compensation   |                                  |                                
|expense determined under fair value based |                                  |                                
|method for all awards, net of related tax |                                  |                                
|effects                                   |                                  |                                
|                                          |                                  |                                
|Pro forma net income                      |                                  |                                
|                                          |                                  |                                
|Earnings per share:                       |                                  |                                
|Basic - as reported                       |                                  |                                
|                                          |                                  |                                
|Basic - pro forma                         |                                  |                                
|                                          |                                  |                                
|Diluted - as reported                     |                                  |                                
|                                          |                                  |                                
|Diluted - pro forma                       |                                  |                                
|                                          |                                  |                                

| | (d)   Reclassifications
| | -----------------------

Certain
amounts for 2003 have been reclassified to conform to presentations adopted in 2004.

# (2)    Subsequent Events

On
October 27, 2004, the Company closed a $900.0 million asset backed securitization.

On
October 25, 2004, the Company acquired $83.3 million of mortgage loans from the SAST
1999-1 and SAST 1999-4 securitizations pursuant to the clean-up call provision of the
trusts.

On
October 26, 2004, the Company sold $12.8 million of delinquent mortgage loans and
recognized a loss of $1.4 million.

In
October 2004, the Company purchased $1.7 billion in third party servicing rights for
approximately $12.3 million.

---

(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 September 30, | Nine Months Ended September 30,
|---------------------------------------------- | -------------------------------- | -------------------------------
|
|
|Basic:                                         |                                  |                                
|Net income                                     |                                  |                                
|Weighted average common shares outstanding     |                                  |                                
|                                               |                                  |                                
|Earnings per share                             |                                  |                                
|                                               |                                  |                                
|Diluted:                                       |                                  |                                
|Net income                                     |                                  |                                
|Weighted average common shares outstanding     |                                  |                                
|Dilutive effect of stock options, warrants and |                                  |                                
|restricted stock units                         |                                  |                                
|                                               |                                  |                                
|Weighted average common shares outstanding -   |                                  |                                
|diluted                                        |                                  |                                
|                                               |                                  |                                
|Earnings per share                             |                                  |                                
|                                               |                                  |                                

(4)    Mortgage Loan
Portfolio

Mortgage
loans reflected on the Companys condensed consolidated balance sheets as of
September 30, 2004 and December 31, 2003 were comprised of the following:

|                                                 | September 30, 2004 | December 31, 2003
|------------------------------------------------ | ------------------ | -----------------
|
|
|Securitized mortgage loans - principal balance   |                    |                  
|Unsecuritized mortgage loans - principal balance |                    |                  
|Premiums, net of discounts                       |                    |                  
|Hedge basis adjustments                          |                    |                  
|Deferred origination costs, net                  |                    |                  
|Fair value adjustments                           |                    |                  
|                                                 |                    |                  
|Total                                            |                    |                  
|                                                 |                    |                  

---

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 September 30, | Nine Months Ended September 30,
|----------------------------------- | -------------------------------- | -------------------------------
|
|
|Mortgage loans sold:                |                                  |                                
|Performing mortgage loans sold:     |                                  |                                
|Non conforming first lien mortgages |                                  |                                
|Conforming first lien mortgages (1) |                                  |                                
|Second lien mortgages               |                                  |                                
|Delinquent mortgage loans(2)        |                                  |                                
|                                    |                                  |                                
|Total mortgage loans sold           |                                  |                                
|Basis adjustments                   |                                  |                                
|Cash received                       |                                  |                                
|                                    |                                  |                                
|Gain on sale of mortgage            |                                  |                                
|loans (2)(3)                        |                                  |                                
|                                    |                                  |                                

---

| | (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 $924, $3,079 and $975 on the Condensed
               Consolidated Statements of Operations for the three months ended September
30,                2003 and the nine months ended September 30, 2004 and 2003,
respectively,                includes the gain recognized on sale of other assets of
approximately $175                thousand, $31 thousand and $175 thousand, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(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 and
nine months ended September 30, 2004 and 2003 is as follows:

|                              | Three Months Ended September 30, | Nine Months Ended September 30,
|----------------------------- | -------------------------------- | -------------------------------
|
|
|Beginning balance             |                                  |                                
|Provision for loan losses (1) |                                  |                                
|Charge-offs                   |                                  |                                
|                              |                                  |                                
|Ending balance                |                                  |                                
|                              |                                  |                                

---

| | (1) | Includes
$(0.5) million and $0.3 million for the three months ended September                30,
2004 and 2003, respectively, and $(1.1) million and $0.8 million for the
               nine months ended September 30, 2004 and 2003, respectively, related to advanced
interest                paid to securitization trusts but not yet collected. This amount
is included as                a component of interest income in the Condensed
Consolidated Statements of                Operations.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# (6) Mortgage Servicing
Rights

As of
September 30, 2004, the fair value of the mortgage servicing rights in total was $112.4
million, compared to $46.8 million at December 31, 2003. The following table summarizes
activity in mortgage servicing rights for the three and nine months ended September 30,
2004 and 2003:

|                             | Three Months Ended September 30, | Nine Months Ended September 30,
|---------------------------- | -------------------------------- | -------------------------------
|
|
|Balance, beginning of period |                                  |                                
|Purchased                    |                                  |                                
|Amortization                 |                                  |                                
|Temporary impairment         |                                  |                                
|Permanent impairment         |                                  |                                
|                             |                                  |                                
|Balance, end of period       |                                  |                                
|                             |                                  |                                

The
Company recognized a permanent impairment during the third quarter of 2004 because
experienced prepayments on loans were significantly higher than the assumptions used to
amortize the servicing rights. The following table summarizes the activity of our
valuation allowance:

|                              | Valuation Allowance
|----------------------------- | -------------------
|
|
|Balance at January 1, 2004    |                    
|Temporary impairment          |                    
|Permanent impairment          |                    
|                              |                    
|Balance at September 30, 2004 |                    
|                              |                    

As
of September 30, 2004, the following table summarizes the remaining estimated projected
amortization expense for the carrying value of the mortgage servicing rights for each of
the five succeeding years and thereafter:

|                                   | Years Ending December
31,
|---------------------------------- | -------------------------
|
|
|October 2004 through December 2004 |                          
|2005                               |                          
|2006                               |                          
|2007                               |                          
|2008                               |                          
|Thereafter                         |                          
|                                   |                          
|Total                              |                          
|                                   |                          

# (7) Warehouse Financing,
Securitization Financing and Note Payable

A
summary of the amounts outstanding under these agreements at September 30, 2004 and
December 31, 2003 is as follows:

|                                                       | September 30, 2004 | December 31, 2003
|------------------------------------------------------ | ------------------ | -----------------
|
|
|Debt Outstanding                                       |                    |                  
|Warehouse financing - loans and servicing advances     |                    |                  
|Repurchase agreements - loans                          |                    |                  
|Repurchase agreements - mortgage bonds                 |                    |                  
|Securitization financing - servicing advances          |                    |                  
|Securitization financing - loans and real estate owned |                    |                  
|Securitization financing - net interest margin         |                    |                  
|Note payable                                           |                    |                  
|                                                       |                    |                  
|Total                                                  |                    |                  
|                                                       |                    |                  

---

The following table summarizes our
contractual obligations at September 30, 2004:

|As of September 30, 2004                             | Total | Less than 1
year | 1-3 years | 3-5 years | After 5
years
|---------------------------------------------------- | ----- | ---------------- | --------- | --------- | -------------
|
|
|Warehouse financing facility - line of credit        |       |                  | $         | 188,419   |              
|Warehouse financing facility - repurchase agreements |       |                  |           | 451,307   |              
|Repurchase agreements - bonds                        |       |                  |           | 1,054     |              
|Securitization financing - servicing advances (1)    |       |                  |           | 105,539   |              
|Securitization financing - loans and real estate     |       |                 
|owned (2)                                            |       |                  |           | 4,823,536 |              
|Securitization financing - net interest margin (2)   |       |                  |           | 24,162    |              
|                                                     |       |                  |           |           |              
|Total contractual cash obligations                   |       |                  | $         | 5,594,017 |              
|                                                     |       |                  |           |           |              

---

| | (1) | Amounts
shown are estimated bond payments based on anticipated recovery of the
               underlying principal and interest servicing advances.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | 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 September 30, | Nine Months Ended September 30,
|------------------------------ | -------------------------------- | -------------------------------
|
|
|Interest Expense               |                                  |                                
|Warehouse financing            |                                  |                                
|Repurchase agreements          |                                  |                                
|Securitization financing       |                                  |                                
|Notes payable                  |                                  |                                
|Other                          |                                  |                                
|                               |                                  |                                
|Total                          |                                  |                                
|                               |                                  |                                
|Weighted Average Cost of Funds |                                  |                                
|Warehouse financing            |                                  |                                
|Repurchase agreements          |                                  |                                
|Securitization financing       |                                  |                                
|Notes payable                  |                                  |                                
|                               |                                  |                                
|Total                          |                                  |                                
|                               |                                  |                                

---

During
the nine months ended September 30, 2004, the Company completed two securitizations of
mortgage loans, totaling $2.3 billion in principal balances and $35.5 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. At September 30, 2004, the Company
was in compliance with all its covenants under the respective borrowing agreements.

# (8) Derivatives

The
Company accounts for its derivative financial instruments as cash flow hedges, which hedge
the Companys variable rate debt. At September 30, 2004 and December 31, 2003, the
fair value of the Companys derivatives totaled $6.2 million and $5.7 million,
respectively. The derivative assets are held on the Condensed Consolidated Balance Sheet
as part of Other Assets. As of September 30, 2004 and December 31, 2003, the mark to
market adjustment on effective hedges recorded in accumulated other comprehensive income
(loss) was $(13.0) million with a tax benefit of $5.3 million and $(7.7) million with a
tax benefit of $3.0 million, respectively. Accumulated other comprehensive income (loss)
related to cash flow hedging is amortized into earnings through interest expense as the
hedged risk affects earnings. The expected effect of amortization of the accumulated other
comprehensive income (loss) on earnings for the next twelve months is $2.5 million of
expense, depending on future repayment of debt. Hedge ineffectiveness resulted in $105
thousand of expense and $16 thousand of income for the three months ended September 30,
2004 and 2003, respectively, and resulted in $114 thousand of expense and $486 thousand of
expense for the nine months ended September 30, 2004 and 2003, respectively. These
ineffective portions are included as part of Other (Expense) Income on the Condensed
Consolidated Statement of Operations.

At
September 30, 2004 and December 31, 2003, the Company had $32.2 million and $46.3 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) Stock Compensation
Plans

Stock
Incentive Plan Pursuant to the merger agreement in connection with the REIT
conversion, the Company assumed the Saxon Capital, Inc. 2001 Stock Incentive Plan (the
Stock Incentive Plan), which provides for the issuance of restricted common
stock, stock appreciation rights, dividend equivalent rights, stock options, or unit
awards based on the value of the Companys common stock to eligible employees and
other eligible participants. The maximum number of shares or other awards authorized for
issuance under the Stock Incentive Plan is reset as of January 1 of each year at the
greater of (i) 2,998,556; (ii) 10.69% of the total number of then outstanding shares of
common stock of the Company as of January 1 of each year; or (iii) the maximum number that
has been previously awarded or granted under the Stock Incentive Plan, provided that the
total number of shares authorized to be issued under the Stock Incentive Plan may not
exceed 6,000,000 shares.

The
Compensation Committee of the Board of Directors administers the Stock Incentive Plan, and
has full authority to select the recipients of awards, to decide when awards are to be
made, to determine the type and number of awards, and to establish the vesting
requirements as well as other features and conditions of each award.

Effective
September 13, 2004, upon shareholder approval of the merger agreement required in
connection with the REIT conversion, all outstanding stock options and restricted stock
units granted by Old Saxon vested. New Saxon assumed all outstanding options and warrants
to acquire the Companys common stock that were not exercised on or before September
24, 2004. In connection with the accelerated vesting of the options, the Company recorded
compensation expense of $0.3 million for all options outstanding as of September 13, 2004.

---

The
following table summarizes the transactions relating to the Companys stock options
for the period ended September 30, 2004:

|                                                                   | Number of Options | Weighted Average
Exercise Price
|------------------------------------------------------------------ | ----------------- | -------------------------------
|
|
|Options outstanding, December 31, 2003 (includes 2,295,000 options |                   |                                
|outstanding under the Stock Incentive Plan and 475,000             |                   |                                
|outstanding to the Company's non-employee board members)           |                   |                                
|Options granted                                                    |                   |                                
|Options exercised                                                  |                   |                                
|Options cancelled                                                  |                   |                                
|                                                                   |                   |                                
|Options outstanding, September 30, 2004 (includes 11,000 options   |                   |                                
|with a remaining contractual life of 7 years outstanding           |                   |                                
|under the Stock Incentive Plan)                                    |                   |                                
|                                                                   |                   |                                

Restricted
Stock Units On September 4, 2003, the Company granted 180,000 restricted stock
units under the Companys Stock Incentive Plan to the Companys Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer, and the Company granted
60,000 restricted stock units to its non-employee directors. All 240,000 outstanding
restricted stock units that were not previously vested were vested and the related shares
were delivered following approval of the merger agreement required for the REIT
conversion. Compensation expense related to the restricted stock units for the period
ended September 30, 2004 was $3.9 million.

Warrants
In connection with the Companys private offering in
2001, the Company granted warrants to Friedman, Billings, Ramsey & Co., Inc.
(FBR) to purchase an aggregate of 1,200,000 shares of our common stock, of
which 1,192,000 have been exercised as of September 30, 2004.

# (10) Income Taxes

The
Company recorded a $27.5 million tax benefit during the third quarter of 2004 relating to
the structure and formation transactions with regards to the Companys REIT
conversion as outlined in the Companys registration statement on Form S-11 declared
effective by the SEC on September 20, 2004.  This benefit is comprised of a reversal
of $5.6 million in net deferred tax liabilities, which will not result in taxable amounts
in future years as a result of our conversion to REIT status, and $21.9 million relating
to income earned in our qualified REIT subsidiary during 2004, that is now not subject to
corporate taxation.  The $27.5 million tax benefit is offset by the third quarter
2004 tax expense of $8.5 million.

The
components of the provision for income taxes for the three and nine months ended September
30, 2004 and 2003 consist of the following:

|                                   | For the Three Months Ended
September 30, | For the Nine Months Ended September
30,
|---------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|Federal                            |                                          |                                        
|Current                            |                                          |                                        
|Deferred                           |                                          |                                        
|State                              |                                          |                                        
|Current                            |                                          |                                        
|Deferred                           |                                          |                                        
|                                   |                                          |                                        
|Total income tax (benefit) expense |                                          |                                        
|                                   |                                          |                                        

The
amounts provided for income taxes differ from the amount provided at the statutory federal
rate as follows:

|                                             | For the Three Months
EndedSeptember 30,
2004 | For the Three Months
Ended September 30,
2003 | For the Nine Months
Ended September 30,
2004 | For the Nine Months
Ended September 30,
2003
|-------------------------------------------- | -------------------------------------------- | --------------------------------------------- | -------------------------------------------- | --------------------------------------------
|
|
|Federal income tax expense at statutory rate |                                              |                                               | $                                            | 6,759                                       
|State income tax benefit) expense, net       |                                              |                                               |                                              | (249                                        
|Federal tax expense of state tax deduction   |                                              |                                               |                                              | 87                                          
|Impact of REIT conversion                    |                                              |                                               |                                              | (27,500                                     
|Other expense (benefit), net                 |                                              |                                               |                                              | 1,853                                       
|                                             |                                              |                                               |                                              |                                             
|Total income tax (benefit) expense           |                                              |                                               | $                                            | (19,050                                     
|                                             |                                              |                                               |                                              |                                             

---

The
income tax effects of temporary differences that give rise to the net deferred tax asset
(liability) at September 30, 2004 and December 31, 2003 are as follows:

|                                       | September 30, 2004 | December 31, 2003
|-------------------------------------- | ------------------ | -----------------
|
|
|Deferred tax asset:                    |                    |                  
|Tax gain on sale of loans              |                    |                  
|Amortization of intangibles            |                    |                  
|Deferred revenue                       |                    |                  
|Hedging transactions                   |                    |                  
|Mark to market adjustment              |                    |                  
|Original issue discount                |                    |                  
|Accumulated other comprehensive income |                    |                  
|                                       |                    |                  
|Total deferred tax asset               |                    |                  
|                                       |                    |                  

|                                       | September 30, 2004 | December 31, 2003
|-------------------------------------- | ------------------ | -----------------
|
|
|Deferred tax liability:                |                    |                  
|Deferred revenue                       |                    |                  
|Allowance for loan loss                |                    |                  
|Depreciation                           |                    |                  
|Hedging transactions                   |                    |                  
|Accumulated other comprehensive income |                    |                  
|Other                                  |                    |                  
|                                       |                    |                  
|Total deferred tax liability           |                    |                  
|                                       |                    |                  
|Net deferred tax asset (liability)     |                    |                  
|                                       |                    |                  

As
a result of the conversion to REIT status, federal income taxes on the income of Saxon
REIT are payable directly by its shareholders pursuant to the Internal Revenue Code.
 Accordingly, no provision for federal or state income tax has been included in the
Companys financial statements with respect to such taxable income.  The difference
between the federal tax and book basis of Saxon REITs assets and liabilities is a net
taxable temporary difference of $9.0 million at September 30, 2004 (consisting of
tax-deductible temporary differences of $13.6 million and taxable temporary differences
of $4.6 million).

The
Company recognizes all of its deferred tax assets if it believes 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 the Company will realize the
benefit from its deferred tax assets.

# (11) Commitments and
Contingencies

Mortgage
Loans

At
September 30, 2004 and December 31, 2003, the Companys subsidiaries had commitments
to fund mortgage loans with agreed-upon rates of approximately $265.5 million and $144.3
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 $0.8 billion of mortgage loans securitized in off
balance sheet transactions from May 1996 to July 5, 2001, and which are still outstanding
as of September 30, 2004, 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. At September 30,
2004 those subsidiaries neither had nor expect to incur any material obligation to remove
any such loans, or to provide any such indemnification.

Mortgage
Servicing Rights

The
Company anticipates purchasing third party servicing rights for an additional $4.7 billion
of mortgage loans during the fourth quarter of 2004, of which $1.7 billion were purchased
in October 2004 for approximately $12.3 million.

---

Legal
Matters

Because
the business of the Companys subsidiaries involves the collection of numerous
accounts, the validity of liens and compliance with various state and federal lending
laws, the Company and its subsidiaries are subject, in the normal course of business, to
various legal proceedings. The resolution of these lawsuits, in managements opinion,
will not have a material adverse effect on the financial position or the results of
operations of the Company.

# (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
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 operations 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 25 branch offices. The
mortgage loan operations 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 operations 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.

|                                | Three Months Ended September 30, 2004
|------------------------------- | -------------------------------------
|
|
|
|Interest income                 |                                      
|Interest expense                |                                      
|                                |                                      
|Net interest income             |                                      
|Provision for mortgage loan     |                                      
|losses                          |                                      
|                                |                                      
|Net interest income after       |                                      
|provision for mortgage          |                                      
|loan losses                     |                                      
|Servicing income, net of        |                                      
|amortization and impairment     |                                      
|Gain on sale of mortgage assets |                                      
|                                |                                      
|Total net revenues              |                                      
|Operating expenses              |                                      
|Other income (expense)          |                                      
|                                |                                      
|Income (loss) before taxes      |                                      
|Income tax (expense) benefit    |                                      
|                                |                                      
|Net income (loss)               |                                      
|                                |                                      

---

|                                   | Three Months Ended September 30, 2003
|---------------------------------- | -------------------------------------
|
|
|
|Interest income                    |                                      
|Interest expense                   |                                      
|                                   |                                      
|Net interest income                |                                      
|Provision for mortgage loan losses |                                      
|                                   |                                      
|Net interest income after          |                                      
|provision for mortgage             |                                      
|loan losses                        |                                      
|Servicing income, net of           |                                      
|amortization and impairment        |                                      
|Gain on sale of mortgage assets    |                                      
|                                   |                                      
|Total net revenues                 |                                      
|Operating expenses                 |                                      
|Other income (expense)             |                                      
|                                   |                                      
|Income (loss) before taxes         |                                      
|Income tax (expense) benefit       |                                      
|                                   |                                      
|Net income (loss)                  |                                      
|                                   |                                      

|                                   | Nine Months Ended September 30, 2004
|---------------------------------- | ------------------------------------
|
|
|
|Interest income                    |                                     
|Interest expense                   |                                     
|                                   |                                     
|Net interest income                |                                     
|Provision for mortgage loan losses |                                     
|                                   |                                     
|Net interest income after          |                                     
|provision for mortgage             |                                     
|loan losses                        |                                     
|Servicing income, net of           |                                     
|amortization and impairment        |                                     
|Gain on sale of mortgage assets    |                                     
|                                   |                                     
|Total net revenues                 |                                     
|Operating expenses                 |                                     
|Other income (expense)             |                                     
|                                   |                                     
|Income (loss) before taxes         |                                     
|Income tax (expense) benefit       |                                     
|                                   |                                     
|Net income (loss)                  |                                     
|                                   |                                     

|                                   | Nine Months Ended September 30, 2003
|---------------------------------- | ------------------------------------
|
|
|
|Interest income                    |                                     
|Interest expense                   |                                     
|                                   |                                     
|Net interest income                |                                     
|Provision for mortgage loan losses |                                     
|                                   |                                     
|Net interest income after          |                                     
|provision for mortgage             |                                     
|loan losses                        |                                     
|Servicing income, net of           |                                     
|amortization and impairment        |                                     
|Gain on sale of mortgage assets    |                                     
|                                   |                                     
|Total net revenues                 |                                     
|Operating expenses                 |                                     
|Other income (expense)             |                                     
|                                   |                                     
|Income (loss) before taxes         |                                     
|Income tax (expense) benefit       |                                     
|                                   |                                     
|Net income (loss)                  |                                     
|                                   |                                     

---

|                     | September 30, 2004 | December 31, 2003
|-------------------- | ------------------ | -----------------
|
|
|
|Segment Assets:      |                    |                  
|Portfolio            |                    |                  
|Servicing            |                    |                  
|                     |                    |                  
|Total segment assets |                    |                  
|                     |                    |                  
|Corporate assets     |                    |                  
|                     |                    |                  
|Total assets         |                    |                  
|                     |                    |                  

# 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, as amended for the year ended December 31, 2003,
or the 2003 Form 10-K, filed with the Securities and Exchange Commission, or the SEC.
Certain information contained in this Report constitutes forward-looking statements under
Section 27 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 which
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 mortgages, particularly non-conforming loans.
- our ability to sustain loan origination growth at levels sufficient to absorb costs of production and operational costs;
- continued availability of financing facilities and access to the securitization markets or other funding sources;
- deterioration in the credit quality of our loan portfolio and those 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 qualify 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; 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 SEC.

---

The
following sets forth the table of contents for Managements Discussion and Analysis.

# Table of Contents

|                                                    | Page
|--------------------------------------------------- | ----
|Executive Summary                                   | 20  
|Description of Other Data                           | 22  
|Third Quarter 2004 Events and Outlook               | 23  
|Critical Accounting Estimates                       | 24  
|Consolidated Results                                | 28  
|Business Segment Results - Portfolio                | 32  
|Business Segment Results - Servicing                | 39  
|Wholesale Channel                                   | 44  
|Correspondent Channel                               | 46  
|Retail Channel                                      | 48  
|Called Loans                                        | 49  
|Financial Condition                                 | 50  
|Liquidity and Capital Resources                     | 52  
|Off Balance Sheet Items and Contractual Obligations | 57  
|Other Matters                                       | 57  
|Mortgage Loan Portfolio                             | 57  
|Mortgage Loan Production                            | 65  

# Executive Summary

Industry Overview

According
to the Mortgage Bankers Association of Americas, or MBAA, website as of April 14,
2004, lenders in the United States originated $3.8 trillion in single-family mortgage
loans in 2003. Approximately 66% of the loan originations in 2003 were attributable to
mortgage loan refinancings by customers taking advantage of the decline in interest rates
during 2003. As of October 19, 2004, lenders in the United States are expected to
originate approximately $2.7 trillion in single-family mortgage loans in 2004. We believe
that the projected decline is largely attributable to a reduction in refinancing of
conforming loans as interest rates rise. 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, as discussed in Mortgage Loan Portfolio by
Borrower Purpose.

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.
Our qualified REIT subsidiaries and our taxable REIT subsidiaries earn our revenues from the interest income from those mortgages through our portfolio
segment and from servicing loans for other companies through our servicing segment. Our qualified REIT
subsidiaries and our taxable REIT subsidiaries pay
interest to finance our mortgage loan portfolio and incur general and administrative
expenses to operate our business. Our qualified REIT subsidiaries and our taxable REIT subsidiaries
maintain a provision for mortgage loan losses that
may occur from impaired mortgage loans that are in our portfolio. 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. 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.

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 because loan
originations tend to rise during periods of decreased interest rates, generally lead to
increases in our borrowings.

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 because loan originations tend to decline during periods of increased interest rates,
generally lead to decreases in our borrowings.

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 open and operate, the number of sales representatives we employ, the volume of
third party servicing we acquire, and the cost of being a public company. As our loan
production and loan portfolio increase 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, which would result in increased office rent, equipment rent and insurance costs
that would be incurred. 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
Sarbanes-Oxley, the SEC 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 September 30, 2004 and 2003, through our taxable REIT subsidiaries
we originated, purchased, or called approximately $999.6 million and $704.2 million,
respectively, and securitized approximately $1.2 billion and $800.0 million of residential
mortgage loans, respectively. For the nine months ended September 30, 2004 and 2003,
through our taxable REIT subsidiaries we originated, purchased, or called approximately
$2.7 billion and $2.2 billion, respectively, and securitized approximately $2.3 billion
and $2.5 billion 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
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
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 September 30, 2004, we securitized approximately
$16.5 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.

# 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. However, these losses are recorded as charge-offs in our condensed
consolidated financial statements. 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.

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
2003 Form 10-K.

---

# Third Quarter 2004
Events and Outlook

REIT
Conversion

On
September 24, 2004, we completed our conversion to a REIT. The merger had no effect on the
condensed consolidated financial statements, as this was a merger of companies under
common control. The condensed consolidated statements of operations, shareholders
equity, and cash flows for the nine months ended September 30, 2004 include six days
of operations under this new structure. Use of the terms we or our
in this section shall be deemed to refer to or include our applicable subsidiaries.

Pursuant
to the merger agreement, Saxon Capital, Inc., or Old Saxon merged with and into Saxon
Capital Holdings, Inc., a wholly-owned subsidiary of Saxon REIT, Inc., or New Saxon, an
entity formed for the purpose of effecting the REIT conversion, and New Saxon succeeded to
and continued the operations of Old Saxon, changing its name to Saxon Capital,
Inc. At the effective time of the merger, each outstanding share of Old Saxon common
stock was converted into the right to receive one share of New Saxon common stock and a
cash payment of $4.00. Our common stock trades on Nasdaq under the symbol
SAXN. New Saxon issued 17.0 million shares of its common stock in a public
offering, resulting in $386.8 million in gross proceeds, which was partly used to pay the
cash portion of the merger consideration.

We
will apply REIT rules for federal income tax and accounting purposes beginning as of the
effective time of the merger. To qualify for tax treatment as a REIT, the parent company
must meet certain income and asset tests and distribution requirements. Generally, we will
not be subject to federal income tax at the corporate level to the extent we distribute
90% of our taxable income to our shareholders and comply with certain other requirements.
Our strategy is to accumulate in our qualified REIT subsidiaries a portfolio of
non-conforming mortgage loans that we originate in our qualified REIT subsidiaries or
taxable REIT subsidiaries to produce stable net interest income and dividends to our
shareholders. We also sell loans in our taxable REIT subsidiaries and to generate
origination fees and servicing income in those subsidiaries, enabling us to increase our
capital by retaining the after tax income in those subsidiaries, subject to the
limitations imposed by REIT tax rules.

Our
principal elements of revenues are interest income generated from our portfolio of
non-conforming mortgage loans in our qualified REIT subsidiaries. Additional components of
revenues are gains on sale from the sale of loans, servicing income, and loan origination
fees, all generated at our taxable REIT subsidiaries. Our primary components of expenses
are expected to be interest expense on our warehouse lines and repurchase facilities and
securitizations and general and administrative expenses and payroll and related expenses
arising from our origination and servicing businesses. With the exception of the impact of
taxes and dividends following the REIT conversion, we expect that our historical results
of operations will be comparable to our results of operations following the REIT
conversion.

We
expect to experience increased costs primarily related to additional staffing to ensure
compliance with REIT qualification rules in connection with the REIT conversion in 2004.
However, we expect the benefits of the conversion will compensate for such increased
costs.

Earnings
of our taxable REIT subsidiaries will be taxed and retained in the subsidiaries as
retained earnings. To the extent that our taxable REIT subsidiaries do not dividend these
retained earnings to us, these earnings will not be distributed as dividends to our
shareholders. We anticipate that we will be able to grow shareholder equity through the
retained earnings of our taxable REIT subsidiaries.

Revenue
Growth and Increased Expenses

In
the remainder of 2004 and in 2005, we expect market interest rates to rise. 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 2004 and
2005 may be lower than we experienced in 2003. As a result, we expect to earn higher
interest rates on the loans we originate in the remainder of 2004 and 2005 than the
interest rates earned on loans we originated in 2003; however, we may also experience more
delinquencies and defaults, the risk of which is typically greater with lower credit
quality loans over time.

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 the remainder of 2004
and 2005, we expect to incur higher levels of payroll and related expenses and general and
administrative expenses compared to 2003.

# Critical Accounting
Estimates

Managements
Discussion and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with GAAP. The
preparation of these consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and judgments.
Management bases its estimates and judgments on historical experience and on various other
factors that 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 fees and 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
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 faster than originally projected,
GAAP requires us to write down the remaining capitalized yield adjustments at a faster
speed than was originally projected, which would decrease our current net interest 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 using the interest method.

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. We anticipate that prepayment rates on a significant
portion of our adjustable rate mortgage portfolio will increase as these predominately
adjustable rate loans reach their initial adjustments during 2004 and 2005 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 33
percent over twelve months. Actual prepayment penalty income is recorded as 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.

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.

---

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 REO. 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 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. 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. MSRs are assessed periodically to determine if there has
been any impairment to the carrying value, based on the fair value at 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 on a one-month lag basis.

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 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, and would be
recorded in our consolidated statements of operations.

Accounting for Hedging
Activities

We
incorporate the use of derivative instruments to manage certain risks. We have qualified
for hedge accounting treatment for all of our derivative instruments, which are accounted
for as cash flow hedges. To qualify, on the date a derivative instrument agreement is
entered into, we designate the derivative as a hedge of a forecasted transaction or of the
variability of cash flows to be paid related to a recognized liability. 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. 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. Therefore, we
consider the swaps to be an effective hedge against interest rate risk if they satisfy the
documentation and correlation criteria. Likewise, when we use options as a hedge, such as
caps and floors, they also are considered to be effective hedges 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 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. The difference
between a 100% correlation result and our actual correlation percentage is used to
calculate the ineffective portion related to the Eurodollar futures; which is recorded as
income or expense in the Statement of Operations.

Deferral of Direct Loan
Origination Fees and Costs

We
collect certain nonrefundable fees associated with our loan origination activities. In
addition, we incur certain direct loan origination costs in connection with these
activities. The net of such amounts is 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.

The
amount of deferred nonrefundable fees is determined based on the amount of such fees
collected at the time of loan closing. 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 nine months ended September 30, 2004 as
defined within 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 originations are not included, as we purchase these loans as
closed loans and therefore, loan origination costs related to these purchases are recorded
as incurred.

Accounting for Income
Taxes

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 September 30, 2004, 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
intend to comply with the REIT provisions of the Internal Revenue Code of 1986, as
amended, which we refer to as the Code, effective as of the conversion date. Accordingly,
from the date of the conversion forward, we will 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
stockownership 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 estimates, refer to our 2003 Form 10-K for
the year ended December 31, 2003.

# Consolidated Results

Three and Nine Months
Ended September 30, 2004 versus Three and Nine Months Ended September 30, 2003

Overview. Net
income increased $21.7 million, or 131%, to $38.3 million for the three           months
ended September 30, 2004, from $16.6 million for the three months ended
          September 30, 2003. The increase was primarily the result of an increase in our
          income tax benefit for the third quarter of 2004 and increased net interest
          income due to growth in our mortgage loan portfolio, partially offset by an
          increase in total operating expenses and provision for mortgage loan losses,
          Net income increased $30.5 million, or 68%, to $75.4 million for the nine
months           ended September 30, 2004, from $44.9 million for the nine months ended
September           30, 2003. The increase was primarily the result of a decrease in our
income tax           expense and an increase in our net interest income. This increase
was partially           offset by a decrease in servicing income, net of amortization and
impairment,           and an increase in total operating expenses during the nine months
ended           September 30, 2004. Due to the higher rated credit quality mix, we
continue to           see lower weighted average coupons on our mortgage loan portfolio
and we           continue to experience lower delinquencies in the 2002 and 2003
portfolios           compared to the 2001 portfolio. In addition, marketplace perception
that           interest rates would increase in the near future caused higher refinance
          activity, which generated higher prepayment penalty income during the first
nine           months of 2004 compared to the first nine months of 2003. To the extent
interest           rates continue to rise in the remainder of 2004 and in 2005, we would
expect an           increase in the interest rates we charge on the mortgage loans we
originate,           decreases in our loan prepayments, and increases in our servicing
income. 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 may be lower than we experienced in 2003. As a
result,           we expect to charge higher interest rates on the loans we originate in
the           remainder of 2004 and in 2005 than the interest rates earned on loans we
          originated in 2003; however, we may also experience more delinquencies and
          defaults over time, the risk typically associated with lower credit quality
          loans.

Total
Net Revenues. Total net revenues increased $0.9 million, or 2%, to $55.6 million for
the three months ended September 30, 2004, from $54.7 million for the three months ended
September 30, 2003. Total net revenues increased $23.6 million, or 15%, to $177.1 million
for the nine months ended September 30, 2004, from $153.5 million for the nine months
ended September 30, 2003. Our increase in total net revenues was due to an increase in
total net interest income after provision for mortgage loan losses resulting from the
continued growth of our owned portfolio and increase in prepayment penalty income,
partially offset by a decrease in servicing income, net of amortization and impairment,
for the nine months ended September 30, 2004, resulting from an increase in impairment of
our MSRs recorded during the first nine months of 2004.

Payroll
and Related Expenses. Payroll and related expenses increased $4.9 million, or 33%, to
$19.7 million for the three months ended September 30, 2004, from $14.8 million for the
three months ended September 30, 2003. Payroll and related expenses increased $10.4
million, or 24%, to $52.9 million for the nine months ended September 30, 2004, from $42.5
million for the nine months ended September 30, 2003. Specifically:

- Severance expense increased $1.5 million, or 375%, to $1.9 million for the nine months
ended September 30, 2004, from $0.4 million for the nine months ended September 30, 2003.
The severance expense increase is due to the resignation of our President/Chief Operating
Officer in June 2004 and the associated provisions contained in his employment agreement
relating thereto;
- Executive compensation plan expense increased to $3.6 million and $4.9 million for the
three and nine months ended September 30, 2004, respectively, from $0.1 million for both
the three and nine months ended September 30, 2003 primarily due to vesting of all
restricted stock units as a result of the REIT conversion;
- Salary expense increased $3.1 million, or 10%, to $35.3 million for the nine months ended
September 30, 2004, from $32.2 million for the nine months ended September 30, 2003,
primarily because we employed 1,231 predominantly full time employees as of September 30,
2004, compared to 1,150 as of September 30, 2003. This increase in employees is due
primarily to increased staffing for expected third and fourth quarter 2004 servicing
portfolio growth. The increase in salary expense was also attributed to normal merit
increases granted each year;
- Bonus expense increased $0.4 million, or 29%, to $1.8 million for the three months ended
September 30, 2004 from $1.4 million for the three months ended September 30, 2003. Bonus
expense increased $1.7 million, or 39%, to $6.1 million for the nine months ended
September 30, 2004 from $4.4 million for the nine months ended September 30, 2003;
- Commission expense increased $2.3 million, or 52%, to $6.7 million for the three months
ended September 30, 2004 from $4.4 million for the three months ended September 30, 2003.
Commission expense increased $4.1 million, or 29%, to $18.0 million for the nine months
ended September 30, 2004 from $13.9 million for the nine months ended September 30, 2003.
These increases were due primarily to increased mortgage loan production during the three
and nine months ended September 30, 2004;
- Deferred payroll and related expenses, as they related to direct loan origination costs,
increased $1.8 million, or 29%, to $8.1 million for the three months ended September 30,
2004, from $6.3 million for the three months ended September 30, 2003. Deferred payroll
and related expenses, as they related to direct loan origination costs, increased $5.3
million, or 27%, to $24.6 million for the nine months ended September 30, 2004, from $19.3
million for the nine months ended September 30, 2003. These increases were due primarily
to an increase in mortgage loan production during the three and nine months ended
September 30, 2004.

We
expect payroll and related expenses to continue to increase as we continue to grow our
staffing to support further loan production growth, third party servicing acquisitions,
and to ensure compliance with REIT qualification rules.

---

General
and Administrative Expenses. General and administrative expenses increased $2.9
million, or 25%, to $14.3 million for the three months ended September 30, 2004, from
$11.4 million for the three months ended September 30, 2003. General and administrative
expenses increased $6.5 million, or 19%, to $40.4 million for the nine months ended
September 30, 2004, from $33.9 million for the nine months ended September 30, 2003. The
following factors contributed to the increase in general and administrative expenses:

- a $0.4 million increase and a $1.2 million increase for the three and nine months ended
September 30, 2004, compared to the three and nine months ended September 30, 2003,
respectively, in insurance expense relating to increases in our directors and
officers liability insurance;
- a $0.7 million increase and a $1.0 million increase for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003,
respectively, in advertising expenses;
- a $0.1 million increase and a $0.4 million increase for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003,
respectively in appraisal and credit report expenses, primarily due to higher
originations;
- a $0.2 million increase and a $0.5 million increase for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003,
respectively, in temporary office assistance;
- a $0.2 million increase and a $0.7 million increase for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003,
respectively, in maintenance agreement expense; and
- a $0.8 million increase and a $1.9 million increase for the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003,
respectively, in increased consulting, legal, and auditing services relating to
Sarbanes-Oxley and SEC requirements.

Income
Tax Benefit. We recorded a $27.5 million tax benefit during the third quarter of 2004
relating to the structure and formation transactions with regards to our REIT conversion
as outlined in our registration statement on Form S-11 dated September 20, 2004.
 This benefit is comprised of a reversal of $5.6 million in net deferred tax
liabilities, which will not result in taxable amounts in future years as a result of our
conversion to REIT status, and $21.9 million relating to income earned in our qualified
REIT subsidiary during 2004, that is now not subject to corporate taxation.  The
$27.5 million tax benefit is offset by the third quarter 2004 tax expense of $8.5 million.
We expect a significant decrease in our future tax expense related to the REIT conversion
if we continue to satisfy the requirements for taxation as a REIT going forward.

# 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. The portfolio segment uses our equity capital and borrowed
funds to invest in our mortgage loan portfolio, to produce 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, correspondent lenders, and directly to borrowers through our
25 branch offices. The mortgage loan operations 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 operations segment 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.

In
this section, we discuss performance and results of our business segments for the three
and nine months ended September 30, 2004 and 2003.

Portfolio
Segment

|                                                 | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------------------ | -------------------------------- | -------------------------------
|
|
|
|Net revenues                                     |                                  |                                
|Interest income                                  |                                  |                                
|Interest expense                                 |                                  |                                
|                                                 |                                  |                                
|Net interest income                              |                                  |                                
|Provision for mortgage loan losses               |                                  |                                
|Net interest income after provision for mortgage |                                  |                                
|loan losses                                      |                                  |                                
|Gain (loss) on sale of mortgage assets           |                                  |                                
|                                                 |                                  |                                
|Total net revenues                               |                                  |                                
|                                                 |                                  |                                

We
evaluate the performance of our portfolio segment based on total net revenues. The
following discussion highlights changes in our portfolio segment.

---

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

Interest
Income. Interest income increased $14.2 million, or 17%, to $99.7 million for the
three months ended September 30, 2004, from $85.5 million for the three months ended
September 30, 2003. Interest income increased $45.4 million, or 19%, to $289.7 million for
the nine months ended September 30, 2004, from $244.3 million for the nine months ended
September 30, 2003. The increase in interest income was due primarily to: (1) an increase
in gross interest income from growth in our mortgage loan portfolio, partially offset by
the impact of lower interest rates; (2) an increase in prepayment penalty income resulting
from an increase in the prepayments of mortgages held in our owned portfolio; and (3) a
decrease in the amortization of fair value hedges. These increases were partially offset
by an increase in amortization of yield adjustments for the nine months ended September
30, 2004. As shown in the table below, for the three and nine months ended September 30,
2004 compared to the three and nine months ended September 30, 2003, our interest income
increased $16.0 million and $49.2 million, respectively, due to an increase in the size of
our mortgage loan portfolio, partially offset by decreases of $2.6 million and $9.7
million, respectively, as a result of declining interest rates on our mortgage loan
portfolio.

Rate/Volume Table For the Three
and Nine Months Ended September 30, 2004 Compared to the Three and Nine Months Ended
September 30, 2003

|                          | Three Months Ended September 30, 2004
Compared to Three Months Ended September
30, 2003 | Nine Months Ended September 30, 2004
Compared to Nine Months Ended September
30, 2003
|------------------------- | --------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|
|
|
|Securitized loans         |                                                                                         |                                                                                      
|Warehouse loans           |                                                                                         |                                                                                      
|Mortgage bonds            |                                                                                         |                                                                                      
|Other                     |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      
|Total                     |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      
|Prepayment penalty income |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      
|                          |                                                                                         |                                                                                      

The
increase in interest income correlates to the growth of our mortgage loan portfolio. The
mortgage loan portfolio increased $1.0 billion, or 22%, to $5.6 billion at September 30,
2004, from $4.6 billion at September 30, 2003. However, this growth was offset partially
by the 80 and 67 basis point decrease in the gross weighted-average coupon rate due to the
increase in the credit grade of our mortgage loan portfolio and the liquidation of higher
weighted average coupon collateral. Our weighted-average credit score increased to 617 at
September 30, 2004, from 608 at September 30, 2003. We anticipate that our gross interest
income in dollars will continue to grow as our mortgage loan portfolio grows if interest
rates rise. We also expect that our interest income may increase in the remainder of 2004
and in 2005 if we originate or purchase lower credit quality loans that typically yield
higher interest. See Mortgage Loan Portfolio.

Prepayment
penalty income increased $0.7 million, or 8%, to $9.3 million for the three months ended
September 30, 2004, from $8.6 million for the three months ended September 30, 2003.
Prepayment penalty income increased $5.8 million, or 27%, to $27.0 million for the nine
months ended September 30, 2004, from $21.2 million for the nine months ended September
30, 2003. The marketplace perception that interest rates would begin to rise in the near
future appears to have contributed to the increase in prepayment penalty income earned,
since mortgage loan prepayments tend to increase as interest rates are expected to
increase. We expect that prepayment penalty income may decrease in the fourth quarter of
2004 if prepayments slow; however, we also expect to generate higher interest income on
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.

Amortization
expense of yield adjustments decreased $1.4 million, or 21%, to $5.2 million for the three
months ended September 30, 2004, from $6.6 million for the three months ended September
30, 2003. This decrease was attributable to slower expected future prepayment speeds.
Amortization expense of yield adjustments increased $0.9 million, or 5.1%, to $18.4
million for the nine months ended September 30, 2004, from $17.5 million for the nine
months ended September 30, 2003. This increase was predominantly caused by the
amortization related to the yield adjustments on loans originated during 2003 and during
the first nine months of 2004, which increased due to the origination and purchase of more
mortgage loans. We expect that the amortization of yield adjustments will continue to
increase in the future due to our anticipated mortgage loan portfolio growth, and that
generally our amortization of yield adjustments should increase as our interest income
increases. We also expect our amortization of yield adjustments to fluctuate as prepayment
speeds fluctuate in the future.

The
amortization expense of fair value hedges decreased $3.7 million, or 55%, to $3.0 million
for the three months ended September 30, 2004, from $6.7 million for the three months
ended September 30, 2003. The amortization expense of fair value hedges decreased $6.0
million, or 30%, to $13.9 million for the nine months ended September 30, 2004, from $19.9
million for the nine months ended September 30, 2003. The amortization of fair value
hedges should decline in future years as the existing balance of $32.2 million at
September 30, 2004 continues to decrease. We do not expect to use fair value hedges in the
future, as we now use cash flow hedging for all hedging transactions.

---

The
following table presents the average yield on our interest-earning assets for the three
and nine months ended September 30, 2004 and 2003, respectively.

Interest Income Yield Analysis For
the Three and Nine Months Ended September 30, 2004 Compared to the Three and Nine Months
Ended September 30, 2003

|                                          | Three Months Ended September 30, 2004 | Three Months Ended September 30, 2003
|----------------------------------------- | ------------------------------------- | -------------------------------------
|
|
|
|Gross                                     |                                       |                                      
|Add prepayment penalty income             |                                       |                                      
|Less amortization of yield adjustments(1) |                                       |                                      
|Less amortization of fair value hedges    |                                       |                                      
|                                          |                                       |                                      
|Total interest-earning assets             |                                       |                                      
|                                          |                                       |                                      

|                                           | Nine Months Ended September 30, 2004 | Nine Months Ended September 30, 2003
|------------------------------------------ | ------------------------------------ | ------------------------------------
|
|
|
|Gross                                      |                                      |                                     
|Add prepayment penalty income              |                                      |                                     
|Less amortization of yield adjustments (1) |                                      |                                     
|Less amortization of fair value hedges     |                                      |                                     
|                                           |                                      |                                     
|Total interest-earning assets              |                                      |                                     
|                                           |                                      |                                     

---

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

Interest
Expense. Interest expense increased $6.8 million, or 22%, to $37.9 million for the
three months ended September 30, 2004, from $31.1 million for the three months ended
September 30, 2003. Interest expense increased $18.3 million, or 21%, to $107.1 million
for the nine months ended September 30, 2004, from $88.8 million for the nine months ended
September 30, 2003. The table below presents the total change in interest expense from the
three and nine months ended September 30, 2003 to the three and nine months ended
September 30, 2004, and the amount of the total change that is attributable to declining
interest rates and an increase in our outstanding debt related to an increase in our loan
production. As shown in the table below, for the three and nine months ended September 30,
2004 compared to the three and nine months ended September 30, 2003, our interest expense
decreased $0.9 million and $2.7 million, respectively, as a result of declining interest
rates on certain of our interest bearing liabilities and increased $7.7 million and $21.0
million, respectively, due to an increase in our borrowings relating to an increase in our
mortgage loan production.

Rate/Volume Table For the Three
and Nine Months Ended September 30, 2004 Compared to the Three and Nine Months Ended
September 30, 2003

|                         | Three Months Ended September 30, 2004Compared to Three Months Ended September 30, 2003 | Nine Months Ended September 30, 2004Compared to Nine Months Ended September 30, 2003
|------------------------ | -------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|
|
|
|Securitization financing |                                                                                        |                                                                                     
|Warehouse financing:     |                                                                                        |                                                                                     
|Lines of credit          |                                                                                        |                                                                                     
|Repurchase agreements    |                                                                                        |                                                                                     
|Other                    |                                                                                        |                                                                                     
|                         |                                                                                        |                                                                                     
|Total                    |                                                                                        |                                                                                     
|                         |                                                                                        |                                                                                     

As
seen in the table below, the increase in interest expense was primarily related to an
increase in the average balance of borrowings of $1.1 billion, or 24%, to $5.6 billion for
the three months ended September 30, 2004, from $4.5 billion for the three months ended
September 30, 2003, and an increase in the average balance of borrowings of $1.1 billion,
or 26%, to $5.3 billion for the nine months ended September 30, 2004, from $4.2 billion
for the nine months ended September 30, 2003 as a result of the growth in our mortgage
loan portfolio. This interest expense increase was partially offset by the accretion of
yield adjustments for the three and nine months ended September 30, 2004, as well as a
decrease in the average yield on certain interest-bearing liabilities. The accretion of
yield adjustments decreased $4.2 million, or 47%, to $4.8 million for the three months
ended September 30, 2004, from $9.0 million for the three months ended September 30, 2003.
The accretion of yield adjustments decreased $5.2 million, or 21%, to $19.8 million for
the nine months ended September 30, 2004, from $25.0 million for the nine months ended
September 30, 2003. This was due to increased amortization of bond issuance costs as a
result of issuing more bonds. We expect a decrease in our future interest expense as a
result of the retirement of our note payable in the third quarter of 2004. We also expect
our interest expense to be lower in the short-term due to the use of our capital raise
proceeds to pay down our warehouse debt in the fourth quarter of 2004.

---

The
table below presents the average yield on our interest-bearing liabilities for the three
and nine months ended September 30, 2004 and 2003, respectively.

Interest Expense Yield Analysis
For the Three and Nine Months Ended September 30, 2004 Compared to the Three and Nine
Months Ended September 30, 2003

|                                           | Three Months Ended September 30, 2004 | Three Months Ended September 30, 2003
|------------------------------------------ | ------------------------------------- | -------------------------------------
|
|
|
|Warehouse financing                        |                                       |                                      
|Less compensating balance credits (1)      |                                       |                                      
|                                           |                                       |                                      
|Net warehouse financing                    |                                       |                                      
|                                           |                                       |                                      
|Repurchase agreements                      |                                       |                                      
|Securitization financing:                  |                                       |                                      
|Gross                                      |                                       |                                      
|Less net accretion of yield adjustments(2) |                                       |                                      
|Add amortization (accretion) of cash       |                                       |                                      
|flow hedges                                |                                       |                                      
|                                           |                                       |                                      
|Net securitization financing:              |                                       |                                      
|                                           |                                       |                                      
|Notes payable                              |                                       |                                      
|Other expenses                             |                                       |                                      
|                                           |                                       |                                      
|Total interest-bearing liabilities         |                                       |                                      
|                                           |                                       |                                      

|                                        | Nine Months Ended September 30, 2004 | Nine Months Ended September 30, 2003
|--------------------------------------- | ------------------------------------ | ------------------------------------
|
|
|
|Warehouse financing                     |                                      |                                     
|Less compensating balance credits (1)   |                                      |                                     
|                                        |                                      |                                     
|Net warehouse financing                 |                                      |                                     
|                                        |                                      |                                     
|Repurchase agreements                   |                                      |                                     
|Securitization financing:               |                                      |                                     
|Gross                                   |                                      |                                     
|Less accretion of yield adjustments (2) |                                      |                                     
|Add amortization (accretion) of cash    |                                      |                                     
|flow hedges                             |                                      |                                     
|                                        |                                      |                                     
|Net securitization financing:           |                                      |                                     
|                                        |                                      |                                     
|Notes payable                           |                                      |                                     
|Other expenses                          |                                      |                                     
|                                        |                                      |                                     
|Total interest-bearing liabilities      |                                      |                                     
|                                        |                                      |                                     

---

| | (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, bond issuance costs and
               accumulated other comprehensive income relating to cash flow hedging
related to                our bonds.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net
Interest Margin. Our net interest margin decreased to 4.6% for the three months ended
September 30, 2004, from 4.9% for the three months ended September 30, 2003. Our net
interest margin decreased to 4.9% for the nine months ended September 30, 2004, from 5.1%
for the nine months ended September 30, 2003. The decline in our net interest margin was
primarily attributable to an increase in the cost of our short-term borrowings, as well as
our shift in credit mix to loans with lower weighted average coupons and prepayment of
higher coupon loans. We anticipate that net interest margin may continue to decline, as
our current production may not offset the increased liquidation of higher coupon loans.

---

Provision
for Mortgage Loan Losses. Provision for mortgage loan losses increased $6.2 million,
or 73%, to $14.7 million for the three months ended September 30, 2004, from $8.5 million
for the three months ended September 30, 2003. Provision for mortgage loan losses
increased $2.0 million, or 7%, to $28.8 million for the nine months ended September 30,
2004, from $26.8 million for the nine months ended September 30, 2003. The increase in the
provision for the three and nine months ended September 30, 2004 was primarily
attributable to an increase in delinquencies and charge-offs during the quarter as the
portfolio continues to age. We expect that our future provisions for mortgage loan losses
may increase related to delinquent loan balances increasing in the future primarily as a
result of the continued aging and growth of our mortgage loan portfolio. We did not make
any significant changes in our reserve methodologies or assumptions during the nine months
ended September 30, 2004 and 2003.

We
saw a slight increase in delinquency rates and loan loss experience in our owned servicing
portfolio in the third quarter of 2004 compared to the third quarter of 2003 by year of
origination, or vintage, due to the aging and growth of the portfolio. However, relative
to past production, measured as a percentage of the original balance, 2002, 2003, and 2004
delinquency rates are the lowest we have experienced since 1996. We believe this is the
result of the credit mix of production we have originated or purchased. Loans with higher
credit scores typically have lower frequency of foreclosure and loss, and our weighted
average median credit score rose to 623 for the nine months ended September 30, 2004, from
617 for the nine months ended September 30, 2003. The chart below shows our cumulative
losses by vintage.



Also
by looking at the portfolio on a static pool basis, or each years production over
time, we are experiencing an increase in overall losses. This is expected as the portfolio
seasons and more foreclosure events occur. However, losses on higher credit production,
primarily 2002 and 2003 production, are lower than for 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 as well. This is also expected as aged REO
properties begin to liquidate, even though property values are presumed to increase.
Because loss severities typically increase as the portfolio gets older and refinance
activity is expected to decrease, management expects our average loss severities to
increase.

The
following table sets forth information about the delinquency and loss experience of our
owned servicing portfolio.

Delinquency and Loss
Experience Of Our Owned Portfolio For September 30, 2004 and 2003

---

|                                                            | September 30,
|----------------------------------------------------------- | -------------
|
|
|
|Total outstanding principal balance (at period end)         |              
|Delinquency (at period end):                                |              
|30-59 days:                                                 |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|60-89 days:                                                 |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|90 days or more:                                            |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|Bankruptcies (1):                                           |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|Foreclosures:                                               |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|Real estate owned (2):                                      |              
|Principal balance                                           |              
|Delinquency percentage                                      |              
|Total seriously delinquent including real estate owned (3)  |              
|Total seriously delinquent including real estate owned (3)  |              
|Total seriously delinquent excluding real estate owned      |              
|Total seriously delinquent excluding real estate owned      |              
|Net losses on liquidated loans - trust basis - quarter      |              
|ended (4) (5)                                               |              
|Charge-offs - quarter ended (5) (6)                         |              
|Percentage of trust basis losses on liquidated loans (5)(7) |              
|Percentage of charge-offs on liquidated loans (5) (7)       |              
|Loss severity on liquidated loans - quarter ended (5)(8)    |              

---

| | (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 September 30, 2004 and 2003 are
$13.6                million and $11.8 million, respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (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) | Net
losses on liquidated loans for our portfolio exclude losses of $2.0 million
               relating to sales of delinquent called loans purchased at a discount and
certain                recoveries during the third quarter of 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Amounts
are for the three months ended September 30, 2004 and 2003,                respectively.
| | --- | ------------------------------------------------------------------------------------------------

| | (6) | Charge-offs
represent the losses recognized in our financial statements in                accordance
with GAAP. See reconciliation of trust to charge-offs below.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Annualized.
| | --- | -----------

| | (8) | 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
reconciliation between trust losses and charge-offs is provided below.

---

Reconciliation of Trust Losses and
Charge-offs For the Three Months Ended September 30, 2004 and 2003

|                                                  | For the Three Months Ended
September 30,
|------------------------------------------------- | ----------------------------------------
|
|
|
|Losses - trust basis                              |                                         
|Loan transfers to real estate owned               |                                         
|Realized losses on real estate owned              |                                         
|Timing differences between liquidation and claims |                                         
|processing                                        |                                         
|Basis adjustments applied against loss            |                                         
|Interest not advanced on warehouse                |                                         
|Other                                             |                                         
|                                                  |                                         
|Charge-offs (1)                                   |                                         
|                                                  |                                         

---

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

Servicing
Segment

|                                          | Three Months Ended
September 30, | Nine Months Ended
September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|
|
|Net Revenues                              |                                  |                                
|Gross servicing income                    |                                  |                                
|Amortization and impairment               |                                  |                                
|                                          |                                  |                                
|Servicing income, net of amortization and |                                  |                                
|impairment                                |                                  |                                
|                                          |                                  |                                
|                                          |                                  |                                

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 performance of our servicing segment. The following discussion highlights
changes in our servicing segment for the periods indicated.

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

Servicing
Income, Net of Amortization and Impairment. Servicing income, net of amortization and
impairment, increased $0.4 million, or 5%, to $8.4 million for the three months ended
September 30, 2004, from $8.0 million for the three months ended September 30, 2003.
Servicing income, net of amortization and impairment, decreased $3.6 million, or 15%, to
$20.2 million for the nine months ended September 30, 2004, from $23.8 million for the
nine months ended September 30, 2003. The increase in gross servicing income for the three
and nine months ended September 30, 2004 compared to the three and nine months ended
September 30, 2003 of $6.2 million and $9.4 million, respectively, was primarily the
result of a higher average total servicing portfolio due to the continued growth in our
owned portfolio as well as the acquisition of additional third party servicing rights.
This increase was offset by an increase of $5.8 million and $13.0 million of amortization
and impairment expense of MSRs for the three and nine months ended September 30, 2004,
respectively, compared to the three and nine months ended September 30, 2003. The increase
in MSR amortization expense was due to increased prepayment speeds during 2004 as compared
to 2003, as well as increased servicing acquisitions and the use of discounted projected
net servicing income as a prospective change in estimate in the first quarter of 2004,
which further accelerates amortization expense and is more consistent with the underlying
methods used to determine fair value. The increase in the MSR impairment was due to
increased prepayment speeds during the three and nine months ended September 30, 2004. We
expect our servicing income, net of amortization and impairment, 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 and impairment expense
assuming a constant level in our mortgage loan servicing portfolio. Information relating
to our servicing income is shown in the table below:

---

Servicing Income For the Three and
Nine Months Ended September 30, 2004 Compared to the Three and Nine Months Ended
September 30, 2003

|                                                         | Three Months Ended September 30, | Nine Months Ended September 30,
|-------------------------------------------------------- | -------------------------------- | -------------------------------
|
|
|
|Average third party servicing portfolio                  |                                  |                                
|Average owned portfolio                                  |                                  |                                
|Average total servicing portfolio                        |                                  |                                
|Gross servicing income                                   |                                  |                                
|Amortization and impairment                              |                                  |                                
|Servicing fees  - third party portfolio(1)(2)            |                                  |                                
|Amortization - third party portfolio (1)                 |                                  |                                
|Impairment - third party portfolio (1)                   |                                  |                                
|Other servicing income - total servicing portfolio(1)(3) |                                  |                                
|Servicing income - total servicing portfolio (1)         |                                  |                                

---

| | (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.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
Mortgage Loan Servicing Portfolio

In
addition to servicing mortgage loans that we originate or purchase through our taxable
REIT subsidiaries, we also service mortgage loans for other lenders
and investors.  For the three and nine months ended September 30, 2004, we purchased the
rights to service $5.1 billion and $7.2 billion of mortgage loans, respectively.

Our
loan servicing portfolio as of September 30, 2004 is summarized below:

|                                                | Number of Loans | Principal
Balance | Percent of
Total | Average Loan
Balance
|----------------------------------------------- | --------------- | ----------------- | ---------------- | --------------------
|
|
|
|Owned Portfolio:                                |                 |                   |                  |                     
|Saxon Capital, Inc. (1)                         |                 |                   |                  | 40,670              
|Third Party Servicing:                          |                 |                  
|Greenwich Capital, Inc.                         |                 |                   |                  | 52,613              
|Dominion Capital (2)                            |                 |                   |                  | 10,664              
|Credit Suisse First Boston                      |                 |                   |                  | 7,601               
|Dynex Capital, Inc.                             |                 |                   |                  | 418                 
|Fannie Mae                                      |                 |                   |                  | 212                 
|Various government entities and other investors |                 |                   |                  | 323                 
|                                                |                 |                   |                  |                     
|Total third party servicing                     |                 |                   |                  | 71,831              
|                                                |                 |                   |                  |                     
|Total                                           |                 |                   |                  | 112,501             
|                                                |                 |                   |                  |                     

---

| | (1) | Includes
loans we originated and purchased from July 6, 2001 to September 30,           2004.
| | --- | ---------------------------------------------------------------------------------------------

| | (2) | Includes
loans securitized by SCI Services, Inc. from May 1996 to July 5, 2001.
| | --- | -------------------------------------------------------------------------------

---



Our
mortgage loan servicing portfolio, including loans recorded on the condensed consolidated
balance sheets, increased $6.2 billion, or 63%, to $16.1 billion at September 30, 2004,
from $9.9 billion at December 31, 2003. The increase was due primarily to the origination
and purchase of $2.7 billion of mortgage loans during the first nine months of 2004 and
the acquisition of servicing rights related to $7.2 billion of mortgage loans owned by
non-affiliated companies during the first nine months of 2004, partially offset by
decreases caused by prepayments and losses totaling $3.6 billion.

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 is presenting 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 $4.7 billion of mortgage loans
during the fourth quarter of 2004, of which $1.7 billion were purchased in October 2004
for approximately $12.3 million.

We
include all costs to service mortgage loans within the servicing segment. We reduced our
cost to service to 20 basis points for the third quarter of 2004, from 26 basis points for
the third quarter of 2003 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.

Our
Delinquency and Loss Experience  Total Servicing Portfolio

We
experienced a decline in seriously delinquent accounts for our total servicing portfolio
to 5.83% for the third quarter of 2004, from 10.12% for the third quarter of 2003. This
was mainly a result of the higher credit quality of new production since 2001, as well as
the higher credit quality of our additional third party purchases since 2002, and the
volume of recent third party purchases. Higher delinquencies on our third party servicing
portfolio will negatively impact our servicing income and the fair value of our MSRs, and
cause 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 (which are
primarily loans we have originated or purchased and have been or will be securitized for
the periods indicated).

---

|                                                                  | September 30,
|----------------------------------------------------------------- | -------------
|
|
|
|Total outstanding principal balance (at period end)               |              
|Delinquency (at period end):                                      |              
|30-59 days:                                                       |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|60-89 days:                                                       |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|90 days or more:                                                  |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|Bankruptcies (2):                                                 |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|Foreclosures:                                                     |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|Real estate owned:                                                |              
|Principal balance                                                 |              
|Delinquency percentage                                            |              
|Total seriously delinquent including real estate owned (3)        |              
|Total seriously delinquent including real estate owned (3)        |              
|Total seriously delinquent excluding real estate owned            |              
|Total seriously delinquent excluding real estate owned            |              
|Net losses on liquidated loans - trust basis-quarter ended (4)(5) |              
|Percentage of trust basis losses on liquidated loans (4)(6)       |              
|Loss severity on liquidated loans - quarter ended (4)(7)          |              

---

| | (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 September 30, 2004 and
2003                are $32.1 million and $36.3 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) | Amounts
are for the three months ended September 30, 2004 and 2003,                respectively.
| | --- | ------------------------------------------------------------------------------------------------

| | (5) | Net
losses on liquidated loans exclude losses of $2.0 million relating to sales
               of delinquent called loans purchased at a discount and certain recoveries
during                the third quarter of 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# Delinquency by Credit
Grade by Year Funded (1)(2)

|                  |  |  |   | Percentage 60+ Days Delinquent |  |  
|----------------- |  |  | - | ------------------------------ |  | -
|
|
|
|Pre-divestiture:  |  |  |   |                                |  |  
|1996              |  |  | $ | 741,645                        |  | $
|1997              |  |  | $ | 1,769,538                      |  | $
|1998              |  |  | $ | 2,084,718                      |  | $
|1999              |  |  | $ | 2,381,387                      |  | $
|2000              |  |  | $ | 2,078,637                      |  | $
|2001              |  |  | $ | 499,879                        |  | $
|Post-divestiture: |  | 
|2001              |  |  | $ | 1,833,357                      |  | $
|2002              |  |  | $ | 2,484,074                      |  | $
|2003              |  |  | $ | 2,842,942                      |  | $
|2004              |  |  | $ | 2,722,277                      |  | $

---

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

| | (2) | As
of September 30, 2004.
| | --- | -------------------------

| | (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 Operations
Segment

The
mortgage loan operations 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 25 branch offices. We
evaluate the performance of our mortgage loan operations segment based on production
levels. We believe the characteristics and level of mortgage loan operations assists
investors by allowing them to evaluate performance of our mortgage loan operations
segment. The following discussion highlights changes in our mortgage loan operations
segment.

# Wholesale Channel

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

Wholesale
loan production increased $97.9 million, or 33%, to $394.9 million for the three months
ended September 30, 2004, from $297.0 million for the three months ended September 30,
2003. Wholesale loan production increased $267.4 million, or 31%, to $1.1 billion for the
nine months ended September 30, 2004, from $854.1 million for the nine months ended
September 30, 2003. This favorable production trend was primarily the result of the
marketplace perception that interest rates would increase in the near future as well as a
change in our pricing methodology to become more competitive and gain market share. Our
weighted average median credit scores decreased slightly to 632 for both the three and
nine months ended September 30, 2004, respectively, from 641 and 633, respectively, for
the three and nine months ended September 30, 2003. For both the three and nine months
ended September 30, 2004, as compared to the three and nine months ended September 30,
2003, we experienced a significant decline in the production of fixed rate mortgages. We
also saw an increase in our fixed product weighted average interest rate for the third
quarter of 2004. We have seen an increase in our average balance per loan and the number
of loans originated for both the three and nine months ended September 30, 2004 compared
to the three and nine months ended September 30, 2003.

---

The
following table sets forth selected information about our wholesale loan production for
the three and nine months ended September 30, 2004 and 2003:

|                                                      | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|----------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan production                                       |                                          |                                        
|Average principal balance per loan                    |                                          |                                        
|Number of loans originated                            |                                          |                                        
|Combined weighted average initial loan to value (LTV) |                                          |                                        
|Percentage of first mortgage loans owner occupied     |                                          |                                        
|Percentage with prepayment penalty                    |                                          |                                        
|Weighted average median credit score (1)              |                                          |                                        
|Percentage fixed rate mortgages                       |                                          |                                        
|Percentage adjustable rate mortgages                  |                                          |                                        
|Weighted average interest rate:                       |                                          |                                        
|Fixed rate mortgages                                  |                                          |                                        
|Adjustable rate mortgages                             |                                          |                                        
|Gross margin - adjustable rate mortgages (2)          |                                          |                                        
|Average number of account executives                  |                                          |                                        
|Volume per account executive                          |                                          |                                        
|Loans originated per account executive                |                                          |                                        

---

| | (1) | The credit score is determined based on the median of FICO, Empirica, and
          Beacon credit scores.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (2) | The gross margin is the amount added to the applicable index rate, subject to
          rate caps and limits, to determine the interest rate.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------



# Correspondent Channel

Over
the past three years we have generally seen a steady decline in our bulk purchases. Our
bulk prices include a review of each loan for conformity to our underwriting guidelines
prior to purchasing the pool. The decreasing rate environment brought a number of new
investors into the market, which increased competition and caused pricing to escalate to
levels, which would not provide us an adequate return on investment in the bulk market. We
maintained our pricing discipline in the bulk market and, therefore, concentrated our
efforts on increasing flow production. If pricing competition lessens and the bulk market
becomes more economical for us as it did in the second and third quarter of 2004, we may
choose to increase our bulk volume going forward.

---

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

Correspondent
bulk loan production increased $2.3 million, or 6%, to $39.7 million for the three months
ended September 30, 2004, from $37.4 million for the three months ended September 30,
2003. Correspondent bulk loan production decreased $68.7 million, or 37%, to $118.0
million for the nine months ended September 30, 2004, from $186.7 million for the nine
months ended September 30, 2003. Our weighted average median credit scores increased, to
614 and 575 for the three and nine months ended September 30, 2004, respectively, from 603
and 571, respectively, for the three and nine months ended September 30, 2003; however, we
experienced declines in our weighted average interest rates over the same periods. We saw
an increase in our average balance per loan for both the three and nine months ended
September 30, 2004 compared to the three and nine months ended September 30, 2003. We also
saw declines in the percentage of our production with prepayment penalties, primarily
related to amended government regulations, and we expect this trend to continue.

The
following table sets forth selected information about loans purchased by our correspondent
channel through bulk delivery for the three and nine months ended September 30, 2004 and
2003:

|                                                  | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan production - bulk                            |                                          |                                        
|Average principal balance per loan                |                                          |                                        
|Number of loans originated                        |                                          |                                        
|Combined weighted average initial LTV             |                                          |                                        
|Percentage of first mortgage loans owner occupied |                                          |                                        
|Percentage with prepayment penalty                |                                          |                                        
|Weighted average median credit score (1)          |                                          |                                        
|Percentage fixed rate mortgages                   |                                          |                                        
|Percentage adjustable rate mortgages              |                                          |                                        
|Weighted average interest rate:                   |                                          |                                        
|Fixed rate mortgages                              |                                          |                                        
|Adjustable rate mortgages                         |                                          |                                        
|Gross margin - adjustable rate mortgages(2)       |                                          |                                        

---

| | (1) | The
credit score is determined based on the median of FICO, Empirica, and Beacon
               credit scores.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (2) | The
gross margin is the amount added to the applicable index rate, subject to
               rate caps and limits, to determine the interest rate.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

Correspondent
flow loan production increased $81.7 million, or 44%, to $267.1 million for the three
months ended September 30, 2004, from $185.4 million for the three months ended September
30, 2003. Correspondent flow loan production increased $58.1 million, or 11%, to $586.4
million for the nine months ended September 30, 2004, from $528.3 million for the nine
months ended September 30, 2003. Market conditions improved during the second and third
quarters of 2004, which contributed to our favorable production trend for the third
quarter of 2004 and for the first nine months of 2004. We saw an increase in our average
balance per loan and in the number of loans originated for both the three and nine months
ended September 30, 2004 compared to the three and nine months ended September 30, 2003.
Our weighted average median credit scores have increased, to 627 and 609 for the three and
nine months ended September 30, 2004, respectively, from 623 and 606 for the three and
nine months ended September 30, 2003; and, we experienced a slight increase in our average
coupon rate for fixed rate mortgages; however, we did see a decline in our adjustable rate
mortgage average coupon for the third quarter of 2004. We also saw declines in our
percentage of our production with prepayment penalties, primarily related to amended
government regulations, and we expect this trend to continue.

---

The
following table sets forth selected information about loans purchased by our correspondent
channel through flow delivery for the three and nine months ended September 30, 2004 and
2003:

|                                                  | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan production - flow                            |                                          |                                        
|Average principal balance per loan                |                                          |                                        
|Number of loans originated                        |                                          |                                        
|Combined weighted average initial LTV             |                                          |                                        
|Percentage of first mortgage loans owner occupied |                                          |                                        
|Percentage with prepayment penalty                |                                          |                                        
|Weighted average median credit score (1)          |                                          |                                        
|Percentage fixed rate mortgages                   |                                          |                                        
|Percentage adjustable rate mortgages              |                                          |                                        
|Weighted average interest rate:                   |                                          |                                        
|Fixed rate mortgages                              |                                          |                                        
|Adjustable rate mortgages                         |                                          |                                        
|Gross margin - adjustable rate mortgages (2)      |                                          |                                        

---

| | (1) | The
credit score is determined based on the median of FICO, Empirica, and Beacon
               credit scores.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (2) | The
gross margin is the amount added to the applicable index rate, subject to
               rate caps and limits, to determine the interest rate.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

The
following table sets forth selected information about our sales representatives in
the correspondent channel for the three and nine months ended September 30, 2004 and 2003:

|                                | For the Three Months Ended September
30, | For the Nine Months Ended
September 30,
|------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan production - bulk          |                                          |                                        
|Loan production - flow          |                                          |                                        
|Total loan production           |                                          |                                        
|Number of loans originated      |                                          |                                        
|Average number of sales         |                                          |                                        
|representatives                 |                                          |                                        
|Volume per sales representative |                                          |                                        
|Loan production per sales       |                                          |                                        
|representative                  |                                          |                                        

---



Retail
Channel

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

Retail
originations increased $63.0 million, or 34%, to $247.5 million for the three months ended
September 30, 2004, from $184.5 million for the three months ended September 30, 2003.
Retail originations increased $119.1 million, or 20%, to $709.6 million for the nine
months ended September 30, 2004, from $590.5 million for the nine months ended September
30, 2003. The number of loans originated also increased for the three and nine months
ended September 30, 2004 compared to the three and nine months ended September 30, 2003.
This favorable production trend was primarily the result of the marketplace perception
that interest rates would increase in the near future and the result of changing our
pricing methodology to become more competitive and gain market share. We have also become
more efficient in our retail channel with an increase in our volume per loan officer for
2004 as compared to 2003. For both the three and nine months ended September 30, 2004, as
compared to the three and nine months ended September 30, 2003, we experienced a
significant decline in the production of fixed rate mortgages. We also saw an increase in
our fixed product weighted average interest rate for the third quarter of 2004. Our
weighted average median credit scores decreased, to 607 and 615 for the three and nine
months ended September 30, 2004, respectively, from 617 and 618, respectively, for the
three and nine months ended September 30, 2003.

The
following table sets forth selected information about our retail loan originations for the
three and nine months ended September 30, 2004 and 2003:

|                                         | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|---------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan originations                        |                                          |                                        
|Average principal balance per loan       |                                          |                                        
|Number of loans originated               |                                          |                                        
|Combined weighted average initial LTV    |                                          |                                        
|Percentage of first mortgage loans owner |                                          |                                        
|occupied                                 |                                          |                                        
|Percentage with prepayment penalty       |                                          |                                        
|Weighted average median credit score (1) |                                          |                                        
|Percentage fixed rate mortgages          |                                          |                                        
|Percentage adjustable rate mortgages     |                                          |                                        
|Weighted average interest rate:          |                                          |                                        
|Fixed rate mortgages                     |                                          |                                        
|Adjustable rate mortgages                |                                          |                                        
|Gross margin - adjustable rate           |                                          |                                        
|mortgages (2)                            |                                          |                                        
|Average number of loan officers          |                                          |                                        
|Volume per loan officer                  |                                          |                                        
|Loans originated per loan officer        |                                          |                                        

---

| | (1) | The
credit score is determined based on the median of FICO, Empirica, and Beacon
               credit scores.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (2) | The
gross margin is the amount added to the applicable index rate, subject to
               rate caps and limits, to determine the interest rate.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

---



Called
Loans

Through
our taxable REIT subsidiaries we generally have the option, called a clean-up call option,
to purchase mortgage loans in a securitized pool for which we act as servicer or master
servicer once the aggregate principal balance of the remaining mortgage loans in the
securitized pool is less than a specified percentage (generally 10%) of the original
aggregate principal balance of the pool at the time of the securitization. We refer to the
loans we acquire upon exercise of a clean-up call option as called loans. We routinely
review the securitized pools subject to clean-up call options, and frequently determine it
to be to our advantage to call those loans.

Because
our called loan purchases represent a more seasoned portfolio than the new production we
have originated through our wholesale, correspondent, and retail channels, we have provided
data below regarding the characteristics of our called loan production for the periods
indicated.

Three
and Nine Months Ended September 30, 2004 versus Three and Nine Months Ended September 30,
2003

During
the first nine months of 2004, we called loans in the total amount of $186.8 million.
There were no loans called in 2003. The following table sets forth selected information
about our called loans for the three and nine months ended September 30, 2004 and 2003:

|                                                  | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Called loans purchased                            |                                          |                                        
|Average principal balance per loan                |                                          |                                        
|Number of loans originated                        |                                          |                                        
|Combined weighted average initial LTV             |                                          |                                        
|Percentage of first mortgage loans owner occupied |                                          |                                        
|Percentage with prepayment penalty                |                                          |                                        
|Weighted average median credit score (1)          |                                          |                                        
|Percentage fixed rate mortgages                   |                                          |                                        
|Percentage adjustable rate mortgages              |                                          |                                        
|Weighted average interest rate:                   |                                          |                                        
|Fixed rate mortgages                              |                                          |                                        
|Adjustable rate mortgages                         |                                          |                                        
|Gross margin - adjustable rate mortgages (2)      |                                          |                                        

---

| | (1) | The
credit score is determined based on the median of FICO, Empirica, and Beacon
               initial credit scores.
| | --- | ----------------------------------------------------------------------------------------------------------------------

| | (2) | The
gross margin is the amount added to the applicable index rate, subject to
               rate caps and limits, to determine the interest rate.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

# Financial Condition

September
30, 2004 Compared to December 31, 2003

Cash.Cash
increased $221.6 million, or 4,262%, to $226.8 million at September 30,           2004,
from $5.2 million at December 31, 2003. This increase was primarily the           result
of the issuance of 17 million additional shares of common stock resulting           in
proceeds of $386.8 million. Further discussion of the overall change in our
          cash balance is discussed in Liquidity and Capital Resources.

---

Net
Mortgage Loan Portfolio.Our net mortgage loan portfolio increased $0.9 billion, or
19%, to $5.6 billion at September 30, 2004, from $4.7 billion at December 31, 2003. This
increase was the result of the origination and purchase of $2.7 billion of mortgage loans
during the nine months ended September 30, 2004, offset by principal payments of $1.6
billion and loan sales of $0.2 billion. 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. A detailed discussion of our portfolio
characteristics is discussed in Mortgage Loan Portfolio.

Allowance
for Loan Loss. The allowance for loan loss decreased $7.1 million, or 16%, to $36.3
million at September 30, 2004, from $43.4 million at December 31, 2003. This decrease was
due to charge-offs of $34.8 million from primarily our 2001 and early 2002
securitizations, which were provided for in previous periods, offset by additional
provision of $27.7 million. We expect our allowance for loan loss may increase in the
future as our portfolio continues to grow.

MSRs,
net. MSRs, net increased $33.6 million, or 81%, to $74.9 million at September 30,
2004, from $41.3 million at December 31, 2003. This increase was primarily due to
purchases of $52.3 million of rights to service $7.2 billion of mortgage loans during the
nine months ended September 30, 2004. We have strategically positioned 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 $4.7 billion of
mortgage loans during the fourth quarter of 2004, of which $1.7 billion were purchased in
October 2004 for approximately $12.3 million. The increase in MSRs was partially offset by
amortization of servicing rights of $11.9 million during the first nine months of 2004,
which was higher than the first nine months of 2003 due to our additional servicing
acquisitions and the use of discounted projected net servicing income as a prospective
change in estimate which further accelerates amortization expense and is more consistent
with the underlying methods used to determine fair value. Also, a temporary impairment of
$6.0 million and a permanent impairment of $0.8 million further offset the increase. The
impairment of MSRs was primarily the result of increased prepayment speeds during 2004 on
certain third party servicing portfolios retained from the 2001 divestiture.

Servicing
Related Advances. Servicing related advances increased $12.8 million, or 13%, to
$111.4 million at September 30, 2004, from $98.6 million at December 31, 2003. The
increase was primarily due to the increase in our third party servicing balances.

Trustee
Receivable. Trustee receivable increased $25.0 million, or 34%, to $99.6 million at
September 30, 2004, from $74.6 million at December 31, 2003. The increase was primarily
due to the completion of two securitizations during the first nine months of 2004. Our
trustee receivable balance increased at a greater rate than our mortgage loan portfolio
balance during 2003, primarily due to more loans paying as scheduled due to lower
delinquency rates. On each payment date, the trust distributes SAST securitization loan
payments to their related bondholders. These loan payments are collected by the trust
before the cut-off date, which is typically the 17th 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 increased $23.9 million, or 30%, to $103.9 million at September
30, 2004, from $80.0 million at December 31, 2003. The increase in other assets is
primarily the result of an increase of $24.0 million in current tax receivable.

Warehouse
Financing. Warehouse financing increased $212.8 million, or 50%, to $640.8 million at
September 30, 2004, from $428.0 million at December 31, 2003. 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 $0.8 billion, or 19%, to $5.0 billion at
September 30, 2004, from $4.2 billion at December 31, 2003. This increase resulted
primarily from the execution of two asset-backed securitizations, which resulted in bonds
being issued in the amount of $2.3 billion during the nine months ended September 30,
2004. This increase was primarily offset by bond and certificate payments of $1.6 billion.
In general, we will expect increases in our securitization financing as we experience
increased mortgage loan production and continue to securitize our mortgage loans.

Note
Payable. Note payable decreased $25.0 million, or 100%, to none at September 30, 2004,
from $25.0 million at December 31, 2003 as a result of the retirement of our note
payable during the third quarter of 2004.

Shareholders
Equity.Shareholders equity increased $355.6 million, or 103%, to $700.6 million
at September 30, 2004, from $345.0 million at December 31, 2003. The increase in
shareholders equity was due primarily to the REIT conversion which resulted in the
vesting and exercise of a majority of Old Saxons outstanding stock warrants,
restricted stock units, and stock options and a corresponding tax benefit of $16.2 million
associated with the stock option exercises, the issuance of an additional 17 million
shares, partially offset by, (1) the capitalization of certain costs associated with the
REIT conversion and stock issuance of $32.6 million and (2) the payment of merger
consideration of $131.4 million. The remaining increase is primarily related to net income
of $75.4 million for the nine months ended September 30, 2004.

We
expect to make quarterly distributions to shareholders totaling, on an annual basis, at
least 90% of our annual REIT taxable income (determined without regard to the deduction
for dividends paid and by excluding any net capital gain). The actual amount and timing of
dividends will be declared by the Board of Directors and will depend on our financial
condition and earnings. Therefore, while we expect our shareholders equity to
increase in the future due to continued growth in our net income at the taxable REIT
subsidiary level, we anticipate shareholders equity, to grow relatively slowly
because we expect to make regular distributions in the future.

---

# Liquidity and Capital
Resources

Cash
increased by $221.6 million during the nine months ended September 30, 2004. The overall
change in cash was comprised of the following:

|                                      | Nine Months
Ended September
30, 2004 | Nine Months Ended
September 30, 2003
|------------------------------------- | ------------------------------------ | ------------------------------------
|
|
|
|Cash provided by operations           |                                      |                                     
|Cash used by investing activities     |                                      |                                     
|Cash provided by financing activities |                                      |                                     
|                                      |                                      |                                     
|Increase (decrease) in cash           |                                      |                                     
|                                      |                                      |                                     

Operating
Activities. Cash provided by operations for the nine months ended September 30, 2004
was $102.8 million, reflecting an improvement of $59.9 million, or 139%, compared to the
prior year. This change was the result of increased net income from operations adjusted
for non-cash items such as depreciation and amortization, deferred income taxes and
provision for mortgage loan losses. 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.

The
overall increase in cash provided by operations for the nine months ended September 30,
2004 was somewhat offset by increases in trustee receivable balances and servicing related
advances of $25.0 million and $12.8 million, respectively. The increase in trustee
receivable balances resulted from the continued growth in the underlying mortgage loan
portfolio. The increase in the servicing related advances resulted from the overall growth
in the portfolio of MSRs.

Investing
Activities. Cash used for investing activities was $1.0 billion for the nine months
ended September 30, 2004. 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 totaled $2.8 billion for the nine months ended September 30,
2004. In addition, MSRs were purchased totaling $52.3 million. These decreases to cash
were partially offset by cash received from principal payments on our mortgage loan
portfolio totaling $1.5 billion and proceeds from the sale of mortgage loans and REO which
totaled $205.2 million and $42.3 million, respectively.

Capital
expenditures during the nine months ended September 30, 2004 were $5.3 million and related
primarily to various information technology enhancements.

Financing
Activities. Cash provided by financing activities during the nine months ended
September 30, 2004 was $1.2 billion and was primarily the result of proceeds from the
issuance of securitization financing of $2.3 billion and net proceeds from additional
warehouse financing of $212.8 million.

These
proceeds were partially offset by principal payments on securitization financing of $1.6
billion, and bond issuance costs of $25.4 million relating to the SAST 2004-1 and SAST 2004-2
securitizations. 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 nine months ended September 30, 2004 used
primarily as cash flow hedges with the objective of hedging interest rate risk related to
our financing activities resulted in an decrease in cash of $5.8 million.

Additional increases in cash provided by financing activities for the nine months ended September 30,
2004 were the result of the issuance of 17 million additional shares of common stock resulting in proceeds of
$386.8 million and $40.0 million as a result of the vesting and exercise of outstanding stock warrants and stock
options.  Additional decreases in cash provided by financing activities for the nine months ended September 30,
2004 were the result of $131.4 million paid as merger consideration, $30.6 million paid related to cash
associated with the REIT conversion and the issuance of additional shares of common stock, and the payment of
$25.0 million for the retirement of the note payable.

---

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 September 30, 2004 to be approximately $333.0 million. Under the
commonly defined working capital definition, we calculated our working capital as of
September 30, 2004 to be $527.5 million. A reconciliation between our working capital
calculation and the common definition of working capital is provided below. Management
focuses on our internally defined calculations of working capital rather than the commonly
used definition of working capital because management believes our definition provides a
better indication of how much liquidity we have available to conduct business at the time
of the calculation.

|Working Capital Reconciliation - September 30, 2004        | Saxon Defined
Working Capital | Commonly
Defined Working
Capital
|---------------------------------------------------------- | ----------------------------- | --------------------------------
|
|
|
|Unrestricted cash                                          |                               |                                 
|Borrowing availability                                     |                               |                                 
|Trustee receivable                                         |                               |                                 
|Accrued interest receivable                                |                               |                                 
|Accrued interest payable                                   |                               |                                 
|Unsecuritized mortgage loans - payments less than one year |                               |                                 
|Warehouse financing facility - payments less than one year |                               |                                 
|Bonds - repurchase agreement - payments less than one year |                               |                                 
|Servicing advances                                         |                               |                                 
|Financed advances  - payments less than one year           |                               |                                 
|Securitized loans - payments less than one year            |                               |                                 
|Securitized debt  - payments less than one year            |                               |                                 
|                                                           |                               |                                 
|Total                                                      |                               |                                 
|                                                           |                               |                                 

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 committed facilities during the third quarter of 2004 include:

Our
$300.0 million syndicated warehouse facility with JP Morgan Chase Bank was amended August
30, 2004 to permit the REIT conversion. The amendment became effective at the time of the
REIT conversion. No changes to facility amounts were made.

Our
$150.0 million repurchase facility with Greenwich Capital Financial Products, Inc. was
amended effective July 16, 2004 extending the termination date of the facility to
September 1, 2004. The facility was further amended effective August 30, 2004 increasing
the facility amount from $150.0 million to $175.0 million, extending the termination date
of the facility to August 29, 2005 and in connection with the REIT conversion.

Our
$175.0 million repurchase facility with Greenwich Capital Financial Products, Inc. was
amended effective August 30, 2004 decreasing the facility amount from $175 million to
$150.0 million, extending the termination date of the facility to June 26, 2006 and in
connection with the REIT conversion.

Our
$300.0 million repurchase facility with Bank of America, N.A. was amended effective August
20, 2004 extending the termination date of the facility to June 23, 2005 and in connection
with the REIT conversion. No changes to facility amounts were made.

---

Our
$300.0 million repurchase facility with Credit Suisse First Boston Mortgage Capital, LLC
was amended effective August 20, 2004 extending the termination date to April 30, 2005 and
in connection with the REIT conversion. No changes to facility amounts were made.

Our
$400.0 million repurchase facility with Merrill Lynch Mortgage Capital, Inc. was amended
effective August 6, 2004 extending the termination date of the facility to November 19,
2004. The facility was further amended effective August 20, 2004 in connection with the
REIT conversion. No changes to facility amounts were made. We expect to renegotiate this
facility to extend the termination date.

At
September 30, 2004 we had committed revolving warehouse and repurchase facilities in the
amount of approximately $1.6 billion. The table below summarizes our facilities and their
expiration dates at September 30, 2004. We believe this level of committed financing will
allow us flexibility to execute our asset-backed securitizations in accordance with our
business plans.

|Counterparty Committed Lines               | Facility Amount | Expiration Date
|------------------------------------------ | --------------- | ---------------
|
|
|
|JP Morgan Chase Bank                       |                 |                
|Greenwich Capital Financial Products, Inc. |                 |                
|Greenwich Capital Financial Products, Inc. |                 |                
|Bank of America, N.A                       |                 |                
|CS First Boston Mortgage Capital, LLC      |                 |                
|Merrill Lynch Mortgage Capital, Inc.       |                 |                
|                                           |                 |                
|Total committed facilities                 |                 |                
|                                           |                 |                

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, which approximate six
months of mortgage production that allows for flexibility in securitization timing.

We
had $640.8 million of warehouse borrowings collateralized by residential mortgages
outstanding at September 30, 2004. 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
$640.8 million we held at September 30, 2004, as our mortgage production and
securitization programs continue.

Our
financing facilities require us to comply with various customary operating and financial
covenants, which generally relate 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, the Company may be prohibited from paying dividends and
making distributions under certain of its financing facilities without the prior approval
of its lenders. In conjunction with the amendments to our committed financing facilities
during the third quarter, our financial covenants were adjusted to take into account the
equity raise contemplated with the REIT conversion. We do not believe that these existing
financial covenants will restrict our operations or growth. We were in compliance with all
covenants under the agreements as of and for the nine months ended September 30, 2004.

---

Securitization
Financing

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 mortgages and home equity loans.

In
addition to the securitizations backed by our mortgage loan portfolio, on July 13, 2004 we
closed a new servicing advance facility, Saxon Advance Receivables Note Trust. The
facility allows for the issuance of multiple series 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. The initial Series
2004-1 Notes included two classes of term notes with a combined face value of $95.0
million and one class of variable funding notes with a maximum of $65.0 million. The
initial amount financed under the Series 2004-1 Notes amounted to $109.2 million. The
September 30, 2004 amount financed under the Series 2004-1 Notes amounted to $105.5
million. The terms of the Series 2004-1 Notes require the Notes to begin to amortize at
various dates through October 2006. In conjunction with the new facility, the existing
Saxon Advance Receivables Backed Certificates 2002-A and Saxon Advance Receivables Backed
Certificates 2003-A facilities were both terminated.

As
of September 30, 2004, securitization financing on our consolidated balance sheet was
approximately $5.0 billion. Generally 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 only from the cash flows
from the real estate specifically collateralizing the debt.

# Off Balance Sheet Items
and Contractual Obligations

In
connection with the approximately $0.8 billion of mortgage loans securitized in off
balance sheet transactions from May 1996 to July 5, 2001, and which are still outstanding
as of September 30, 2004, 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, the 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. At September 30,
2004 our subsidiaries neither had nor expects to incur any material obligation to remove
any such loans, or to provide any such indemnification.

Our
subsidiaries are subject to premium recapture expenses in connection with the sale of
residential mortgage loans. Premium recapture expenses represent repayment of a portion of
certain loan sale premiums to investors on previously sold loans that are repaid within
six months of the loan sale. We accrue an estimate of the potential refunds of premium
received on loan sales based upon historical experience. At both September 30, 2004 and
December 31, 2003, the liability recorded for premium recapture expense was $0.2 million.

Our
subsidiaries have commitments to fund mortgage loans with agreed upon rates of
approximately $265.5 million and $144.3 million at September 30, 2004 and December 31,
2003, 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.

Our
subsidiaries are obligated under non-cancelable operating leases for property and
equipment. Future minimum rental payments for all of our operating leases as of September
30, 2004 and December 31, 2003 totaled $23.6 million and $21.8 million, respectively.

We
anticipate purchasing third party servicing rights for an additional $4.7 billion of
mortgage loans during the fourth quarter of 2004, of which $1.7 billion were purchased in
October 2004 for approximately $12.3 million.

# Other Matters

Related
Party Transactions

At
September 30, 2004 and December 31, 2003, we had $9.8 million and $12.0 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.

Mortgage
Loan Portfolio

Our
net mortgage loan portfolio included on our condensed consolidated balance sheet was $5.6
billion at September 30, 2004. We have generally seen consistent levels on our combined
weighted average LTV, percentage of first mortgage owner occupied and mix of fixed rate
and variable rate mortgage loan characteristics. We saw a slight increase in our weighted
average median credit scores during the first nine months of 2004. We expect these changes
to the composition of our portfolio credit scores to have a positive effect on the
performance of our portfolio with a lower level of losses expected. We expect lower levels
of impaired loans and losses in relation to the portfolio as a whole and this has led to a
lower required allowance for loan loss as a percentage of the mortgage loan portfolio.

---

We
also saw a decrease in the weighted average interest rate on our portfolio during the
first nine months of 2004. This was primarily due to an increase in the credit quality of
our mortgage loan portfolio because higher credit quality loans generally have lower
interest rates and the liquidation of higher weighted average coupon loans. This decrease
in interest rates has caused a decline in the gross yield that we earn on our mortgage
portfolio. If we increase our lower credit quality production in the future, and thereby
increase our percentage of these loans in our portfolio mix, we may increase the weighted
average interest rate on our portfolio and therefore positively impact net interest
income, if managed properly. This will likely also lead to increased delinquencies and
higher provisions for mortgage loan losses, due to lower credit quality of the borrowers.

Overview of Mortgage Loan
Portfolio

|                                                  | September 30, 2004 (1) | December 31, 2003 (1) | Variance
|------------------------------------------------- | ---------------------- | --------------------- | --------
|
|
|
|Average principal balance per loan                |                        |                       | $       
|Combined weighted average initial LTV             |                        |                       |         
|Percentage of first mortgage loans owner occupied |                        |                       |         
|Percentage with prepayment penalty                |                        |                       |         
|Weighted average median credit score (2)          |                        |                       |         
|Percentage fixed rate mortgages                   |                        |                       |         
|Percentage adjustable rate mortgages              |                        |                       |         
|Weighted average interest rate:                   |                        |                      
|Fixed rate mortgages                              |                        |                       |         
|Adjustable rate mortgages                         |                        |                       |         
|Gross margin - adjustable rate mortgages(3)       |                        |                       |         

---

| | (1) | Excludes loans funded but not transmitted to the servicing system at September
          30, 2004 and December 31, 2003 of $172.0 million and $78.8 million,
          respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The credit score is determined based on the median of FICO, Empirica, and
          Beacon credit scores.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (3) | The gross margin is the amount added to the applicable index rate, subject to
          any rate caps and limits specified in the mortgage note, to determine the
          interest rate.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mortgage Loan Portfolio
by Product Type

Through
our taxable REIT subsidiaries we originate and purchase both adjustable rate mortgages, or
ARMs, and fixed rate mortgages, or FRMs. The majority of our FRMs are 30-year mortgages.
Our ARM production is then divided into two categories: floating ARMs and hybrid ARMs. A
floating ARM is a loan on which the interest rate adjusts throughout the life of the loan,
either every six or every 12-months. A hybrid ARM is a loan on which the interest rate is
fixed for the initial 24 to 60-months on the loan term, and thereafter adjusts either
every six or every 12-months. All of our ARMs adjust with reference to a defined index
rate.

The
interest rate on ARMs once the initial rate period has lapsed is determined by adding the
gross margin amount to the index rate. The index most commonly
used in our loan programs is the one-month LIBOR. The gross margin is a predetermined
percentage that, when added to the index, gives the borrower the rate that will eventually
be due. It is common in the beginning stages of an ARM loan to allow the borrower to pay a
rate lower than the rate that would be determined by adding the margin to the index. Over
time, the rate adjusts upward so that the interest rate the borrower pays eventually takes
into account the index plus the entire margin amount.

In
general, our mix of ARMs and FRMs remained relatively consistent during the first nine
months of 2004. We have seen, however, a decrease in our two-year hybrid loans, our three
to five-year hybrid loans, and our floating ARMs, primarily due to the fact that we have
experienced a significant increase in our adjustable interest only product.

---

The
following table sets forth information about our mortgage loan portfolio based on product
type as of September 30, 2004 and December 31, 2003.

|                                        | September 30, 2004
(1) | December 31, 2003 (1) | Variance
|--------------------------------------- | ---------------------- | --------------------- | --------
|
|
|
|Floating adjustable rate mortgages      |                        |                       |         
|Interest only adjustable rate mortgages |                        |                       |         
|Two year hybrids (2)                    |                        |                       |         
|Three - five year hybrids (2)           |                        |                       |         
|                                        |                        |                       |         
|Total adjustable rate mortgages         |                        |                       |         
|                                        |                        |                       |         
|Fifteen year                            |                        |                       |         
|Thirty year                             |                        |                       |         
|Interest only fixed rate mortgages      |                        |                       |         
|Balloons and other (3)                  |                        |                       |         
|                                        |                        |                       |         
|Total fixed rate mortgages              |                        |                       |         
|                                        |                        |                       |         

---

| | (1) | Excludes loans funded but not transmitted to the servicing system at September
          30, 2004 and December 31, 2003 of $172.0 million and $78.8 million,
          respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Hybrid loans are loans that have a fixed interest rate for the initial two to
          five years and after that specified time period, become adjustable rate loans.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Balloon loans are loans with payments calculated according to a 30-year
          amortization schedule, but which require the entire unpaid principal and accrued
          interest to be paid in full on a specified date that is less than 30 years after
          origination.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

Mortgage Loan Portfolio
by Borrower Credit Score

The
following table sets forth information about our mortgage loan portfolio by borrower risk
classification as of September 30, 2004 and December 31, 2003.

|                                              | September 30, 2004 (1) | December 31, 2003 (1) | Variance
|--------------------------------------------- | ---------------------- | --------------------- | --------
|
|
|
|A+ Credit Loans (credit scores > 650) (2)     |                        |                       |         
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         
|A Credit Loans (credit scores 650 - 601) (2)  |                        |                      
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         
|A- Credit Loans (credit scores 600 - 551) (2) |                        |                      
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         
|B Credit Loans (credit scores 550 - 526) (2)  |                        |                      
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         
|C/D Credit Loans (credit scores <=525) (2)    |                        |                      
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         
|Unavailable credit scores                     |                        |                      
|Percentage of portfolio                       |                        |                       |         
|Combined weighted average initial LTV         |                        |                       |         
|Weighted average median credit score          |                        |                       |         
|Weighted average interest rate:               |                        |                      
|Fixed rate mortgages                          |                        |                       |         
|Adjustable rate mortgages                     |                        |                       |         
|Gross margin - adjustable rate mortgages      |                        |                       |         

---

| | (1) | Excludes loans funded but not transmitted to the servicing system at September
          30, 2004 and December 31, 2003 of $172.0 million and $78.8 million,
          respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The letter grade applied to each risk classification reflects our internal
          standards and does not necessarily correspond to classifications used by other
          mortgage lenders. We use our credit grades only for non-conforming and sub-prime
          loans, many of which inherently carry greater risk than conforming and prime
          loans carry.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

During
the first nine months of 2004, our loan originations continued to include a high
percentage of A plus production, which has lowered the weighted average coupon on our
portfolio. As a result, we have experienced declines in our weighted average interest
rates on our portfolio during the first nine months of 2004.

Mortgage Loan Portfolio
by Income Documentation

Typically,
we require income documentation that conforms to Government Sponsored Entity, or GSE,
requirements. We call this a full documentation mortgage loan. We also originate loans
that require less income documentation through our limited documentation mortgage loan
program, and we originate loans with no verification of income through our stated income
mortgage loan program. In general, the risk of loss on the mortgage loan increases as less
income documentation is required during the origination process.

We
have seen very little change in our mortgage loan documentation at September 30, 2004
compared to December 31, 2003. The following table sets forth information about our
mortgage loan portfolio based on income documentation as of September 30, 2004 and
December 31, 2003.

|                      | September 30, 2004 (1) | December 31, 2003 (1) |  |      
|--------------------- | ---------------------- | --------------------- |  | -----
|
|
|
|Full documentation    |                        |                       |  | 72.15
|Limited documentation |                        |                       |  | 4.52 
|Stated income         |                        |                       |  | 23.33

---

| | (1) | Excludes
               loans funded but not transmitted to the servicing system at September 30,
2004                and December 31, 2003 of $172.0 million and $78.8 million,
respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mortgage Loan Portfolio
by Borrower Purpose

We
saw very little change in the mix of borrower purpose within our portfolio during the
first nine months of 2004; however, we did see a slight decrease in our rate or term
refinancings due to a rise in market interest rates. We anticipate an increase in the
future in the percentage of our cash-out refinance mortgage loan portfolio as a result of
increased interest rates and our strategically focused marketing efforts. We expect
borrowers who have credit card or installment debt will still be in the market for cash
out refinance loans as they strive to reduce their monthly payments by extending debt over
a longer period of time to help increase their disposable income. Most of this activity
will likely be within the sub-prime lending sector. The following table sets forth
information about our mortgage loan portfolio based on borrower purpose as of September
30, 2004 and December 31, 2003.

|Borrower Purpose       | September 30, 2004 (1) | December 31, 2003 (1) | Variance
|---------------------- | ---------------------- | --------------------- | --------
|
|
|
|Cash-out refinance     |                        |                       |         
|Purchase               |                        |                       |         
|Rate or term refinance |                        |                       |         

---

| | (1) | Excludes loans funded but not transmitted to the servicing system at September
          30, 2004 and December 31, 2003 of $172.0 million and $78.8 million,
          respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Mortgage Loan Portfolio
Geographic Distribution

We
saw very little shift in the concentration of our geographic distribution during the first
nine months of 2004. We do not expect our portfolio mix to change materially from the
distribution we had at September 30, 2004. We analyze our portfolio for economic trends
from both a macro and a micro level to determine if we have any credit loss exposure
within a specific geographic region. We group the states in the United States by region as
follows:



The
following table sets forth the percentage of our mortgage loan portfolio by region as of
September 30, 2004 and December 31, 2003.

|             | September 30, 2004 (1) | December 31, 2003 (1) | Variance
|------------ | ---------------------- | --------------------- | --------
|
|
|
|South        |                        |                       |         
|California   |                        |                       |         
|Mid Atlantic |                        |                       |         
|Midwest      |                        |                       |         
|West         |                        |                       |         
|Southwest    |                        |                       |         
|New England  |                        |                       |         
|             |                        |                       |         
|Total        |                        |                       |         
|             |                        |                       |         

---

| | (1) | Excludes loans funded but not transmitted to the servicing system at September
          30, 2004 and December 31, 2003 of $172.0 million and $78.8 million,
          respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Securitized Mortgage Loan
Coupon and Prepayment Penalty Coverage

Our
weighted average coupon, or WAC, on our respective securitizations has declined since 2001
due to the declining interest rate environment and our strategic shift in originating
higher credit grade mortgage loans over that period. The current loan balance as a
percentage of original loan balance has declined from December 31, 2003 through the third
quarter of 2004 as our customers either prepay or paydown the mortgage loans by making the
regular contractual principal payments.

The
following tables set forth information about our securitized mortgage loan portfolio at
September 30, 2004 and December 31, 2003.

|                   | Issue Date | Original
Loan
Principal
Balance | Current
Loan
Principal
Balance | Percentage
of Portfolio | Percentage
of
Original
Remaining | WAC
Fixed | WAC Arm  
|------------------ | ---------- | ------------------------------- | ------------------------------ | ----------------------- | -------------------------------- | --------- | ---------
|
|
|
|September 30, 2004 |            |                                 |                                |                         |                                  |           |          
|SAST 2001-2        |            |                                 |                                | 8/2/2001                |                                  | $         | 650,410  
|SAST 2001-3        |            |                                 |                                | 10/11/2001              |                                  | $         | 699,999  
|SAST 2002-1        |            |                                 |                                | 3/14/2002               |                                  | $         | 899,995  
|SAST 2002-2        |            |                                 |                                | 7/10/2002               |                                  | $         | 605,000  
|SAST 2002-3        |            |                                 |                                | 11/8/2002               |                                  | $         | 999,999  
|SAST 2003-1        |            |                                 |                                | 3/6/2003                |                                  | $         | 749,996  
|SAST 2003-2        |            |                                 |                                | 5/29/2003               |                                  | $         | 599,989  
|SAST 2003-3        |            |                                 |                                | 9/16/2003               |                                  | $         | 1,000,000
|SAST 2004-1        |            |                                 |                                | 2/19/2004               |                                  | $         | 1,099,999
|SAST 2004-2        |            |                                 |                                | 7/27/2004               |                                  | $         | 1,199,994
|                   |            |                                 |                                |                         |                                  |           |          
|Total              |            |                                 |                                |                         |                                  | $         | 8,505,381
|                   |            |                                 |                                |                         |                                  |           |          
|December 31, 2003  |            |                                
|SAST 2001-2        |            |                                 |                                | 8/2/2001                |                                  | $         | 650,410  
|SAST 2001-3        |            |                                 |                                | 10/11/2001              |                                  | $         | 699,999  
|SAST 2002-1        |            |                                 |                                | 3/14/2002               |                                  | $         | 899,995  
|SAST 2002-2        |            |                                 |                                | 7/10/2002               |                                  | $         | 605,000  
|SAST 2002-3        |            |                                 |                                | 11/8/2002               |                                  | $         | 999,999  
|SAST 2003-1        |            |                                 |                                | 3/6/2003                |                                  | $         | 749,996  
|SAST 2003-2        |            |                                 |                                | 5/29/2003               |                                  | $         | 599,989  
|SAST 2003-3        |            |                                 |                                | 9/16/2003               |                                  | $         | 1,000,000
|                   |            |                                 |                                |                         |                                  |           |          
|Total              |            |                                 |                                |                         |                                  | $         | 6,205,388
|                   |            |                                 |                                |                         |                                  |           |          

We
experienced slower prepayments of our mortgage loans during the third quarter of 2004
compared to the second quarter of 2004 due to an increase in interest rates. A substantial
portion of our loans contain prepayment penalties. Borrowers who accept the prepayment
penalty receive a lower interest rate on their mortgage loan. 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
expect that prepayment speeds will continue to slow in future periods if market interest
rates continue to increase. This would positively impact interest income; however, we
would also anticipate a decrease in the prepayment penalty income we receive.

|                   |  |  | 12 Month Constant
Prepayment Rate
(Annual Percent) | Life-to-date
Constant Prepayment
Rate (Annual
Percent)
|------------------ |  |  | -------------------------------------------------- | ------------------------------------------------------
|
|
|
|September 30, 2004 |  |  |                                                    |                                                       
|SAST 2001-2        |  |  |                                                    | 8/2/2001                                              
|SAST 2001-3        |  |  |                                                    | 10/11/2001                                            
|SAST 2002-1        |  |  |                                                    | 3/14/2002                                             
|SAST 2002-2        |  |  |                                                    | 7/10/2002                                             
|SAST 2002-3        |  |  |                                                    | 11/8/2002                                             
|SAST 2003-1        |  |  |                                                    | 3/6/2003                                              
|SAST 2003-2        |  |  |                                                    | 5/29/2003                                             
|SAST 2003-3        |  |  |                                                    | 9/16/2003                                             
|SAST 2004-1        |  |  |                                                    | 2/19/2004                                             
|SAST 2004-2        |  |  |                                                    | 7/27/2004                                             
|December 31, 2003  |  | 
|SAST 2001-2        |  |  |                                                    | 8/2/2001                                              
|SAST 2001-3        |  |  |                                                    | 10/11/2001                                            
|SAST 2002-1        |  |  |                                                    | 3/14/2002                                             
|SAST 2002-2        |  |  |                                                    | 7/10/2002                                             
|SAST 2002-3        |  |  |                                                    | 11/8/2002                                             
|SAST 2003-1        |  |  |                                                    | 3/6/2003                                              
|SAST 2003-2        |  |  |                                                    | 5/29/2003                                             
|SAST 2003-3        |  |  |                                                    | 9/16/2003                                             

Mortgage
Loan Production

Overview

Our
subsidiaries originate or purchase mortgage loans through our three separate production
channels, wholesale, correspondent, and retail. Having three production channels allows us
to diversify our production without becoming reliant on any one particular segment of the
mortgage loan market. Mortgage loan production was $999.6 million for the three months
ended September 30, 2004, which represents a 42% increase over our three months ended
September 30, 2003 production of $704.2 million. Mortgage loan production was $2.7 billion
for the nine months ended September 30, 2004, which represents a 26% increase over our
nine months ended September 30, 2003 production of $2.2 billion. Our production growth
during the third quarter of 2004 was primarily due to improved market and pricing
conditions, as well as the marketplace perception that interest rates will rise in the
near future. We expect the positive production trends to continue during the remainder of
2004. We also experienced a significant increase in the number of loans originated for
both the three and nine months ended September 30, 2004 compared to the three and nine
months ended September 30, 2003. Of the total mortgage loan production of $2.7 billion for
the nine months ended September 30, 2004, wholesale comprised 41%, correspondent comprised
26%, and retail comprised 26%, with the remaining 7%, or $186.8 million, representing
called loans purchased from previously securitized off-balance sheet pools during the
quarter. We retain the option as master servicer to call loans once the balance is below
10% of the original balance of the securitization. We routinely review the financial
consequences of calling loans, and it is frequently to our advantage to do so since the
loans that we place into our portfolio are performing assets.



---

We
saw a slight decrease in our average loan balance for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2004; however we saw a significant
increase in our average loan balance in the third quarter of 2004 compared to the third
quarter of 2003, as well as a significant increase in our number of loans originated for
the third quarter of 2004 and the first nine months of 2004. We saw an increase in our
weighted average median credit scores during the first nine months of 2004. The decrease
in our average loan balance for the first nine months of 2004 was attributable to the
loans we called during the first and third quarters of 2004 having a much lower average
balance than new production since these loans are six to seven years old. We also saw an
increase in the weighted average interest rates associated with fixed rate mortgages and a
decrease in the weighted average interest rates on our adjustable rate mortgage production
during the first nine months of 2004. Our volume of fixed rate first mortgages has
declined in response to our raising of interest rates on these products, while our volume
of fixed rate second mortgages has remained constant. Because second mortgages also have
significantly higher interest rates than first mortgages, these two factors combined have
pushed the fixed rate mortgage weighted average interest rates higher. Our adjustable rate
mortgage rates have declined in order to remain competitive in the marketplace. The
percentage of our production with prepayment penalties decreased to 66% for the first nine
months of 2004 from 74% from the first nine months of 2003, primarily as a result of the
seasoned portfolio of called loans we acquired during the first and third quarters of 2004
having no prepayment penalties in effect. Further discussion of each channels
mortgage loan production can be found in Business Segment Results.

The
following table sets forth selected information about our total loan production and
purchases for the three and nine months ended September 30, 2004 and 2003.

|                                         | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|---------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Loan production                          |                                          |                                        
|Average principal balance per loan       |                                          |                                        
|Number of loans originated               |                                          |                                        
|Combined weighted average initial LTV    |                                          |                                        
|Percentage of first mortgage loans owner |                                          |                                        
|occupied                                 |                                          |                                        
|Percentage with prepayment penalty       |                                          |                                        
|Weighted average median credit score (2) |                                          |                                        
|Percentage fixed rate mortgages          |                                          |                                        
|Percentage adjustable rate mortgages     |                                          |                                        
|Weighted average interest rate:          |                                          |                                        
|Fixed rate mortgages                     |                                          |                                        
|Adjustable rate mortgages                |                                          |                                        
|Gross margin - adjustable rate           |                                          |                                        
|mortgages (3)                            |                                          |                                        

---

| | (1) | Amounts for the nine months ended September 30, 2004 include $186.8 million in
          called loans.
| | --- | ------------------------------------------------------------------------------------------------------

| | (2) | The credit score is determined based on the median of FICO, Empirica, and
          Beacon credit scores.
| | --- | ---------------------------------------------------------------------------------------------------------

| | (3) | The gross margin is the amount added to the applicable index rate, subject to
          rate caps and limits, to determine the interest rate.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

Loan Production by
Product Type

We
saw an increase in our interest only production and a decrease in our hybrid and our fixed
mortgage production in the first nine months of 2004 as compared to the first nine months
of 2003. During the three and nine months ended September 30, 2004, approximately 37% and
29% of our production was adjustable rate interest only mortgages, compared to 4% and 1%
for the three and nine months ended September 30, 2003, respectively. The following table
shows the composition of our loan production based on product type for the three and nine
months ended September 30, 2004 and 2003.

---

|                                        | For the Three Months Ended September 30, | For the Nine Months Ended September 30,
|--------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Interest only adjustable rate mortgages |                                          |                                        
|Two year hybrids (2)                    |                                          |                                        
|Three -five year hybrids (2)            |                                          |                                        
|Floating adjustable rate mortgages      |                                          |                                        
|                                        |                                          |                                        
|Total adjustable rate mortgages         |                                          |                                        
|                                        |                                          |                                        
|Fifteen year                            |                                          |                                        
|Thirty year                             |                                          |                                        
|Interest only fixed rate mortgages      |                                          |                                        
|Balloons and other (3)                  |                                          |                                        
|                                        |                                          |                                        
|Total fixed rate mortgages              |                                          |                                        
|                                        |                                          |                                        

---

| | (1) | Includes
all called loans.
| | --- | --------------------------

| | (2) | Hybrid
loans are loans that have a fixed interest rate for the initial two to
               five years and after that specified time period, become adjustable rate
loans.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Balloon
loans are loans with payments calculated according to a 30-year
               amortization schedule, but which require the entire unpaid principal and
accrued                interest to be paid in full on a specified date that is less than
30 years after                origination.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





---

Loan Production by
Borrower Credit Score

The following table shows the
composition of our loan production by borrower risk classification for the three and nine
months ended September 30, 2004 and 2003.

|                                               | For the Three Months Ended September 30, | For the Nine Months Ended September 30,
|---------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|A+ Credit Loans (credit scores > 650) (2)      |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate mortgages       |                                          |                                        
|A Credit Loans (credit scores 650 - 601)(2)    |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate                 |                                          |                                        
|mortgages                                      |                                          |                                        
|A- Credit Loans (credit Scores 600 - 551)(2)   |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate                 |                                          |                                        
|mortgages                                      |                                          |                                        
|B Credit Loans (credit Scores 550 - 526)(2)    |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate mortgages       |                                          |                                        
|C /D Credit Loans (credit Scores <=525)(2)     |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate mortgages       |                                          |                                        
|Unavailable credit scores                      |                                          |                                        
|Percentage of total purchases and originations |                                          |                                        
|Combined weighted average initial LTV          |                                          |                                        
|Weighted average median credit score           |                                          |                                        
|Weighted average interest rate:                |                                          |                                        
|Fixed rate mortgages                           |                                          |                                        
|Adjustable rate mortgages                      |                                          |                                        
|Gross margin - adjustable rate mortgages       |                                          |                                        

---

| | (1) | Includes
all called loans.
| | --- | --------------------------

| | (2) | The
letter grade applied to each risk classification reflects our internal standards and does
not necessarily correspond to          classifications used by other mortgage lenders.
 We use our credit grades only for non-conforming and sub-prime loans, many          of
which inherently carry greater risk than conforming and prime loans carry.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

We
continue to experience a decline in the interest rates on our loans due to a significant
increase in our higher credit quality production; however during the third quarter of
2004, our fixed rate mortgage weighted average coupons have increased slightly over the
third quarter of 2003.





Loan Production by Income
Documentation

For
the third quarter of 2004 and the first nine months of 2004, we saw an increase in our
full documentation loan program. The following table shows the composition of our loan
production based on income documentation for the three and nine months ended September
30, 2004 and 2003.

|                      | For the Three Months Ended September 30,
|--------------------- | ----------------------------------------
|
|
|
|Full documentation    |                                         
|Limited documentation |                                         
|Stated income         |                                         

|                      | For the Nine Months Ended September 30,
|--------------------- | ---------------------------------------
|
|
|
|Full documentation    |                                        
|Limited documentation |                                        
|Stated income         |                                        

---

| | (1) | Includes
all called loans.
| | --- | --------------------------

---





Loan Production by
Borrower Purpose

For
the three and nine months ended September 30, 2004 we saw a decrease in our rate or term
refinance loan production, with an increase in our purchase loan production as compared to
the three and nine months ended September 30, 2003. Even in years where we have
experienced significant declines in mortgage interest rates, we have remained focused on
cash-out refinance production. We anticipate the percentage of our purchase mortgage loan
production may continue to increase in the future as a result of increased interest rates
and our strategically focused marketing efforts.The following table shows the
composition of our loan production based on borrower purpose for the three and nine months
ended September 30, 2004 and 2003.

|                       | For the Three Months Ended September
30, | For the Nine Months Ended
September 30,
|---------------------- | ---------------------------------------- | ---------------------------------------
|
|
|
|Cash-out refinance     |                                          |                                        
|Purchase               |                                          |                                        
|Rate or term refinance |                                          |                                        

---

| | (1) | Includes
all called loans.
| | --- | --------------------------





---

Geographic Distribution

We
have seen very little shift in our production levels by region for the nine months ended
September 30, 2004 compared to the nine months ended September 30, 2003. The following
table sets forth the percentage of all loans originated or purchased by us by region for
the three and nine months ended September 30, 2004 and 2003.

|             | For the Three Months Ended September 30, | For the Nine Months Ended September 30,
|------------ | ---------------------------------------- | ---------------------------------------
|
|
|
|South        |                                          |                                        
|California   |                                          |                                        
|Mid Atlantic |                                          |                                        
|Midwest      |                                          |                                        
|West         |                                          |                                        
|Southwest    |                                          |                                        
|New England  |                                          |                                        
|             |                                          |                                        
|Total        |                                          |                                        
|             |                                          |                                        

---

| | (1) | Includes
all called loans.
| | --- | --------------------------





---

# 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
our net 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.

For
further information on our interest rate risk profile and our types of managed interest
rate risks, refer to our 2003 Form 10-K for the year ended December 31, 2003.

Maturity
and Repricing Information

As
shown in the tables below, from December 31, 2003 to September 30, 2004, there was an
increase in our hedging activity due to the addition of new mortgage assets to our
portfolio and the belief that interest rates would increase in the future. The following
table summarizes the notional amounts, expected maturities and weighted average strike
rates for interest rate floors, caps, swaps, and futures that we held as of September 30,
2004 and December 31, 2003.

|                         | As of September 30, 2004
|------------------------ | ------------------------
|
|
|                         |                         
|Caps bought - notional:  |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Caps sold - notional:    |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Futures sold - notional: |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Swaps bought - notional: |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Puts bought - notional:  |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Puts sold - notional:    |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|Calls bought - notional: |                         
|                         |                         
|Weighted average rate    |                         
|                         |                         
|                         |                         
|Total notional:          |                         
|                         |                         

|                         | As of December 31, 2003
|------------------------ | -----------------------
|
|
|Caps bought - notional:  |                        
|                         |                        
|Weighted average rate    |                        
|                         |                        
|Caps sold - notional:    |                        
|                         |                        
|Weighted average rate    |                        
|                         |                        
|Futures sold - notional: |                        
|                         |                        
|Weighted average rate    |                        
|                         |                        
|Puts bought - notional:  |                        
|                         |                        
|Weighted average rate    |                        
|                         |                        
|Puts sold - notional:    |                        
|                         |                        
|Weighted average rate    |                        
|                         |                        
|                         |                        
|Total notional:          |                        
|                         |                        

---

Analyzing Rate Shifts

In
our method of analyzing the potential effect of interest rate changes, we study the
published forward yield curves for applicable interest rates and instruments, and we then
develop various interest rate scenarios for those yield curves, using scenarios that we
develop to provide relevant assumptions concerning economic growth rates, market
conditions, and inflation rates, as well as the timing, duration, and amount of
corresponding Federal Reserve Bank, or FRB, responses, in order to determine hypothetical
impacts on relevant interest rates. We use this method of analysis as a means of valuation
to manage our interest rate risk on our mortgage loan financing over long periods of time.
The table below represents the change in our net interest income 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 September 30, 2004 and the four scenarios that we
used as of December 31, 2003.

|                     | Effect on Net Interest Income of Assumed Changes in Interest Rates Over a Three
Year Period
|-------------------- | -------------------------------------------------------------------------------------------
|
|
|
|Change in net        |                                                                                            
|interest income from |                                                                                            
|mortgage portfolio   |                                                                                            
|Change in net        |                                                                                            
|interest income from |                                                                                            
|hedging instruments: |                                                                                            
|Futures              |                                                                                            
|Swaps                |                                                                                            
|Puts                 |                                                                                            
|Calls                |                                                                                            
|Caps                 |                                                                                            
|                     |                                                                                            
|Total change in net  |                                                                                            
|interest income from |                                                                                            
|hedging instruments  |                                                                                            
|                     |                                                                                            
|Net change in net    |                                                                                            
|interest income      |                                                                                            
|                     |                                                                                            

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 FRB, with the assumption that the economy is growing
at a pace inconsistent with a FRB desire to maintain a stable or declining inflation
environment. Under this scenario, we assume a hypothetical interest rate increase of
approximately 350 basis points over a two-year period beginning in second quarter 2004.
Such an increase in interest rates is aggressive by historical standards, and provides us
with a view of the net interest income changes of our mortgage loans by assuming a
comparable rise in financing rates. Making these assumptions at September 30, 2004, we
estimate that our net interest income from our mortgage loan portfolio would decrease by
$95.2 million. However, we estimate that this amount would be partially offset by an
increase in our hedging instruments of $34.1 million. The net effect of this scenario
would be a potential decline of $61.1 million in our net interest income from our
portfolio. At December 31, 2003, we estimated that our net interest income could decline
by approximately $6.7 million under this scenario.

Scenario
2  In this scenario we assume a slightly less severe hypothetical rise in interest
rates compared to Scenario 1 in which the FRB doesnt begin raising interest rates
until the end of the second quarter of 2004 and then pushes interest rates higher at a
faster pace as the economy expands and inflation increases. Under this scenario, we assume
that interest rates have the potential to rise approximately 375 basis points, over a
three-year period beginning in the second quarter of 2004. Making these assumptions at
September 30, 2004, we estimate that our net interest income from our mortgage loan
portfolio would decrease by $46.3 million. However, we estimate that this amount would be
partially offset by an increase in our hedging instruments of $22.0 million. The net
effect of this scenario would be a potential decline of $24.3 million in our net interest
income from our portfolio. At December 31, 2003, we estimated that our net interest income
could increase by approximately $1.9 million under this scenario.

Scenario
3  In this scenario we assume relatively stable hypothetical short-term rates. This
scenario assumes that the FRB is relatively patient, by historical standards, as the
economy maintains a range of low growth, and thus the FRB is more concerned with economic
expansion than inflation. Interest rates are assumed to rise modestly with only an
approximate 300 basis point increase over three years beginning in the second quarter of
2004. Given these assumptions at September 30, 2004, we estimate that our net interest
income from our mortgage loan portfolio and hedging instruments would increase by $3.6
million and $3.8 million, respectively, for a total potential increase in net interest
income of $7.4 million. At December 31, 2003, we estimated that our net interest income
could increase by approximately $10.1 million under this scenario.

Scenario
4 This scenario assumes that the FRB determines that it must maintain stable rates
in the near term, and then begins to reverse previous interest rate cuts in year two, and
more aggressively in year three, accounting for an approximate 250 basis point increase in
rates over the three year period. Given these assumptions at September 30, 2004, we
estimate that our net interest income from our mortgage portfolio would increase by
approximately $39.8 million, which would partially be offset by an estimated decline in
net interest income from hedging instruments of approximately $8.0 million, for a total
potential increase in net interest income of approximately $31.8 million. At December 31,
2003, we estimated that our net interest income could increase by approximately $38.9
million under this scenario.

---

The
hypothetical yield curve data for each scenario as of September 30, 2004 and December 31,
2003 are as follows:

|        | September 30, 2004
|------- | ------------------
|
|
|Oct-04  |                   
|Dec-04  |                   
|Mar-05  |                   
|Jun-05  |                   
|Sep-05  |                   
|Dec-05  |                   
|Mar-06  |                   
|Jun-06  |                   
|Sep-06  |                   
|Dec-06  |                   
|Mar-07  |                   
|Jun-07  |                   
|Sept-07 |                   

---

| | (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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|       | December 31, 2004
|------ | -----------------
|
|
|Jan-04 |                  
|Mar-04 |                  
|Jun-04 |                  
|Sep-04 |                  
|Dec-04 |                  
|Mar-05 |                  
|Jun-05 |                  
|Sep-05 |                  
|Dec-05 |                  
|Mar-06 |                  
|Jun-06 |                  
|Sep-06 |                  
|Dec-06 |                  

---

| | (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

As
of the end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer carried out an evaluation, with the participation of other members of
management as they deemed appropriate, of the effectiveness of the design and operation of
our disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based
upon, and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and procedures are
effective, in all material respects, in timely alerting them to material information
relating to us (and our consolidated subsidiaries) required to be included in the periodic
reports we are required to file and submit to the SEC under the Exchange Act. There have
been no changes in our internal controls over financial reporting during the third quarter
of 2004 that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.

---

# PART II. Other
Information

# 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 filed on November 20, 2002 in
the Circuit Court of the Third Judicial Circuit, Madison County, Illinois, Case No.
02L1557. This is a class action suit alleging consumer fraud and unjust enrichment under
Illinois law and similar laws of other states. Ms. Coleman alleges that she was improperly
charged a fee for overnight delivery of mortgage loan documents. In December 2002,
defendants filed a Petition to Compel Arbitration in the United States District Court for
the Southern District of Illinois. The Motion to Compel Arbitration in federal court was
denied on jurisdictional grounds. We appealed the District Courts decision to the
United States Court of Appeals for the Seventh Circuit. The Court of Appeals affirmed the
District Courts decision. We filed a motion to compel arbitration in state court,
which was denied during the third quarter of 2004. We plan to appeal the denial of our
Motion to Compel Arbitration to the 5th District Court of Appeals for the State
of Illinois. If the plaintiff achieves nationwide class certification and the case is
decided adversely to Americas MoneyLine, Inc., the potential loss could materially
and adversely affect our earnings. At the present time, however, we cannot predict the
outcome of the case.

Margarita
Barbosa, et al. v. Saxon Mortgage Services, Inc. (f/k/a Meritech Mortgage Services, Inc.)
et al., is a legal proceeding previously reported by the Company. The Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004 contains a description of this
matter. There were no material developments in this legal proceeding during the quarter
ended September 30, 2004.

Shirley
Hagan, et al. v. Concept Mortgage Corp., Saxon Mortgage, Inc. and others is a class
action filed on February 27, 2003 in the Circuit Court of Wayne County, Michigan. The suit
alleges that the defendant mortgage companies, including Saxon Mortgage, Inc., violated
the Home Ownership and Equity Protection Act, the Truth in Lending Act, and the Real
Estate Settlement Procedures Act with respect to the fees and interest rate charged to
plaintiff and the related loan disclosures, in connection with the plaintiffs loan
and the loans of a similarly situated class of borrowers. The suit seeks rescission of the
affected loans, damages with interest, and costs and attorneys fees. We removed the case
to federal court and filed a motion to compel arbitration, which was granted by the
Magistrate Judge and subsequently appealed by the plaintiff. The District Court affirmed
the Magistrate Judges order, and arbitration was initiated. In August, 2004, the
parties entered into a settlement agreement pursuant to which we agreed to reduce the
outstanding balance, and interest rate, of the plaintiffs loan and pay the
plaintiffs legal fees in the approximate amount of $30,000. We are continuing to
perform our obligations under the settlement agreement.

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

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

Use
of Proceeds

On
September 20, 2004, the SEC declared effective the Companys registration statement
on Form S-11 (File No. 333-116028) in connection with its initial public offering of
common stock. Friedman, Billings, Ramsey & Co., Inc. acted as the sole book runner and
lead manager in the offering. The Company initially registered $500,000,000 in shares of
its common stock and sold 17.0 million shares at $22.75 per share, or $386.8 in the
aggregate on September 24, 2004.

From
September 20, 2004 through September 30, 2004, the Company estimates that it incurred
approximately $24.9 million in expenses in connection with the offering, comprised of
underwriting discounts and commissions, financial advisory fees, and other offering
expenses. Of that amount, $0.5 million consisted of direct payments to our attorneys and
various other organizations and $24.4 million consisted of indirect payments to our
underwriters. After deducting the expenses described above, the net offering proceeds the
Company received in the offering was approximately $361.9 million.

From
September 20, 2004 through September 30, 2004, the Company used the net proceeds from this
offering as follows:

- Approximately $131.4 million to pay the cash component of the merger consideration due to
persons and entities that held shares of Old Saxon Capital common stock immediately before
the effective time of the merger; and
- $230.5 million for working capital.

Item 3. Defaults Upon
Senior Securities

| | None.
| | -----

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

On
September 13, 2004, Old Saxon held its annual stockholders meeting. There were
28,773,200 shares of common stock outstanding entitled to vote, and a total of 19,401,577
(67%) were represented at the meeting in person or by proxy for proposals 1, 3, and 4 and
22,715,200 (79%) were represented at the meeting in person or by proxy for proposal 2. The
following summarizes vote results of proposals submitted to our stockholders:

1.     Proposal
to approve the Agreement and Plan of merger dated July 12, 2004, among
               Saxon Capital, Inc., Saxon REIT, Inc., Saxon         Capital Holdings, Inc., and
Saxon                Merger Corporation pursuant to which the REIT conversion was
effected.

|FOR        | AGAINST | ABSTAIN | BROKER NON-VOTES
|---------- | ------- | ------- | ----------------
|19,342,349 | 58,518  | 710     | 3,313,623       

2.    
          Proposal to elect two directors for a term of one year.

|NAME                 | FOR        | WITHHELD 
|-------------------- | ---------- | ---------
|Edward G. Harshfield | 16,807,133 | 5,908,067
|Michael L. Sawyer    | 17,543,100 | 5,172,100

3.    
          Proposal to approve Old Saxons 2004 Incentive Compensation Plan.

|FOR       | AGAINST    | ABSTAIN | BROKER NON-VOTES
|--------- | ---------- | ------- | ----------------
|8,408,468 | 10,989,967 | 3,142   | 3,313,623       

4.    
          Proposal to approve Old Saxons 2004 Employee Stock Purchase Plan.

|FOR        | AGAINST | ABSTAIN | BROKER NON-VOTES
|---------- | ------- | ------- | ----------------
|18,692,373 | 706,336 | 2,868   | 3,313,623       

---

Item 5. Other Information

| | None.
| | -----

Item 6. Exhibits

| | 2.1 | Agreement
and Plan of Merger, dated July 12, 2004, among Registrant, Old Saxon Capital, Saxon
Capital Holdings,                   Inc., and Saxon Merger Corporation(1)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1 | Articles
of Amendment and Restatement of Registrant(2)
| | --- | ------------------------------------------------------

| | 3.2 | Amended
and Restated Bylaws of Registrant(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 SEC upon request.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Amended
and Restated Employment Agreement with Michael L. Sawyer(4)
| | ---- | -------------------------------------------------------------------

| | 10.2 | Amended
and Restated Employment Agreement with Robert B. Eastep(4)
| | ---- | ------------------------------------------------------------------

| | 10.3 | Amended
and Restated Employment Agreement with Bradley D. Adams(4)
| | ---- | ------------------------------------------------------------------

| | 10.4 | Saxon
Capital, Inc. 2001 Stock Incentive Plan(5)
| | ---- | ------------------------------------------------

| | 10.5 | Saxon
Capital, Inc. 2004 Employee Stock Purchase Plan(6)
| | ---- | --------------------------------------------------------

| | 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 Amendment No. 4 to the Companys                registration
statement on Form S-4 (No. 333-112834) filed with the SEC on July                14,
2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated
herein by reference to the Companys registration statement on                Form
S-11 (No. 333-116028) filed with the SEC on May 28, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated
herein by reference to Amendment No. 3 to the Companys                registration
statement on Form S-4 (No. 333-112834) filed with the SEC on June                18,
2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated
herein by reference to the Companys Current Report on Form                8-K (File
No. 000-50945) filed with the SEC on September 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated
herein by reference to Saxon Capital, Inc.s registration                statement
on Form S-1 (File No. 333-71052) filed with the SEC on October 5,                2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

|Dated: November 9, 2004 |  | SAXON CAPITAL, INC.By: /s/ Michael L. Sawyer
Michael L. SawyerChief Executive Officer (authorized officer of registrant)
|----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------

|Dated: November 9, 2004 |  | By: /s/ Robert B. Eastep
Robert B. EastepChief Financial Officer (principal financial officer)
|----------------------- |  | ------------------------------------------------------------------------------------------------------------