______________________________________________________________________________





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


_____________________


**FORM
      10-Q/A**


**(Amendment
      No. 1)**





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


For
      the
      Quarterly Period Ended September 30, 2005


or


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


For
      the
      Transition Period from   to





Commission
      File Number 001-32447


_____________________





**SAXON
      CAPITAL, INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





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





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


_____________________





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes
            x
            No
            o





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





Yes
            x
            No
            o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes
            o
            No
            x





As
      of
      November 3, 2005 there were 49,980,135 shares of our common stock, par value
      $0.01 per share, outstanding.




















Explanatory
      Note





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





For
      additional information on the restatement see Note 12, Restatement, to the
      Financial Statements presented under Item 1 of this report.








**TABLE
                OF CONTENTS****Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Balance Sheets at September
                30, 2005 and December 31, 2004Unaudited
                Consolidated Statements of
                Operations for the three and nine months ended September 30, 2005
                and
                September 30, 2004Unaudited
                Consolidated Statement of Shareholders’ Equity
                for the nine months ended September 30, 2005 and September 30,
                2004Unaudited
                Consolidated Statements of Cash Flows for the
                nine months ended September 30, 2005 and September 30,
                2004Notes
                to Unaudited Consolidated Financial
                StatementsItem
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures About Market
                RiskItem
                4.
            Controls
                and Procedures**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                ProceedingsItem
                2.
            Unregistered
                Sales of Equity Securities and Use of
                ProceedsItem
                3.
            Defaults
                Upon Senior SecuritiesItem
                4.
            Submission
                of Matters to a Vote of Security
                HoldersItem
                5.
            Other
                InformationItem
                6.
            Exhibits








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


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





**Saxon
                Capital, Inc.****Consolidated
                Balance
                Sheets****($
                in thousands, except per share data)****(unaudited)****September
                30, 2005 (as restated - see Note 12)**
            **December
                31, 2004 (as restated - see Note 12)****Assets:**Cash
            $9,493
            $12,852Accrued
                interest receivable, net of allowance of $14,413 and $12,418,
                respectively
            36,755
            37,803Trustee
                receivable
            130,117
            112,062Mortgage
                loan portfolio
            6,245,201
            5,997,376Allowance
                for loan losses
            (34,762)
            (24,892)Net
                mortgage loan portfolio
            6,210,439
            5,972,484Restricted
                cash
            142,233
            1,495Servicing
                related advances
            152,299
            109,848Mortgage
                servicing rights, net
            138,943
            98,995Real
                estate owned
            35,783
            34,051Derivative
                assets
            33,264
            17,568Deferred
                tax asset
            54,418
            27,506Other
                assets
            67,319
            83,865Total
                assets
            $7,011,063
            $6,508,529**Liabilities
                and shareholders’ equity:****Liabilities:**Accrued
                interest payable
            $7,044
            $8,045Dividends
                payable
            —
            28,909Warehouse
                financing
            144,100
            600,646Securitization
                financing
            6,195,417
            5,258,344Derivative
                liabilities
            7,025
            2,636Other
                liabilities
            25,493
            22,876Total
                liabilities
            6,379,079
            5,921,456Commitments
                and contingencies - Note 9**Shareholders’
                equity:**Common
                stock, $0.01 par value per share, 100,000,000 shares authorized;
                shares
                issued and outstanding: 49,980,135 and 49,849,386 as of September
                30, 2005
                and December 31, 2004, respectively
            501
            498Additional
                paid-in capital
            632,702
            625,123Accumulated
                other comprehensive loss, net of tax effect of $(13) and
                $(21)
            (297)
            (474)Accumulated
                deficit
            (922)
            (38,074)Total
                shareholders’ equity
            631,984
            587,073Total
                liabilities and shareholders’ equity
            $7,011,063
            $6,508,529





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










**Saxon
                Capital, Inc.****Consolidated
                Statements of
                Operations****(in
                thousands, except per share data)****(unaudited)****Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,****2005
                (as restated - see Note 12)**
            **2004
                (as restated - see Note 12)**
            **2005
                (as restated - see Note 12)**
            **2004
                (as restated - see Note 12)****Revenues:**Interest
                income
            $116,101
            $101,396
            $339,600
            $301,779Interest
                expense
            (68,807)
            (40,030)
            (185,285)
            (105,552)Net
                interest income
            47,294
            61,366
            154,315
            196,227Provision
                for mortgage loan losses
            (19,092)
            (10,775)
            (30,828)
            (22,004)Net
                interest income after provision
              for
                mortgage loan losses
            28,202
            50,591
            123,487
            174,223Servicing
                income, net of amortization and impairment
            19,063
            6,636
            49,853
            16,574Derivative
                gains (losses)
            19,890
            (15,790)
            26,040
            (5,027)Gain
                on sale of assets
            44
            220
            2,451
            3,079Total
                net revenues, gains and losses
            67,199
            41,657
            201,831
            188,849**Expenses:**Payroll
                and related expenses
            21,324
            20,133
            59,330
            54,987General
                and administrative expenses
            16,918
            13,841
            48,277
            38,310Depreciation
            1,558
            1,393
            4,401
            4,462Other
                expense
            1,286
            1,796
            3,127
            4,591Total
                expenses
            41,086
            37,163
            115,135
            102,350Income
                before taxes
            26,113
            4,494
            86,696
            86,499Income
                tax (benefit) expense
            (5,796)
            (9,294)
            (6,179)
            18,084**Income
                before cumulative effect of change in accounting
                principle**
            31,909
            13,788
            92,875
            68,415Cumulative
                effect of change in accounting principle
            —
            —
            31
            —**Net
                income**
            $31,909
            $13,788
            $92,906
            $68,415**Earnings
                per share:**Weighted
                average common shares - basic
            49,942
            31,525
            49,892
            29,637Weighted
                average common shares - diluted
            50,945
            33,565
            50,753
            32,064Basic
                earnings per common share before cumulative effect of change in accounting
                principle
            $0.64
            $0.44
            $1.86
            $2.31Cumulative
                effect of change in accounting principle
            —
            —
            —
            —Basic
                earnings per common share
            $0.64
            $0.44
            $1.86
            $2.31Diluted
                earnings per common share before cumulative effect of change in accounting
                principle
            $0.63
            $0.41
            $1.83
            $2.13Cumulative
                effect of change in accounting principle
            —
            —
            —
            —Diluted
                earnings per common share
            $0.63
            $0.41
            $1.83
            $2.13Dividends
                declared per common share
            $0.55
            —
            $1.10
            —


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










**Saxon
                Capital, Inc.****Consolidated
                Statement of Shareholders’
                Equity****($
                in thousands)****(unaudited)****Common
                Shares Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **Accumulated**
              **Deficit**
            **Total****Balance
                as of January 1, 2005 (as restated - see Note 12)**
            49,849,386
            $498
            $625,123
            $(474)
            $(38,074)
            $587,073Issuance
                of common stock
            130,749
            2
            2,013
            —
            —
            2,015Compensation
                expense
            —
            1
            2,061
            —
            —
            2,062Share-based
                compensation tax benefit
            —
            —
            3,536
            —
            —
            3,536Cumulative
                effect of change in
              accounting
                principle
            —
            —
            (31)
            —
            —
            (31)Dividends
                declared ($1.10 per share)
            —
            —
            —
            —
            (55,754)
            (55,754)**Comprehensive
                income:**
              Net
                income (as restated - see Note 12)
            —
            —
            —
            —
            92,906Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            (161)
            —Reclassification
                adjustment
            —
            —
            —
            346
            —Tax
                effect
            —
            —
            —
            (8)
            —**Total
                comprehensive income (as restated - see Note 12)**
            —
            —
            —
            177
            92,906
            93,083**Balance
                as of September 30, 2005 (as restated - see Note
                12)**
            49,980,135
            $501
            $632,702
            $(297)
            $(922)
            $631,984







**Common**
              **Shares**
              **Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **Retained**
              **Earnings**
            **Total****Balance
                at January 1, 2004 (as restated - see Note 12)**
            28,661,757
            $287
            $264,030
            $(832)
            $50,245
            $313,730Issuance
                of common stock
            21,182,164
            211
            426,575
            —
            —
            426,786Costs
                associated with REIT conversion and stock issuance
            —
            —
            (32,571)
            —
            —
            (32,571)Compensation
                expense
            —
            —
            3,880
            —
            —
            3,880Stock
                option exercise tax benefit
            —
            —
            16,152
            —
            —
            16,152REIT
                conversion merger consideration
            —
            —
            (51,376)
            —
            (80,000)
            (131,376)**Comprehensive
                income:**
              Net
                income (as restated - see Note 12)
            —
            —
            —
            —
            68,415Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            19
            —Reclassification
                adjustment
            —
            —
            —
            703
            —Tax
                effect
            —
            —
            —
            (442)
            —**Total
                comprehensive income (as restated - see Note 12)**
            —
            —
            —
            280
            68,415
            68,695**Balance
                at September 30, 2004 (as restated - see Note 12)**
            49,843,921
            $498
            $626,690
            $(552)
            38,660
            $665,296


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









**Saxon
                Capital, Inc.****Consolidated
                Statements of Cash
                Flows****($
                in thousands)****(unaudited)****Nine
                Months Ended September 30,****2005****(as
                restated -**
              **see
                Note 12)**
            **2004
                (as restated -**
              **see
                Note 12)****Operating
                Activities:**Net
                income
            $92,906
            $68,415Adjustments
                to reconcile net income to net cash
              provided
                by operating activities:Depreciation
                and amortization
            55,259
            11,908Deferred
                income tax (benefit) provision
            (26,912)
            9,864Impairment
                of assets
            7,560
            10,812Gain
                from sale of assets
            (2,451)
            (3,079)Non
                cash derivative (gains) losses
            (6,975)
            45Provision
                for mortgage loan losses
            30,828
            22,004Provision
                for past due interest
            9,719
            10,954Compensation
                expense for share-based compensation plans
            2,061
            3,880Cumulative
                effect of change in accounting principle
            (31)
            —Increase
                in servicing related advances
            (42,451)
            (12,832)Increase
                in accrued interest receivable
            (652)
            (2,687)(Decrease)
                increase in accrued interest payable
            (1,001)
            514Increase
                in trustee receivable
            (18,055)
            (24,990)Purchases
                of derivative instruments
            (4,332)
            (125)Decrease
                (increase) in income tax receivable
            24,348
            (24,012)Net
                change in miscellaneous assets and liabilities
            (1,939)
            10,938Net
                cash provided by operating activities
            117,882
            81,609**Investing
                Activities:**Purchase
                and origination of mortgage loans
            (2,470,538)
            (2,763,453)Principal
                payments received on mortgage loan portfolio
            1,890,283
            1,519,622Proceeds
                from the sale of mortgage loans
            251,264
            205,214Proceeds
                from the sale of real estate owned
            41,792
            42,347(Increase)
                decrease in restricted cash
            (140,738)
            202Principal
                payments received on mortgage bonds
            —
            3,584Acquisition
                of mortgage servicing rights
            (78,727)
            (52,315)Capital
                expenditures
            (9,100)
            (5,332)Net
                cash used in investing activities
            (515,764)
            (1,050,131)**Financing
                Activities:**Proceeds
                from issuance of securitization financing - bonds
            2,867,371
            2,313,525Proceeds
                from issuance of securitization financing - certificates
            150,249
            14,660Debt
                issuance costs
            (10,667)
            (8,306)Principal
                payments on securitization financing - bonds
            (1,970,147)
            (1,573,036)Principal
                payments on securitization financing - certificates
            (103,089)
            (9,359)(Repayment
                of) proceeds from warehouse financing, net
            (456,546)
            212,811Proceeds
                received from issuance of stock
            2,015
            426,786Payment
                of expenses related to REIT conversion and stock issuance
            —
            (30,621)Payment
                of merger consideration
            —
            (131,376)Repayment
                of note payable
            —
            (25,000)Payment
                of dividends
            (84,663)
            —Net
                cash provided by financing activities
            394,523
            1,190,084Net
                (decrease) increase in cash
            (3,359)
            221,562Cash
                at beginning of period
            12,852
            5,245Cash
                at end of period
            $9,493
            $226,807**Supplemental
                Cash Flow Information:**Cash
                paid for interest
            $(185,644)
            $(128,784)Cash
                received (paid) for income taxes
            $7,143
            $(16,576)**Non-Cash
                Financing Activities:**Transfer
                of mortgage loans to real estate owned
            $63,143
            $69,864




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


**Notes
      to Unaudited Consolidated Financial Statements**





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




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




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





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





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




During
      the
      third quarter of 2005, the Company recorded a cumulative adjustment to increase
      income tax benefit and increase deferred tax asset of approximately $3.7 million
      to correct the amortization of the net prepaid liability created by the tax
      on
      intercompany gains and losses related to the sales of mortgage loans and
      servicing advance receivables from the taxable REIT subsidiary to the qualified
      REIT subsidiary. The Company does not believe that the impact of the correction
      for the adjustment is material to the financial statements as of and for the
      quarters ended September 30, 2004; December 31, 2004; March 31, 2005; and June
      30, 2005; as of and for the year ended December 31, 2004; nor is the cumulative
      adjustment recorded in the third quarter of 2005 expected to be material, in
      the
      aggregate, to the financial statements as of and for the year ending December
      31, 2005. The adjustment had no impact on cash flows, taxable income or the
      amount of dividends declared for any of these periods.




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




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





The
      Company recorded $1.2 million of expense during the third quarter of 2005
      relating to a change in accounting estimate for its deferral of certain direct
      loan origination costs. This change in estimate decreased net income by $1.2
      million and reduced basic and diluted earnings per share by $0.02.




**(c)
        Stock Options**


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




In
      periods prior to April 1, 2005, the Company had elected to follow the intrinsic
      value method in accounting for stock options issued to employees and
      non-employee directors. Effective
      September 13, 2004, upon approval by Old Saxon’s shareholders of the merger
      agreement in connection with the REIT conversion, all then-outstanding stock
      options and restricted stock units immediately vested and were expensed at
      that
      time. The
      following table illustrates the effect on net income and earnings per share
      if
      the Company had applied the fair value method using the Black-Scholes
      option-pricing model to options and restricted stock units granted during the
      nine months ended September 30, 2005 and the three and nine months ended
      September 30, 2004.  As shown in the table, there would have been no effect
      on net income and earnings per share if the company had applied the fair value
      method using the Black-Scholes option pricing model during the nine months
      ended
      September 30, 2005.  This is because all outstanding options were
      vested upon the Company's conversion to REIT status in 2004, and restricted
      stock unit awards are accounted for similarly under either method.




**Three
                Months Ended**
            **Nine
                Months Ended****September
                30, 2004**
            **September
                  30, 2005**
            **September
                30, 2004**($
                in thousands, except per share data)Net
                income
            $13,788
            $92,906
            $68,415Add:
                stock-based compensation expense included in net income, net of related
                tax effects
            199
            694
            199Deduct:
                total share-based compensation expense determined under fair value
                based
                method for all awards, net of related tax effects
            (2,918)
            (694)
            (4,194)Pro
                forma net income
            $11,069
            $92,906
            $64,420Earnings
                per share:Basic
            $0.44
            $1.86
            $2.31Basic
                - pro forma
            $0.35
            $1.86
            $2.17Diluted
            $0.41
            $1.83
            $2.13Diluted
                - pro forma
            $0.33
            $1.83
            $2.00






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




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




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




On
      October 12, 2005, a matter was filed in the Common Pleas Court for Cuyahoga
      County, Ohio as Jumar
      Hooks and Diane Felder, et al., v. Saxon Mortgage, Inc. ,
      Case
      No. CV 05 574577. The plaintiffs filed this case as a class action on behalf
      of
      themselves and similarly situated Ohio borrowers, alleging that the Company’s
      subsidiary engaged in unlawful practices in originating and servicing the
      plaintiffs’ loans. As with other pending litigation, if a class is certified and
      there is an adverse outcome or we do not otherwise prevail in the matter, we
      could suffer material losses, although we intend to vigorously defend this
      lawsuit. At the present time, we cannot predict the outcome of this case.





On
      October 27, 2005 the Company entered into a new $300.0 million repurchase
      facility with Greenwich Capital Financial Products, Inc. due to expire on
      September 28, 2006. The new facility provides the Company with the ability
      to
      finance first and second lien mortgage loans and to finance mortgage bonds.
      In
      conjunction with the new facility, the existing $150.0 million and $175.0
      million facilities with Greenwich Capital Financial Products, Inc. were both
      terminated.





On
      October 18, 2005, the Company granted 70,000 restricted stock units to some
      of
      the Company’s employees. The restricted stock units will vest on the fifth
      anniversary of the date of grant. The grantees of the restricted stock units
      will be entitled to receive all dividends and other distributions paid with
      respect to the common shares of the Company underlying such restricted stock
      units at the time such dividends or distributions are paid to holders of common
      shares.




On
      October 18, 2005, the Company declared a quarterly dividend of $0.50 per share
      of common stock payable on November 10, 2005 to shareholders of record as of
      the
      close of business on October 28, 2005.




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




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






**Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,****2005**
            **2004**
            **2005**
            **2004**(in
                thousands, except per share data)**Basic:**Net
                income
            $31,909
            $13,788
            $92,906
            $68,415Weighted
                average shares outstanding
            49,942
            31,525
            49,892
            29,637Earnings
                per share
            $0.64
            $0.44
            $1.86
            $2.31**Diluted:**Net
                income
            $31,909
            $13,788
            $92,906
            $68,415Weighted
                average shares outstanding
            49,942
            31,525
            49,892
            29,637Dilutive
                effect of stock options, warrants and restricted stock
                units
            1,003
            2,040
            861
            2,427Weighted
                average shares outstanding - diluted
            50,945
            33,565
            50,753
            32,064Earnings
                per share
            $0.63
            $0.41
            $1.83
            $2.13





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




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




**September
                30, 2005**
            **December
                31, 2004**($
                in thousands)Securitized
                mortgage loans - principal balance
            $5,928,360
            $5,123,071Unsecuritized
                mortgage loans - principal balance
            212,630
            782,717Premiums,
                net of discounts
            88,953
            75,562Deferred
                origination costs, net of deferred fees
            12,342
            11,288Purchase
                accounting fair value adjustments
            2,916
            4,738Total
            6,245,201
            5,997,376Less
                allowance for losses
            (34,762)
            (24,892)Net
                mortgage loan portfolio
            $6,210,439
            $5,972,484




During
      the
      three months ended September 30, 2005, the Company completed the final funding
      of Saxon Asset Securities Trust, or SAST, 2005-2 ($203.0 million in principal
      balances and $2.8 million in unamortized basis adjustments) and the initial
      funding of SAST 2005-3 ($759.4 million in principal balances and $9.2 million
      in
      unamortized basis adjustments).




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


**Three
                  Months Ended September 30,**
              **Nine
                  Months Ended September 30,****2005**
              **2004**
              **2005**
              **2004**($
                  in thousands)Performing
                  mortgage loans sold:Non
                conforming first lien mortgages
              $-
              $-
              $98,786
              $69,274Conforming
                first lien mortgages (1)
              12,758
              1,270
              52,845
              2,205Second
                lien mortgages
              21,636
              42,312
              85,871
              94,584Delinquent
                  mortgage loans (2)
              -
              10,142
              8,812
              34,607Total
                mortgage loans sold
              34,394
              53,724
              246,314
              200,670Plus
                basis adjustments
              426
              579
              2,521
              1,496Less:
                cash received
              (34,867)
              (54,523)
              (251,263)
              (205,214)Gain
                  on sale of mortgages (2)(3)
              $47
              $220
              $2,428
              $3,048





___________


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


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


(3)
            Total
                gain on sale of assets of $44 thousand, $2.5 million, and $3.1 million
                on
                the consolidated statements of operations for the three months ended
                September 30, 2005 and for the nine months ended September 30, 2005
                and
                2004, respectively, includes the gain (loss) recognized on sale of
                other
                assets.





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




The
      Company is exposed to risk of loss from its mortgage loan portfolio and
      establishes the allowance for loan losses and past due interest taking into
      account a variety of criteria including contractual delinquency status,
      historical loss experience, and catastrophic environmental influences or natural
      disasters - see Note 9 for further details. The allowance for loan losses and
      past due interest is evaluated monthly and adjusted based on this
      evaluation.





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





**September
                30, 2005**
            **December
                31, 2004**($
                in thousands)Allowance
                for loan losses
            $34,762
            $24,892Allowance
                for past due interest (1)
            14,413
            12,418Total
                allowance for loan losses and past due interest
            $49,175
            $37,310








**Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Beginning
                balance
            $36,278
            $34,032
            $37,310
            $43,369Provision
                for loan losses (2)
            19,092
            10,775
            30,828
            22,004Provision
                for past due interest (3)
            2,423
            2,497
            7,009
            4,371Charge-offs
            (8,618)
            (10,988)
            (25,972)
            (33,428)Ending
                balance
            $49,175
            $36,316
            $49,175
            $36,316


________________


(1)
            Provided for within accrued interest receivable
                on the
                consolidated balance sheets (2)
            Includes
                $6.8 million for the three and nine months ended September 30, 2005
                with
                respect to probable losses incurred due to Hurricane Katrina.


(3)
            Recorded
                as a component within interest income on the consolidated statements
                of
                operations and represents the reversal of interest income on loans
                delinquent for 90 days or more.





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





As
      of
      September 30, 2005, the aggregate fair value of the mortgage servicing rights
      (MSRs) was $171.0 million, compared to $155.1 million as of December 31, 2004. The
      Company recognized a permanent impairment during the first nine months of 2005
      due to significant prepayment experience in certain underlying loans and
      recognized a temporary impairment relating to lower valuations of MSRs in the
      marketplace. The Company also recognized temporary impairments during the three
      months ended September 30, 2005 relating to hurricane-related factors - see
      Note
      9 for further details. The
      following table summarizes activity in mortgage servicing rights and its related
      valuation allowance for the three and nine months ended September 30, 2005
      and
      2004:





**Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Beginning
                balance of MSRs, gross
            $135,122
            $50,035
            $106,619
            $41,942Purchased
            26,729
            37,489
            78,727
            52,315Amortization
            (13,410)
            (5,139)
            (33,931)
            (11,872)Charge-offs
            (419)
            (755)
            (3,393)
            (755)Ending
                balance of MSRs, gross
            148,022
            81,630
            148,022
            81,630Beginning
                balance of valuation allowance
            (6,083)
            (5,337)
            (7,624)
            (687)Impairment
            (3,415)
            (2,113)
            (4,848)
            (6,763)Charge-offs
            419
            755
            3,393
            755Ending
                balance of valuation allowance
            (9,079)
            (6,695)
            (9,079)
            (6,695)MSRs,
                net
            $138,943
            $74,935
            $138,943
            $74,935




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











**Years
                Ending December 31,**($
                in thousands)October
                2005 through December 2005
            $13,8552006
            49,9942007
            30,6132008
            19,3712009
            12,329Thereafter
            21,860Total
            $148,022







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




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





**September
                30, 2005**
            **December
                31, 2004**($
                in thousands)**Debt
                Outstanding**Warehouse
                financing - loans and servicing advances
            $122,473
            $282,092Repurchase
                agreements - loans and mortgage bonds (1)(2)
            21,627
            318,554Securitization
                financing - servicing advances
            165,147
            117,988Securitization
                financing - loans and real estate owned
            6,030,270
            5,125,572Securitization
                financing - net interest margin
            -
            14,784Total
            $6,339,517
            $5,858,990


___________________


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


(2)
            As
                of September 30, 2005 and December 31, 2004, amounts outstanding
                of $1.0
                million and $1.1 million were borrowed against an uncommitted
                facility.





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


**As
                of September 30, 2005**
            **Total**
            **Less
                than 1 year**
            **1-3
                years**
            **3-5
                years**
            **After
                5 years**($
                in thousands)Warehouse
                financing - loans and servicing advances
            $122,473
            $122,473
            $—
            $—
            $—Repurchase
                agreements - loans and mortgage bonds (1)
            21,627
            21,627
            —
            —
            —Securitization
                financing - servicing advances
            165,147
            25,147
            55,000
            85,000
            —Securitization
                financing - loans and real estate owned (2)
            6,030,270
            2,400,559
            3,003,763
            536,782
            89,166Total
                contractual cash obligations
            $6,339,517
            $2,569,806
            $3,058,763
            $621,782
            $89,166


________________


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




(2)
            Amounts
                shown are estimated debt payments based on anticipated 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,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)**Interest
                Expense**Warehouse
                financing
            $126
            $1,099
            $2,307
            $2,309Repurchase
                agreements
            3,258
            2,354
            7,357
            5,676Securitization
                financing
            64,325
            34,917
            172,419
            93,212Note
                payable
            —
            448
            —
            1,443Other
            1,098
            1,212
            3,202
            2,912Total
            $68,807
            $40,030
            $185,285
            $105,552**Weighted
                Average Cost of Funds**Warehouse
                financing
            0.28%
            2.10%
            1.70%
            1.92%Repurchase
                agreements
            4.22%
            2.35%
            3.80%
            2.01%Securitization
                financing
            4.48%
            2.77%
            4.01%
            2.63%Note
                payable
            —
            8.00%
            —
            8.00%Total
            4.42%
            2.83%
            4.01%
            2.67%







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





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





The
      Company may use a variety of financial instruments to manage the exposure to
      changes in interest rates. The Company may enter into interest rate swap
      agreements, interest rate cap agreements, interest rate floor agreements,
      financial forwards, financial futures, and options on financial instruments
      (collectively referred to as “Interest Rate Agreements”) to manage the
      sensitivity to changes in market interest rates. The Interest Rate Agreements
      used have an active secondary market, and none are obtained for speculation.
      The
      Company accounts for all of its derivative financial instruments as undesignated
      derivative instruments. The maximum term over which the Company is currently
      managing its exposure for forecasted transactions is 60 months. The Company
      has
      classified cash activity associated with derivatives as an operating activity
      in
      the consolidated statements of cash flows. Derivative gains (losses) totaled
      $19.9 million and $(15.8) million for the three months ended September 30,
      2005
      and 2004, respectively, and $26.0 million and $(5.0) million for the nine months
      ended September 30, 2005 and 2004, respectively. The components of these
      derivative gains (losses) consist of the following:




**Three
                Months****Ended**
              **September
                30,**
            **Nine
                Months****Ended**
              **September
                30,****2005**
            **2004**
            **2005**
            **2004**($
                in thousands)Non
                cash fair value gain (loss)
            $11,191
            $(11,521)
            $6,975
            $(45)Cash
                settlements, net
            8,762
            (4,181)
            19,380
            (4,606)Broker
                commissions
            (81)
            (92)
            (372)
            (384)Interest
                on margin
            18
            4
            57
            8Total
            $19,890
            $(15,790)
            $26,040
            $(5,027)







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




*Mortgage
      Loans*




As
      of
      September 30, 2005 and December 31, 2004, the Company’s subsidiaries had
      commitments to fund mortgage loans with agreed-upon rates of approximately
      $261.8 million and $240.3 million, respectively. These amounts do not
      necessarily represent future cash requirements, as some portion of the
      commitments are likely to expire without being drawn upon or may be subsequently
      declined for credit or other reasons.





In
      connection with the approximately $433.6 million of mortgage loans securitized
      in off-balance sheet transactions from May 1996 to July 5, 2001 which are still
      outstanding as of September 30, 2005, and in connection with the sales of
      mortgage loans to nonaffiliated parties, the Company’s subsidiaries made
      representations and warranties about certain characteristics of the loans,
      the
      borrowers, and the underlying properties. In the event of a breach of these
      representations and warranties, those subsidiaries may be required to remove
      loans from a securitization and replace them with cash or substitute loans,
      and
      to indemnify parties for any losses related to such breach. As of September
      30,
      2005 those subsidiaries neither had nor expect to incur any material obligation
      to remove any such loans, or to provide any such indemnification.




*Mortgage
      Servicing Rights*





The
      Company has committed to purchase the rights to service an additional unpaid
      principal balance of $1.1 billion of third party mortgage loans during the
      fourth quarter of 2005, of which $0.2 billion has been purchased during October
      2005 for approximately $1.1 million.




*Impact
      of Hurricane Katrina*





In
      August
      2005, Hurricane Katrina made landfall in the U.S. Gulf Coast region. The Company
      is in the process of evaluating its mortgage loan portfolio in the affected
      areas for collectibility and evaluating its MSRs and real estate owned for
      impairment. The percentage of the Company’s mortgage loan portfolio and the
      loans underlying the MSRs in the federally declared disaster areas is 2% and
      1%,
      respectively. Assessing the extent to which insurance coverage exists may be
      challenging. Also, many insurance policies exclude coverage for flood damage.
      Therefore, claims for insurance recoveries may be disputed if insured parties
      and their insurers disagree in their assessments of how much of the damage
      was
      due to wind versus flooding. Estimates of the full extent of real estate losses
      may take some time to tally. Furthermore, the Company believes that the impact
      of the hurricane may pose additional risks and uncertainties for its servicing
      and portfolio business segments, including: increase in tax and insurance
      advance costs; conflicts of claim management between homeowners insurance and
      flood policy insurance; delinquency and foreclosure advance costs on losses
      on
      mortgage loans secured by homes that might be damaged beyond repair; and an
      increase in non-payment of mortgage loans due to the displacement of homeowners
      and their inability to make their mortgage payments. The collectibility of
      the
      Company’s mortgage loan portfolio and valuation of the Company’s MSRs and real
      estate owned may be impacted by this exposure due to higher delinquency and
      foreclosure rates, increased servicer advances due to non-payment of mortgage
      loans, increased loss severities, and added servicing costs needed to
      effectively and efficiently service these loans as these loans will require
      increased contact with the borrower to ensure that timely payments are rendered.
      Foreclosure timelines are likely to lengthen as a result of increased conflict
      between insurers and homeowners relating to coverage under applicable flood
      or
      homeowners insurance policies.





While
      the
      ultimate impact of Hurricane Katrina on the Company’s business is uncertain, it
      could result in a material adverse effect on the Company’s financial position
      and results of operations. As of September 30, 2005, the total recorded
      investment in impaired loans within the Company’s mortgage loan portfolio
      related to Hurricane Katrina is $114.2 million. The Company has recorded
      accruals for losses that it considers to be probable and that can be reasonably
      estimated. During the third quarter of 2005, the Company recorded a reserve
      of
      $6.8 million in connection with estimated losses in its mortgage loan portfolio
      due to Hurricane Katrina. This amount was determined based on an analysis of
      the
      specific pool of mortgage loans within the federally declared disaster areas
      segmented into categories based on an estimation of the extent of flooding
      in
      each such area. The pool was further segmented to exclude loans for properties
      covered by flood insurance and loans for which the Company had received
      correspondence from the borrower and/or actual property inspection reports
      indicating damage was less severe than expected. The remaining pool of loans’
unpaid principal balances and their associated basis adjustments, advances
      and
      accrued interest were accumulated and a range of estimated percentage of loss
      severity was applied using different insurance coverage scenarios. This analysis
      yielded a range of possible loss estimates from $1.4 million to $9.4 million,
      with a best estimate of $6.8 million calculated using what the Company believes
      is the most probable loss severity and insurance coverage scenarios. This
      estimate is imprecise, and if different loss severities had been applied or
      if
      estimates of the extent of flooding had been altered, numerous different
      estimates may have been obtained. As additional information is obtained and
      processed over the coming months and quarters, this reserve will be revised
      accordingly.





The
      Company has also recorded an additional MSR impairment related to the foregoing
      matter of $0.4 million. This amount was determined based on an analysis of
      the
      specific pool of serviced mortgage loans within the federally declared disaster
      areas segmented into categories based on an estimation of the extent of flooding
      in each such area. The pool of serviced loans’ unpaid principal balances were
      accumulated and a percentage of loss was then applied to each segment to
      determine the amount of loan principal at risk. The resulting amount of loan
      principal at risk was then applied to the total MSR balance to determine the
      impact of impairment. This analysis yielded a range of possible loss estimates
      from $0.4 million to $0.5 million, with the lowest end of the range representing
      what the Company believes is the best estimate within the range, given the
      uncertain nature of the final outcome. This estimate is imprecise, and if
      different loss severities had been applied or if estimates of the extent of
      flooding had been altered, numerous different estimates may have been obtained.
      As additional information is obtained and processed over the coming months
      and
      quarters, this estimate will be revised accordingly.





No
      specific provision was recorded for the Company’s real estate owned properties
      as the Company’s analysis indicated that none of these properties are in the
      flooded areas.




*Legal
      Matters*




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





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





Cechini,
      et al., v. America’s MoneyLine, Inc .
      is a
      matter filed on August 10, 2005 in the United States District Court for the
      Northern District of Illinois, Eastern Division, as Case No. 05C 4570. The
      Plaintiff filed the case as a class action, alleging violation of the Fair
      Credit Reporting Act in connection with the use of pre-approved offers of credit
      by the Company’s subsidiary, America’s MoneyLine, Inc. At this time, the Company
      cannot predict the outcome of this matter and cannot reasonably estimate a
      range
      of possible loss given the current status of the litigation; accordingly, no
      amounts have been accrued in the Company’s accompanying consolidated financial
      statements.





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





**(10)**  **Share-Based
      Compensation Plans**




Compensation
      cost that has been charged against income for the Company’s share-based
      compensation plans was $1.5
      million and $3.6 million for the three months ended September 30, 2005 and
      2004,
      respectively, and $3.1 million and $4.9 million for the nine months ended
      September 30, 2005 and 2004, respectively.





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





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




The
      following table summarizes the transactions relating to the Company’s stock
      options for the nine months ended September 30, 2005.








**Number
                of Options**
            **Weighted
                Average**
              **Exercise
                Price**Options
                outstanding, December 31, 2004 (includes 11,000 options with a remaining
                contractual life of 6.8 years currently exercisable under the Stock
                Incentive Plan)
            11,000
            $10.10Options
                granted
            —
            $—Options
                exercised
            (5,000)
            $10.10Options
                cancelled
            —
            $—Options
                outstanding, September 30, 2005 (includes 6,000 options with a remaining
                contractual life of 6.1 years currently exercisable under the Stock
                Incentive Plan)
            6,000
            $10.10





Cash
      received from options exercised under all share-based payment arrangements
      for
      the nine months ended September 30, 2005 and 2004, was $50.5 thousand and $39.6
      million, respectively. The actual tax benefit realized for the tax deductions
      from option exercises under share-based payment arrangements totaled $1.3
      thousand and $19.7 million, respectively for the nine months ended September
      30,
      2005 and 2004. The total intrinsic value of options exercised during the first
      nine months of 2005 and 2004 was $34.7 thousand and $69.9 million,
      respectively.





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




The
      Company recognizes compensation expense for outstanding restricted stock units
      over their vesting periods for an amount equal to the fair value of the
      restricted stock units at grant date. Fair value is determined by the price
      of
      the common shares underlying the restricted stock units on the grant date. As
      of
      September 30, 2005, there was $12.1 million of total unrecognized compensation
      cost related to nonvested restricted stock units granted under the Stock
      Incentive Plan. That cost is expected to be recognized over a weighted-average
      period of 4.1 years.




The
      Company recorded $0.5 million in reduction of expense during the third quarter
      of 2005 related to a change in the accounting for forfeitures of nonvested
      restricted stock units following the Company’s adoption of SFAS 123(R).




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





**Number
                of Restricted**
              **Stock
                Units**
            **Weighted
                Average Grant-Date Fair Value**Nonvested
                at January 1, 2005
            —
            $—Granted
            869,500
            $21.50Vested
            (50,000)
            $21.50Forfeited
            (64,500)
            $21.50Nonvested
                at September 30, 2005
            755,000
            $21.50







*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 common stock, of which 1,192,000 have been
      exercised as of September 30, 2005. The 8,000 remaining warrants have an
      exercise price of $10.00 per share and are exercisable until they expire on
      July
      6, 2006.




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





The
      C ompany
      began recognizing compensation expense for its Employee Stock Purchase Plan
      with
      the adoption of SFAS 123(R) for an amount equal to the difference between the
      fair value and the sales price of the shares on the date of purchase, as a
      result of which the Company incurred $49.1 thousand of expense during the third
      quarter 2005.





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





**Shares
                Issued**
            **Issuance
                Price**
            **Proceeds**(amounts
                in thousands, except issuance price)**For
                the Nine Months Ended September 30, 2005:**March
                31, 2005
            29.7
            $14.62
            $433.5June
                30, 2005
            18.5
            $14.51
            $267.9September
                30, 2005
            27.6
            $10.07
            $278.3




**(11)**  **Segments**




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





The
      portfolio segment uses the Company’s equity capital and borrowed funds to invest
      in its mortgage loan portfolio, thereby producing net interest income. The
      portfolio segment also records servicing expense associated with servicing
      its
      mortgage loan portfolio. The
      mortgage loan production segment purchases and originates non-conforming
      residential mortgage loans through relationships with various mortgage
      companies, mortgage brokers, and correspondent lenders, and directly to
      borrowers through its nine branch offices. The mortgage loan production segment
      also records interest income, interest expense, servicing expense, and provision
      for mortgage loan losses on the mortgage loans it holds prior to selling its
      loans to the portfolio segment. This segment also collects revenues such as
      origination and underwriting fees and certain other nonrefundable fees that
      are
      deferred and recognized over the life of the loan as an adjustment to interest
      income recorded in the portfolio segment. The servicing segment services loans,
      seeking to ensure that loans are repaid in accordance with their terms.








**Three
                Months Ended September 30, 2005****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $102,351
            $9,622
            $(17)
            $4,145
            $116,101Interest
                expense
            (64,325)
            (4,482)
            —
            —
            (68,807)Net
                intercompany interest
            (932)
            1,260
            (328)
            —
            —Net
                interest income
            37,094
            6,400
            (345)
            4,145
            47,294Provision
                for mortgage loan losses
            (18,747)
            (345)
            —
            —
            (19,092)Net
                interest income after provision for mortgage loan losses
            18,347
            6,055
            (345)
            4,145
            28,202Servicing
                income, net of amortization and impairment
            —
            741
            25,580
            (7,258)
            19,063Derivative
                gains
            19,890
            —
            —
            —
            19,890Gain
                (loss) on sale of mortgage assets
            (1,339)
            15,214
            (5,277)
            (8,554)
            44Total
                net revenues and gains
            36,898
            22,010
            19,958
            (11,667)
            67,199Payroll,
                general and administrative, and other expenses
            13,370
            21,728
            12,054
            (7,624)
            39,528Depreciation
            64
            869
            625
            —
            1,558Total
                operating expenses
            13,434
            22,597
            12,679
            (7,624)
            41,086Income
                (loss) before taxes
            23,464
            (587)
            7,279
            (4,043)
            26,113Income
                tax expense (benefit)
            831
            (1)
            3,212
            (9,838)
            (5,796)**Net
                income (loss)**
            $22,633
            $(586)
            $4,067
            $5,795
            $31,909








**Three
                Months Ended September 30, 2004****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $80,306
            $19,695
            $—
            $1,395
            $101,396Interest
                expense
            (35,253)
            (4,664)
            (113)
            —
            (40,030)Net
                intercompany interest
            (1,521)
            423
            1,098
            —
            —Net
                interest income
            43,532
            15,454
            985
            1,395
            61,366Provision
                for mortgage loan losses
            (9,684)
            (1,091)
            —
            —
            (10,775)Net
                interest income after provision for mortgage loan losses
            33,848
            14,363
            985
            1,395
            50,591Servicing
                income, net of amortization and impairment
            —
            788
            12,086
            (6,238)
            6,636Derivative
                losses
            (15,790)
            —
            —
            —
            (15,790)Gain
                (loss) on sale of mortgage assets
            —
            (6,875)
            (7,339)
            14,434
            220Total
                net revenues and gains
            18,058
            8,276
            5,732
            9,591
            41,657Payroll,
                general and administrative, and
              other
                expenses
            6,077
            29,015
            8,709
            (8,031)
            35,770Depreciation
            —
            902
            491
            —
            1,393Total
                operating expenses
            6,077
            29,917
            9,200
            (8,031)
            37,163Income
                (loss) before taxes
            11,981
            (21,641)
            (3,468)
            17,622
            4,494Income
                tax expense (benefit)
            419
            (8,317)
            (1,169)
            (227)
            (9,294)**Net
                income (loss)**
            $11,562
            $(13,324)
            $(2,299)
            $17,849
            $13,788





**Nine
                Months Ended September 30, 2005****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $298,544
            $30,205
            $(39)
            $10,890
            $339,600Interest
                expense
            (172,419)
            (12,866)
            —
            —
            (185,285)Net
                intercompany interest
            (2,446)
            2,876
            (430)
            —
            —Net
                interest income
            123,679
            20,215
            (469)
            10,890
            154,315Provision
                for mortgage loan losses
            (30,036)
            (792)
            —
            —
            (30,828)Net
                interest income after provision for mortgage loan losses
            93,643
            19,423
            (469)
            10,890
            123,487Servicing
                income, net of amortization and impairment
            —
            2,255
            68,368
            (20,770)
            49,853Derivative
                gains
            26,040
            —
            —
            —
            26,040Gain
                (loss) on sale of mortgage assets
            (1,697)
            53,275
            (12,719)
            (36,408)
            2,451Total
                net revenues and gains
            117,986
            74,953
            55,180
            (46,288)
            201,831Payroll,
                general and administrative,
              and
                other expenses
            36,304
            61,158
            34,305
            (21,033)
            110,734Depreciation
            64
            2,805
            1,532
            —
            4,401Total
                operating expenses
            36,368
            63,963
            35,837
            (21,033)
            115,135Income
                (loss) before taxes
            81,618
            10,990
            19,343
            (25,255)
            86,696Income
                tax (benefit) expense
            2,571
            4,476
            7,878
            (21,104)
            (6,179)**Income
                before cumulative effect of change in accounting
                principle**
            79,047
            6,514
            11,465
            (4,151)
            92,875Cumulative
                effect of change in
              accounting
                principle
            31
            —
            —
            —
            31**Net
                income**
            $79,078
            $6,514
            $11,465
            $(4,151)
            $92,906







**Nine
                Months Ended September 30, 2004****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $231,749
            $58,275
            $11
            $11,744
            $301,779Interest
                expense
            (92,766)
            (10,897)
            (1,889)
            —
            (105,552)Net
                intercompany interest
            (3,975)
            571
            3,404
            —
            —Net
                interest income
            135,008
            47,949
            1,526
            11,744
            196,227Provision
                for mortgage loan losses
            (19,233)
            (2,771)
            —
            —
            (22,004)Net
                interest income after provision for mortgage loan losses
            115,775
            45,178
            1,526
            11,744
            174,223Servicing
                income, net of amortization and impairment
            —
            2,179
            32,532
            (18,137)
            16,574Derivative
                losses
            (5,027)
            —
            —
            —
            (5,027)Gain
                (loss) on sale of mortgage assets
            
            12,600
            (7,308)
            (2,213)
            3,079Total
                net revenues and gains
            110,748
            59,957
            26,750
            (8,606)
            188,849Payroll,
                general and administrative,
              and
                other expensesOperating
                expenses
            12,090
            80,898
            23,037
            (18,137)
            97,888Depreciation
            —
            2,788
            1,674
            —
            4,462Total
                operating expenses
            12,090
            83,686
            24,711
            (18,137)
            102,350Income
                (loss) before taxes
            98,658
            (23,729)
            2,039
            9,531
            86,499Income
                tax expense (benefit)
            30,756
            (9,115)
            936
            (4,493)
            18,084**Net
                income (loss)**
            $67,902
            $(14,614)
            $1,103
            $14,024
            $68,415







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





**September
                30, 2005**
            **December
                31, 2004****Segment
                Assets:**Portfolio
            $6,555,328
            $6,157,895Servicing
            291,242
            208,843Total
                segment assets
            6,846,570
            6,366,738Corporate
                assets
            164,493
            141,791Total
                assets
            $7,011,063
            $6,508,529








**(12)**  **Restatement**




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





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





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





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





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







The
      following tables summarize the significant effects of the restatement.


**Three
                  Months Ended**
                **September
                  30,**
              **Nine
                  Months Ended**
                **September
                  30,****2005****As
                  Previously Reported**
              **As**
                **Restated**
              **As
                  Previously Reported**
              **As**
                **Restated****Statement
                  of Operations:**
              (in
                  thousands, except per share amounts)Interest
                  income
              $115,685
              $116,101
              $341,386
              $339,600Interest
                  expense
              (69,075)
              (68,807)
              (185,815)
              (185,285)Net
                  interest income
              46,610
              47,294
              155,571
              154,315Provision
                  for mortgage loan losses
              (19,369)
              (19,092)
              (38,551)
              (30,828)Net
                  interest income after provision for mortgage loan losses
              27,241
              28,202
              117,020
              123,487Servicing
                  income, net of amortization and impairment
              19,064
              19,063
              49,853
              49,853Derivative
                  gains
              —
              19,890
              —
              26,040Total
                  net revenues and gains
              46,349
              67,199
              169,324
              201,831Other
                  expense
              1,253
              1,286
              2,547
              3,127Total
                  expenses
              41,053
              41,086
              114,555
              115,135Income
                  before taxes
              5,296
              26,113
              54,769
              86,696Income
                  tax benefit
              (6,314)
              (5,796)
              (7,943)
              (6,179)Income
                  before cumulative effect of change in accounting principle (SFAS
                  123R)
              11,610
              31,909
              62,712
              92,875Net
                  income
              11,610
              31,909
              62,743
              92,906Earnings
                  per share - basic
              $0.23
              $0.64
              $1.26
              $1.86Earnings
                  per share - diluted
              $0.23
              $0.63
              $1.24
              $1.83**Balance
                  Sheet:****Balance
                  as of September 30, 2005:**Mortgage
                  loan portfolio
              
              
              $6,270,256
              $6,245,201Servicing
                  related advances
              
              
              155,812
              152,299Derivative
                  assets
              
              
              33,919
              33,264Other
                  assets
              
              
              65,787
              67,319Total
                  assets
              
              
              7,037,590
              7,011,063Derivative
                  liabilities
              
              
              5,262
              7,025Deferred
                  tax asset
              
              
              56,767
              54,418Total
                  liabilities
              
              
              6,377,316
              6,379,079Total
                  liabilities and shareholders’ equity
              
              
              7,037,590
              7,011,063**Statement
                  of Shareholders’ Equity:****Balance
                  as of January 1, 2005:**Accumulated
                  other comprehensive loss
              
              
              $(3,842)
              $(474)Accumulated
                  deficit
              
              
              (2,850)
              (38,074)Total
              
              
              618,929
              587,073**Comprehensive
                  income:**Net
                  income
              
              
              $62,743
              $92,906Cash
                  flow hedging instruments - change in unrealized gain
              
              
              25,151
              —Cash
                  flow hedging instruments - reclassification adjustment
              
              
              1,179
              —Cash
                  flow hedging instruments - tax effect
              
              
              252
              —Total
                  comprehensive income
              
              
              89,517
              93,083**Balance
                  as of September 30, 2005:**Accumulated
                  other comprehensive income (loss)
              
              
              $22,932
              $(297)Retained
                  earnings (accumulated deficit)
              
              
              4,139
              (922)Total
              
              
              660,274
              631,984**Statement
                  of Cash Flows:****Operating
                  Activities:**Net
                  income
              
              
              $62,743
              $92,906Depreciation
                  and amortization
              
              
              66,200
              55,259Deferred
                  income tax benefit
              
              
              (17,549)
              (26,912)Impairment
                  of assets
              
              
              6,812
              7,560Non
                  cash derivative gains
              
              
              —
              (2,451)Provision
                  for mortgage loan losses
              
              
              38,551
              30,828Provision
                  for past due interest
              
              
              34
              9,719Increase
                  in servicing related advances
              
              
              (42,683)
              (42,451)Purchases
                  of derivative instruments
              
              
              —
              (4,332)Net
                  change in miscellaneous assets and liabilities
              
              
              16,398
              (1,939)Net
                  cash provided by operating activities
              
              
              110,377
              117,882**Investing
                  Activities:**Principal
                  payments received on mortgage loan portfolio
              
              
              $1,889,215
              $1,890,283Net
                  cash used in investing activities
              
              
              (516,832)
              (515,764)**Financing
                  Activities:**Debt
                  issuance costs
              
              
              $(11,056)
              $(10,667)Proceeds
                  from derivative instruments
              
              
              8,962
              —Net
                  cash provided by financing activities
              
              
              403,096
              394,523
   **Three
                  Months Ended**
                **September
                  30,**
              **Nine
                  Months Ended**
                **September
                  30,****2004****As
                  Previously Reported**
              **As**
                **Restated**
              **As
                  Previously Reported**
              **As**
                **Restated****Statement
                  of Operations:**
              (in
                  thousands, except per share amounts)Interest
                  income
              $99,657
              $101,396
              $289,707
              $301,779Interest
                  expense
              (37,933)
              (40,030)
              (107,145)
              (105,552)Net
                  interest income
              61,724
              61,366
              182,562
              196,227Provision
                  for mortgage loan losses
              (14,730)
              (10,775)
              (28,768)
              (22,004)Net
                  interest income after provision for mortgage loan losses
              46,994
              50,591
              153,794
              174,223Servicing
                  income, net of amortization and impairment
              8,371
              6,636
              20,194
              16,574Derivative
                  losses
              —
              (15,790)
              —
              (5,027)Total
                  net revenues and gains
              55,585
              41,657
              177,067
              188,849Other
                  expense
              978
              1,796
              3,368
              4,591Total
                  expenses
              36,344
              37,163
              101,127
              102,350Income
                  before taxes
              19,241
              4,494
              75,940
              86,499Income
                  tax (benefit) expense
              (19,044)
              (9,294)
              515
              18,084Income
                  before cumulative effect of change in accounting principle (SFAS
                  123R)
              38,285
              13,788
              75,425
              68,415Net
                  income
              38,285
              13,788
              75,425
              68,415Earnings
                  per share - basic
              $1.21
              $0.44
              $2.54
              $2.31Earnings
                  per share - diluted
              $1.14
              $0.41
              $2.35
              $2.13**As
                  of December 31,:**Mortgage
                  loan portfolio
              
              
              $6,027,620
              $5,997,376Derivative
                  assets
              
              
              16,573
              17,568Other
                  assets
              
              
              84,898
              83,865Derivative
                  liabilities
              
              
              1,809
              2,636Deferred
                  tax asset (liability)
              
              
              27,825
              27,506Other
                  comprehensive loss
              
              
              (3,842)
              (474)**Statement
                  of Shareholders’ Equity:****Balance
                  as of January 1, 2004:**Accumulated
                  other comprehensive loss
              
              
              $(5,497)
              $(832)Retained
                  earnings
              
              
              86,226
              50,245Total
              
              
              345,046
              313,730**Comprehensive
                  income:**Net
                  income
              
              
              $75,425
              $68,415Cash
                  flow hedging instruments - change in unrealized loss
              
              
              (3,490)
              —Cash
                  flow hedging instruments - reclassification adjustment
              
              
              (1,776)
              —Cash
                  flow hedging instruments - tax effect
              
              
              2,048
              —Total
                  comprehensive income
              
              
              72,648
              68,695**Balance
                  as of September 30, 2004:**Accumulated
                  other comprehensive loss
              
              
              $(8,274)
              $(552)Retained
                  earnings
              
              
              81,651
              38,660Total
              
              
              700,565
              665,296**Statement
                  of Cash Flows:****Operating
                  Activities:**Net
                  income
              
              
              $75,425
              $68,415Depreciation
                  and amortization
              
              
              28,009
              11,908Deferred
                  income tax (benefit) provision
              
              
              (9,914)
              9,864Impairment
                  of assets
              
              
              9,485
              10,812Non
                  cash derivative losses
              
              
              —
              45Provision
                  for mortgage loan losses
              
              
              28,768
              22,004(Recovery
                  of) provision for past due interest
              
              
              (1,067)
              10,954Purchases
                  of derivative instruments
              
              
              —
              (125)Net
                  change in miscellaneous assets and liabilities
              
              
              11,332
              10,938Net
                  cash provided by operating activities
              
              
              102,844
              81,609**Investing
                  Activities:**Principal
                  payments received on mortgage loan portfolio
              
              
              $1,521,305
              $1,519,622Net
                  cash used in investing activities
              
              
              (1,048,448)
              (1,050,131)**Financing
                  Activities:**Debt
                  issuance costs
              
              
              $(25,420)
              $(8,306)Purchases
                  of derivative instruments
              
              
              (6,245)
              —Net
                  cash provided by financing activities
              
              
              1,167,166
              1,190,084






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




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





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





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





·
            our
                ability to successfully implement our growth
                strategy;





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





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





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





·
            our
                ability to complete securitizations of our loans at favorable financing
                rates;





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





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





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





·
            changes
                to the rating of our servicing
                operation;





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





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





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





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





·
            increasingly
                stringent servicing termination trigger
                events;





·
            increased
                prepayment speeds;





·
            decreased
                valuations of our mortgage loan portfolio and MSRs due to catastrophic
                environmental influences or natural disasters such as hurricanes,
                tornados
                and earthquakes;





·
            future
                litigation developments or regulatory or enforcement actions;
                and





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







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





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








**Table
                of Contents**Executive
                SummaryDescription
                of Other
                Data2005
                Events and OutlookCritical
                Accounting
                PoliciesConsolidated
                ResultsBusiness
                Segment
                ResultsFinancial
                ConditionLiquidity
                and Capital
                ResourcesOff
                Balance Sheet Items and Contractual
                Obligations







**Executive
      Summary**




*Company
      Overview*




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





·
            Portfolio
                Management, or our portfolio
                segment;





·
            Mortgage
                Loan Servicing, or our servicing
                segment;





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





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




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 may result in growth in our mortgage loan portfolio. Decreases also lead
      to
      increases in loan prepayments, which result in increases in prepayment penalty
      income, but decrease servicing income. In addition, decreases in interest rates
      reduce our cost to borrow, but generally lead to increases in our borrowings
      because loan originations tend to rise during periods of decreased interest
      rates.




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




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




For
      the
      three months ended September 30, 2005 and 2004 we originated, purchased, or
      called approximately $0.8 billion and $1.0 billion, respectively, and
      securitized approximately $1.0 billion and $1.2 billion, respectively, of
      residential mortgage loans. For the nine months ended September 30, 2005 and
      2004 we originated, purchased, or called approximately $2.4 billion and $2.7
      billion, respectively, and securitized approximately $2.7 billion and $2.3
      billion, respectively, of residential mortgage loans. Called loans occur upon
      exercise of the clean-up call option by our taxable REIT subsidiaries, which
      serve as servicer or master servicer of various securitized pools within our
      mortgage loan servicing portfolio. A clean-up call option is an option to
      acquire all remaining mortgage loans, and any real estate owned, referred to
      as
      REO, in a securitized pool that arises at the time the aggregate unpaid
      scheduled principal balance of the loans declines to an amount that is less
      than
      10% of the aggregate unpaid scheduled principal balance of the total pool at
      the
      time of securitization. We did not exercise any clean-up call options during
      the
      first nine months of 2005.




We
      intend
      to continue accessing the asset-backed securitization market to provide
      long-term financing for our mortgage loans. We finance the loans initially
      using
      one of several different secured and committed warehouse financing facilities.
      These loans are subsequently financed using asset-backed securities issued
      through securitization trusts. From May 1996 to September 30, 2005, we
      securitized approximately $21.8 billion in mortgage loans. Since July 6, 2001,
      we have structured our securitizations as financing transactions for financial
      reporting purposes under accounting principles generally accepted in the United
      States of America, or GAAP. Accordingly, following a securitization, (1) the
      mortgage loans we originate or purchase remain on our consolidated balance
      sheet; (2) the securitization indebtedness replaces the warehouse debt
      associated with the securitized mortgage loans; and (3) we record interest
      income on the mortgage loans and interest expense on the securities issued
      in
      the securitization over the life of the securitization, instead of recognizing
      a
      gain or loss upon completion of the securitization. This accounting treatment
      more closely matches the recognition of income with the receipt of cash payments
      on the individual loans than does gain on sale accounting, which we used prior
      to July 6, 2001.






*Industry
      Overview and Prospective Trends*




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




According
      to the Mortgage Bankers Association of America website as of October 12, 2005,
      lenders in the United States originated $2.6 trillion in single-family mortgage
      loans in 2004. Approximately 44% of the loan originations in 2004 were
      attributable to mortgage loan refinancings by customers taking advantage of
      the
      decline in interest rates. As of October 12, 2005, lenders in the United States
      are expected to originate approximately $2.9 trillion in single-family mortgage
      loans in 2005. Generally, we believe sub-prime borrowers are not solely
      motivated by fluctuations in interest rates. We experienced a decrease of $151.8
      million, or 15%, in our production volume to $847.8 million for the third
      quarter of 2005 compared to $999.6 million for the third quarter of 2004.
      Similarly, we experienced a decrease of $0.3 billion, or 11%, in our production
      volume to $2.4 billion for the first nine months of 2005 compared to $2.7
      billion for the first nine months of 2004. Our production levels during the
      first nine months of 2005 were negatively impacted by the closing and/or
      divestiture of several of our retail branches, intense pricing competition
      existing in the marketplace throughout the first nine months of 2005 and the
      introduction of new products to the marketplace by our competitors.




The
      non-conforming, residential mortgage industry has become increasingly
      competitive in recent years. Today the industry is dominated by a small number
      of large companies. According to the B & C Lending Survey, the top three
      mortgage lenders controlled a combined 30% of the mortgage origination market
      as
      of June 30, 2005, up from 27% as of December 31, 2003, and up from 15% as of
      December 31, 1997. This market share domination has led to intense competition
      within the industry and has negatively impacted our profitability. Specifically,
      lenders in the industry have not raised interest rates in line with increases
      in
      market interest rates, which has reduced our net interest margin and negatively
      impacted our liquidity. Also, the introduction and concentration of
      interest-only products in 2004 and 40-year products in 2005 have negatively
      impacted spreads in the industry. We expect these trends to continue throughout
      2005. To compete effectively, we will be required to achieve and maintain a
      high
      level of operational, technological and managerial expertise and efficiencies,
      as well as an ability to attract capital at a competitive cost.




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




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







**Description
      of Other Data**




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




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




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




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





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







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





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





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




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





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




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




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




**2005
      Events and Outlook**




During
      the third quarter of 2005, we made significant progress in increasing our
      staffing levels within our strategically located retail mortgage branches.
      Also,
      we have already begun to experience efficiencies and increased productivity
      from
      centralizing our wholesale and retail back-end operations during the first
      half
      of 2005 and expect this to continue in the future.





In
      the
      third quarter of 2005, we continued to experience an increase in short-term
      borrowing interest rates and faster prepayment speeds due to the popularity
      of
      interest-only and other longer amortization products in the marketplace, and
      we
      continued to see a marked increase in competitive pricing, product, and credit
      exception practices within our industry. We also experienced an increase in
      the
      2/3 year swap curve and six-month LIBOR curve, which positively impacted the
      fair value of our derivatives and increased our derivative gains. We anticipate
      these trends to continue through the remainder of the year.





During
      the third quarter of 2005, whole loan sale premiums continued to decline. If
      this trend continues, we may not utilize whole loan sales as a strategy for
      disposing of non-portfolio assets until the whole loan sale market provides
      economically attractive terms. In the meantime, we seek to avoid originating
      mortgage loans that are not suitable for our portfolio.





In
      August
      2005, Hurricane Katrina made landfall in the U.S. Gulf Coast region. We could
      incur significant losses as a result of this hurricane, which could have a
      material adverse effect on our financial position, results of operations and
      liquidity. Further details are discussed in “-- Consolidated Results.”





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





**Critical
      Accounting Policies**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses our consolidated financial statements, which have been prepared in
      accordance with GAAP. The preparation of these consolidated financial statements
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and the disclosure of contingent assets and
      liabilities as of the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. On an
      on-going basis, management evaluates its estimates and judgments. Management
      bases its estimates and judgments on historical experience and on various other
      factors that it believes to be reasonable under the circumstances, the results
      of which form the basis for making judgments about the carrying values of assets
      and liabilities that are not readily apparent from other sources. Actual results
      may differ from these estimates and the estimates will change under different
      assumptions or conditions.





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





·
            amortization
                of yield adjustments to net interest
                income;




·
            allowance
                for loan losses and past due
                interest;




·
            mortgage
                servicing rights;




·
            deferral
                of direct loan origination costs;
                and




·
            accounting
                for income taxes.








*Amortization
      of Yield Adjustments to Net Interest Income*




Net
      interest income is calculated as the difference between our interest income
      and
      interest expense. Interest income on our mortgage loan portfolio is a
      combination of accruing interest based on the outstanding balance and
      contractual terms of the mortgage loans and the amortization of yield
      adjustments using the interest method, principally the amortization of premiums,
      discounts, and other net capitalized fees or costs associated with originating
      our mortgage loans. These yield adjustments are amortized against interest
      income over the lives of the assets using the interest method adjusted for
      the
      effects of estimated prepayments. Management does not currently use the payment
      terms of each loan contract in the calculation of amortization. Because we
      hold
      a large number of similar loans for which prepayments are probable, we currently
      use a prepayment model to project loan prepayment activity based upon loan
      age,
      loan type and remaining prepayment penalty coverage. Estimating prepayments
      and
      estimating the remaining lives of our mortgage loan portfolio requires
      management judgment, which involves consideration of possible future interest
      rate environments and an estimate of how borrowers will behave in those
      environments. Reasonableness tests are performed against past history, mortgage
      asset pool specific events, current economic outlook and loan age to verify
      the
      overall prepayment projection. If these mortgage loans prepay at an actual
      speed
      that differs from the projections used in our estimates, GAAP requires us to
      adjust the remaining capitalized yield adjustments accordingly on a prospective
      and retrospective basis.




Mortgage
      prepayments generally increase on our adjustable rate mortgages when fixed
      mortgage interest rates fall below the then-current interest rates on
      outstanding adjustable rate mortgage loans. Prepayments on mortgage loans are
      also affected by the terms and credit grades of the loans, conditions in the
      housing and financial markets and general economic conditions. We have sought
      to
      minimize the effects caused by faster than anticipated prepayment rates by
      lowering premiums paid to acquire mortgage loans, which decreases the balance
      of
      premiums to be amortized, and by purchasing and originating mortgage loans
      with
      prepayment penalties. Those penalties typically expire two to three years from
      origination. As of September 30, 2005, approximately 74% of our mortgage loan
      portfolio had active prepayment penalty features. We anticipate that prepayment
      rates on a significant portion of our adjustable rate mortgage portfolio will
      increase as these adjustable rate loans reach their initial adjustments during
      2005 and 2006, due to the high concentration of two to three year hybrid loans
      we originated or purchased during 2002 and 2003. However, management expects
      that the amendments to government regulations related to the Alternative
      Mortgage Transactions Parity Act, which restricted the ability of
      state-chartered mortgage lenders to charge prepayment penalties on certain
      types
      of mortgage loans, effective July 1, 2003, could reduce the percentage of our
      loans with active prepayment penalty features in future periods. The constant
      prepayment rate, or CPR, currently used to project cash flows is 35% over twelve
      months. Actual
      prepayment penalty income is recorded when the cash is collected and is not
      recorded based on CPR assumptions. Therefore, in instances where our CPR
      increases, we anticipate also having an increase in prepayment penalty
      income.




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







*Allowance
      for Loan Losses and Past Due Interes*





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





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





During
      the third quarter of 2005, we recorded a reserve of $6.8 million in connection
      with estimated losses in our mortgage loan portfolio due to Hurricane Katrina.
      This amount was determined based on an analysis of the specific pool of mortgage
      loans within the federally declared disaster areas segmented into categories
      based on an estimation of the extent of flooding in each such area. The pool
      was
      further segmented to exclude loans for properties covered by flood insurance
      and
      loans for which we had received correspondence from the borrower and/or actual
      property inspection reports indicating damage was less severe than expected.
      The
      remaining pool of loans’ unpaid principal balances and their associated basis
      adjustments, advances and accrued interest were accumulated and a range of
      estimated percentage of loss severity was applied using different insurance
      coverage scenarios. This analysis yielded a range of possible loss estimates
      from $1.4 million to $9.4 million, with a best estimate of $6.8 million,
      calculated using what we believe to be the most probable loss severity and
      insurance coverage scenarios. This estimate is imprecise, and if different
      loss
      severities had been applied or if estimates of the extent of flooding had been
      altered, numerous different estimates may have been obtained. As additional
      information is obtained and processed over the coming months and quarters,
      this
      reserve will be revised accordingly.





*Mortgage
      Servicing Rights*





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





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




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





During
      the third quarter of 2005, we recorded an additional MSR impairment related
      to
      the damage caused by Hurricane Katrina of $0.4 million. This amount was
      determined based on an analysis of the specific pool of serviced mortgage loans
      within the federally declared disaster areas segmented into categories based
      on
      an estimation of the extent of flooding in each such area. The pool of serviced
      loans’ unpaid principal balances were accumulated and a percentage of loss was
      then applied to each segment to determine the amount of loan principal at risk.
      The resulting amount of loan principal at risk was then applied to the total
      MSR
      balance to determine the impact of impairment. This analysis yielded a range
      of
      possible loss estimates from $0.4 million to $0.5 million, with the lowest
      end
      of the range representing what we believe is the best estimate within the range,
      given the uncertain nature of the final outcome. This estimate is imprecise,
      and
      if different loss severities had been applied or if estimates of the extent
      of
      flooding had been altered, numerous different estimates may have been obtained.
      As additional information is obtained and processed over the coming months
      and
      quarters, this estimate will be revised accordingly.





*Deferral
      of Direct Loan Origination Costs*





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





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




*Accounting
      for Income Taxes*




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





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





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




**Consolidated
      Results**





*Three
      and Nine Months Ended September 30, 2005 versus Three and Nine Months Ended
      September 30, 2004*





*Overview.* Net
      income increased $18.1 million, or 131%, to $31.9 million for the three months
      ended September 30, 2005 from $13.8 million for the three months ended September
      30, 2004. Net income increased $24.5 million, or 36%, to $92.9 million for
      the
      nine months ended September 30, 2005 from $68.4 million for the nine months
      ended September 30, 2004. The increase was primarily the result of an increase
      in our derivative gains and increased servicing income, net of amortization
      and
      impairment, offset by decreases in our net interest income after provision
      for
      mortgage loan losses and an increase in our total expenses. Overall, our net
      income was positively impacted by the growth in our mortgage loan and servicing
      portfolios and was negatively affected by an increase in one-month LIBOR rates,
      which significantly increased our borrowing costs while intense price
      competition has severely limited our ability to increase the interest rates
      we
      charge on our mortgage loans. To the extent that we continue to grow our
      mortgage loan and servicing portfolios, we would expect an increase in interest
      income and servicing income. However, if one-month LIBOR rates continue to
      rise
      and pricing pressures impede our ability to increase the interest rates we
      charge on our mortgage loans accordingly, the increased interest income would
      be
      offset by higher interest expense. Also, our ability to grow our mortgage loan
      portfolio could be negatively impacted by the intense pricing pressures
      currently being experienced in our industry.




**Revenues**





*Total
      Net Revenues, Gains and Losses.* Total
      net revenues, gains and losses increased $25.5 million, or 61%, to $67.2 million
      for the three months ended September 30, 2005 from $41.7 million for the three
      months ended September 30, 2004. Total net revenues, gains and losses increased
      $13.0 million, or 7%, to $201.8 million for the nine months ended September
      30,
      2005 from $188.8 million for the nine months ended September 30, 2004. The
      increase in total net revenues, gains and losses was due primarily to an
      increase in our derivative gains and our servicing income, net of amortization
      and impairment, partially offset by a decrease in our net interest income
      relating to increased borrowing costs, and an increase in our provision for
      mortgage loan losses. During the last year, our interest income has not grown
      at
      the same rate as our interest expense. This lack of growth is due to the intense
      pricing competition affecting the sub-prime residential mortgage loan industry
      as well as the lowering of accretion on our hedges as they were negatively
      impacted by the flattening of the 2/3 year swap curve during the first half
      of
      2005. However, this curve increased overall during the third quarter, which
      positively impacted the fair value of our derivatives and increased our
      derivatives gains..




*Interest
      Income* .
      Interest income increased $14.7 million, or 14%, to $116.1 million for the
      three
      months ended September 30, 2005, from $101.4 million for the three months ended
      September 30, 2004. Interest income increased $37.8 million, or 13%, to $339.6
      million for the nine months ended September 30, 2005, from $301.8 million for
      the nine months ended September 30, 2004. The increase in interest income was
      due primarily to growth in our mortgage loan portfolio, as well as decreased
      amortization of our yield adjustments. This increase was partially offset by
      (1)
      the impact of lower weighted-average coupon rates (WAC) on our mortgage loans
      and (2) a decrease in prepayment penalty income. The WAC on our production
      for
      2004 and for the first nine months of 2005, which represents 96% of our owned
      portfolio, was negatively impacted by prepayments on higher WAC loans, the
      resetting of adjustable rate mortgage loans in our portfolio as well as the
      intense pricing competition affecting the sub-prime residential mortgage loan
      industry. Competition had less of an effect on the WAC on our mortgage loans
      during the first nine months of 2004 compared to the intensely competitive
      environment we are currently experiencing in 2005. The components of these
      decreases are discussed in more detail below.








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





As
      shown
      in the table below, compared to the three and nine months ended September 30,
      2004, our interest income increased $13.3 million and $54.4 million for the
      three and nine months ended September 30, 2005, respectively, due to an increase
      in the size of our mortgage loan portfolio, and increased $1.7 million and
      decreased $14.0 million for the three and nine months ended September 30, 2005,
      respectively, due to fluctuations in the WAC, net of amortization, on our
      mortgage loan portfolio.







**Three
                Months Ended September 30, 2005**
              **Compared
                to**
              **Three
                Months Ended September 30, 2004**
            **Nine
                Months Ended September 30, 2005**
              **Compared
                to**
              **Nine
                Months Ended September 30, 2004******
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in Interest Income**
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in****Interest Income**(in
                thousands)Securitized
                loans
            $1,623
            $15,426
            $17,049
            $(16,383)
            $58,850
            $42,467Warehouse
                loans
            (143)
            (2,157)
            (2,300)
            1,810
            (4,537)
            (2,727)Mortgage
                bonds
            179
            14
            193
            546
            144
            690Other
            —
            (27)
            (27)
            —
            (36)
            (36)Total
            $1,659
            $13,256
            $14,915
            $(14,027)
            $54,421
            $40,394Prepayment
                penalty income
            —
            —
            (210)
            —
            —
            (2,573)$14,705
            
            
            $37,821






*Interest
      Income Yield Analysis For the Three and Nine Months Ended September 30, 2005
      and
      2004*




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




**Three
                Months Ended September 30, 2005**
            **Three
                Months Ended September 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**($
                in thousands)Gross
            $6,132,934
            $110,450
            7.20%
            $5,375,840
            $97,272
            7.24%Less
                amortization of yield adjustments (1)
            —
            (3,420)
            (0.22)%
            —
            (5,202)
            (0.39)%$6,132,934
            $107,030
            6.98%
            $5,375,840
            $92,070
            6.85%Add
                prepayment penalty income
            —
            9,071
            0.59%
            —
            9,326
            0.69%**Total
                interest-earning assets**
            $6,132,934
            $116,101
            7.57%
            $5,375,840
            $101,396
            7.54%





**Nine
                months ended September 30, 2005**
            **Nine
                months ended September 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**($
                in thousands)Gross
            $6,070,007
            $331,473
            7.28%
            $5,029,513
            $293,066
            7.77%Less
                amortization of yield adjustments (1)
            —
            (16,284)
            (0.36)%
            —
            (18,316)
            (0.49)%$6,070,007
            $315,189
            6.92%
            $5,029,513
            $274,750
            7.28%Add
                prepayment penalty income
            —
            24,411
            0.54%
            —
            27,029
            0.72%**Total
                interest-earning assets**
            $6,070,007
            $339,600
            7.46%
            $5,029,513
            $301,779
            8.00%


_______________


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





The
      increase in gross interest income is consistent with the growth of our mortgage
      loan portfolio. Our gross mortgage loan portfolio increased $0.6 billion, or
      11%, to $6.2 billion as of September 30, 2005 from $5.6 billion as of September
      30, 2004. However, this growth was offset partially by the 49 basis point
      decrease in gross WAC for the nine months ended September 30, 2005 as compared
      to the nine months ended September 30, 2004 due to intense pricing competition,
      the liquidation of higher WAC loans, and the increase in the credit quality
      of
      our mortgage loan portfolio. We anticipate that our gross interest income in
      dollars will continue to grow as our mortgage loan portfolio grows and as the
      adjustable rate mortgage loans in our portfolio reset. This growth could be
      negatively impacted by continuation of the intense pricing pressures we are
      currently experiencing.





Amortization
      expense of yield adjustments decreased $1.8 million, or 35%, to $3.4 million
      for
      the three months ended September 30, 2005 from $5.2 million for the three months
      ended September 30, 2004, and decreased $2.0 million, or 11%, to $16.3 for
      the
      nine months ended September 30, 2005 from $18.3 million for the nine months
      ended September 30, 2004. During the three and nine months ended September
      30,
      2005, the decrease in amortization expense of yield adjustments was due to
      a
      significant increase in the projected forward 6-month LIBOR curve.




Prepayment
      penalty income decreased $0.2 million, or 2%, to $9.1 million for the three
      months ended September 30, 2005 from $9.3 million for the three months ended
      September 30, 2004, and decreased $2.6 million, or 10%, to $24.4 million for
      the
      nine months ended September 30, 2005 from $27.0 million for the nine months
      ended September 30, 2004. Despite
      the return of faster prepayment speeds during the third quarter of 2005, we
      were
      unable to collect prepayment penalty income on a portion of our prepaid loans
      due to the amendment of government regulations related to the Alternative
      Mortgage Transactions Parity Act. We expect that these amendments could continue
      to reduce our prepayment penalty income in future periods.





*Securitized
      Mortgage Loan Coupon and Prepayment Penalty Coverage*





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





Our
      loan
      principal balance was composed of 68% adjustable rate loans and 32% fixed rate
      loans at September 30, 2005. The percentage of our adjustable rate loans in
      their reset period was 12% at September 30, 2005. The following tables set
      forth
      information about our securitized mortgage loan portfolio including those loans
      associated with our securitized REO properties as of September 30, 2005 and
      December 31, 2004.







**Issue
                Date**
            **Original
                Loan Principal Balance**
            **Current
                Loan Principal Balance**
            **Fixed
                Current Loan Principal Balance**
            **Arm
                Current Loan Principal Balance**
            **Percentage
                of Portfolio**
            **Percentage
                of**
              **Original**
              **Remaining**
            **Remaining
                WAC Fixed**
            **Remaining
                WAC Arm**($
                in thousands)**September
                30, 2005**SAST
                2001-2
            8/2/2001
            $650,410
            $104,500
            $74,028
            $30,472
            2%
            16%
            9.22%
            10.17%SAST
                2001-3
            10/11/2001
            $699,999
            $94,606
            $40,245
            $54,361
            2%
            14%
            9.93%
            9.86%SAST
                2002-1
            3/14/2002
            $899,995
            $160,066
            $86,651
            $73,415
            3%
            18%
            8.88%
            9.44%SAST
                2002-2
            7/10/2002
            $605,000
            $117,792
            $52,002
            $65,790
            2%
            19%
            8.95%
            9.47%SAST
                2002-3
            11/8/2002
            $999,999
            $229,180
            $99,708
            $129,472
            4%
            23%
            8.33%
            8.87%SAST
                2003-1
            3/6/2003
            $749,996
            $221,300
            $134,549
            $86,751
            4%
            30%
            7.39%
            8.66%SAST
                2003-2
            5/29/2003
            $599,989
            $181,103
            $95,691
            $85,412
            3%
            30%
            7.23%
            7.94%SAST
                2003-3
            9/16/2003
            $1,000,000
            $406,334
            $212,097
            $194,237
            7%
            41%
            7.19%
            7.85%SAST
                2004-1
            2/19/2004
            $1,099,999
            $558,433
            $171,116
            $387,317
            9%
            51%
            7.82%
            7.40%SAST
                2004-2
            7/27/2004
            $1,199,994
            $787,680
            $418,958
            $368,722
            13%
            66%
            6.97%
            6.68%SAST
                2004-3
            10/27/2004
            $899,956
            $639,496
            $111,511
            $527,985
            11%
            71%
            7.80%
            7.06%SAST
                2005-1
            1/25/2005
            $999,972
            $808,574
            $113,536
            $695,038
            14%
            81%
            7.39%
            6.78%SAST
                2005-2
            6//07/2005
            $979,990
            $906,830
            $140,295
            $766,535
            15%
            93%
            7.51%
            7.18%SAST
                2005-3
            9/29/2005
            $759,446
            $756,074
            $152,072
            $604,002
            13%
            100%
            7.19%
            7.29%Total
            
            $12,144,745
            $5,971,968
            $1,902,459
            $4,069,509Less:
                unpaid principal balance of securitized
              REO
                properties
            (43,608)Total
                securitized loans
            $5,928,360**December
                31, 2004**SAST
                2001-2
            8/2/2001
            $650,410
            $142,563
            $98,239
            $44,324
            3%
            22%
            9.35%
            9.85%SAST
                2001-3
            10/11/2001
            $699,999
            $141,710
            $54,027
            $87,683
            3%
            20%
            10.01%
            9.60%SAST
                2002-1
            3/14/2002
            $899,995
            $247,779
            $118,020
            $129,759
            5%
            28%
            8.87%
            9.01%SAST
                2002-2
            7/10/2002
            $605,000
            $192,448
            $74,037
            $118,411
            4%
            32%
            8.87%
            9.16%SAST
                2002-3
            11/8/2002
            $999,999
            $352,051
            $133,009
            $219,042
            7%
            35%
            8.34%
            8.31%SAST
                2003-1
            3/6/2003
            $749,996
            $344,066
            $178,206
            $165,860
            7%
            46%
            7.45%
            8.09%SAST
                2003-2
            5/29/2003
            $599,989
            $317,171
            $132,299
            $184,872
            6%
            53%
            7.30%
            7.41%SAST
                2003-3
            9/16/2003
            $1,000,000
            $616,099
            $280,365
            $335,734
            12%
            62%
            7.23%
            7.52%SAST
                2004-1
            2/19/2004
            $1,099,999
            $835,925
            $226,877
            $609,048
            16%
            76%
            7.85%
            7.39%SAST
                2004-2
            7/27/2004
            $1,199,994
            $1,097,890
            $532,313
            $565,577
            21%
            91%
            7.02%
            6.74%SAST
                2004-3
            10/27/2004
            $899,956
            $877,628
            $133,122
            $744,506
            17%
            98%
            7.87%
            7.11%Total
            $9,405,337
            $5,165,330
            $1,960,514
            $3,204,816Less:
                unpaid principal balance of securitized
              REO
                properties
            (42,259)Total
                securitized loans
            $5,123,071




Borrowers
      who accept a prepayment penalty receive a lower interest rate on their mortgage
      loan. A number of states restrict our ability to charge prepayment penalties
      on
      mortgage loans made to borrowers in such states. Borrowers always retain the
      right to refinance their loan, but may have to pay a fee of up to six-months
      interest on 80% of the remaining principal when prepaying their loans. If the
      mortgage loan prepays within the prepayment penalty coverage period, we will
      record revenue from collection of a prepayment penalty. We report prepayment
      penalties when we collect such fees in interest income. In addition, if a loan
      prepays we fully expense any related deferred costs for that loan upon
      prepayment. We reflect the amortization of deferred costs in interest
      income.





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





**12
                Month Constant Prepayment Rate (Annual Percent)**
            **Life-to-date
                Constant Prepayment Rate (Annual Percent)******
            **Issue
                Date**
            **Percent
                with**
              **Prepayment
                Penalty**
            **Fixed**
            **Arm**
            **Fixed**
            **Arm****September
                30, 2005**SAST
                2001-2
            8/2/2001
            50.50%
            30.58%
            41.98%
            30.48%
            42.36%SAST
                2001-3
            10/11/2001
            29.58%
            33.82%
            49.04%
            34.96%
            43.47%SAST
                2002-1
            3/14/2002
            35.74%
            33.50%
            51.26%
            31.88%
            43.83%SAST
                2002-2
            7/10/2002
            14.98%
            35.30%
            50.12%
            33.67%
            43.45%SAST
                2002-3
            11/8/2002
            45.66%
            32.77%
            53.05%
            30.73%
            43.66%SAST
                2003-1
            3/6/2003
            61.13%
            31.62%
            57.37%
            27.90%
            46.33%SAST
                2003-2
            5/29/2003
            55.55%
            35.48%
            59.73%
            28.72%
            47.71%SAST
                2003-3
            9/16/2003
            61.98%
            31.56%
            50.20%
            23.88%
            40.95%SAST
                2004-1
            2/19/2004
            64.00%
            29.91%
            43.80%
            24.77%
            38.06%SAST
                2004-2
            7/27/2004
            62.53%
            22.51%
            39.81%
            21.62%
            37.24%SAST
                2004-3
            10/27/2004
            58.69%
            —
            —
            16.13%
            33.62%SAST
                2005-1
            1/25/2005
            60.55%
            —
            —
            14.95%
            29.55%SAST
                2005-2
            6/07/2005
            57.25%
            —
            —
            7.75%
            24.03%SAST
                2005-3
            9/29/2005
            63.88%
            —
            —
            —
            —**December
                31, 2004**SAST
                2001-2
            8/2/2001
            48.42%
            36.11%
            52.36%
            30.75%
            42.96%SAST
                2001-3
            10/11/2001
            25.67%
            41.45%
            50.46%
            35.79%
            42.73%SAST
                2002-1
            3/14/2002
            68.44%
            34.12%
            49.03%
            31.29%
            40.97%SAST
                2002-2
            7/10/2002
            60.73%
            36.03%
            47.77%
            32.90%
            39.90%SAST
                2002-3
            11/8/2002
            57.17%
            38.17%
            51.72%
            30.56%
            41.09%SAST
                2003-1
            3/6/2003
            75.10%
            34.98%
            49.58%
            26.83%
            40.17%SAST
                2003-2
            5/29/2003
            76.57%
            31.87%
            44.93%
            25.88%
            37.15%SAST
                2003-3
            9/16/2003
            71.35%
            24.44%
            41.52%
            20.23%
            35.48%SAST
                2004-1
            2/19/2004
            64.45%
            —
            —
            18.89%
            30.77%SAST
                2004-2
            7/27/2004
            62.73%
            —
            —
            12.37%
            22.62%SAST
                2004-3
            10/27/2004
            55.86%
            —
            —
            1.77%
            21.59%





*Interest
      Expense* .
      Interest expense increased $28.8 million, or 72%, to $68.8 million for the
      three
      months ended September 30, 2005 from $40.0 million for the three months ended
      September 30, 2004, and increased $79.7 million, or 75%, to $185.3 million
      for
      the nine months ended September 30, 2005 from $105.6 million for the nine months
      ended September 30, 2004. The table below presents the total change in interest
      expense for the three and nine months ended September 30, 2005 compared to
      the
      three and nine months ended September 30, 2004, and the amount of the total
      change that is attributable to increasing interest rates and an increase in
      our
      outstanding debt. Compared to the three and nine months ended September 30,
      2004, our interest expense increased $24.7 million and $60.1 million for the
      three and nine months ended September 30, 2005, respectively, as a result of
      higher interest rates on our interest bearing liabilities and increased $4.1
      million and $19.6 million for the three and nine months ended September 30,
      2005, respectively, due to an increase in our borrowings.





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




**Three
                Months Ended September 30, 2005 Compared to**
              **Three
                Months Ended September 30, 2004**
            **Nine
                Months Ended September 30, 2005 Compared to**
              **Nine
                Months Ended September 30, 2004******
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in Interest Expense**
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in**
              **Interest
                Expense**(in
                thousands)Securitization
                financing
            $24,009
            $5,400
            $29,409
            $56,522
            $22,686
            $79,208Warehouse
                financing:Lines
                of credit
            (840)
            (135)
            (975)
            (292)
            289
            (3)Repurchase
                agreements
            1,537
            (633)
            904
            3,871
            (2,190)
            1,681Other
            —
            (561)
            (561)
            —
            (1,153)
            (1,153)Total
            $24,706
            $4,071
            $28,777
            $60,101
            $19,632
            $79,733








*Interest
      Expense Yield Analysis For the Three and Nine Months Ended September 30, 2005
      and 2004*





As
      seen
      in the table below, our increase in interest expense was due primarily to the
      increase in the average yield on interest-bearing liabilities of 159 basis
      points and 134 basis points for the three and nine months ended September 30,
      2005, respectively. One-month LIBOR rates increased 202 basis points from
      September 30, 2004 to September 30, 2005. Our average balance of borrowings
      increased $0.5 billion, or 9%, to $6.2 billion for the three months ended
      September 30, 2005 from $5.7 billion for the three months ended September 30,
      2004, and increased $0.9 billion, or 17%, to $6.2 billion for the nine months
      ended September 30, 2005 from $5.3 billion for the nine months ended September
      30, 2004 as a result of the growth in our mortgage loan portfolio. Our


amortization
      of yield adjustments increased $9.7 million, or 135%, to $2.5 million net
      amortization for the three months ended September 30, 2005 from $(7.2) million
      net accretion for the three months ended September 30, 2004, and increased
      $24.4
      million, or 103%, to $0.6 million net amortization for the nine months ended
      September 30, 2005 from $(23.8) million net accretion for the nine months ended
      September 30, 2004. Specifically, our amortization of debt issuance costs
      increased $1.8 million due to the issuance of new securitization debt in
      January, June, and September 2005. In addition, the accretion of premium on
      the
      interest only classes of certain of our bonds decreased $23.0 million due to
      the
      repayment of such bonds, partially offset by a decrease in our amortization
      of
      discounts on other bonds of $0.4 million.





**Three
                Months Ended September 30, 2005**
            **Three
                Months Ended September 30, 2004****Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**($
                in thousands)**Warehouse
                financing**
            $175,874
            $1,465
            3.26%
            $204,261
            $1,384
            2.65%Less
                compensating balance credits (1)
            —
            (1,339)
            (2.98)%
            —
            (285)
            (0.55)%**Net
                warehouse financing**
            175,874
            126
            0.28%
            204,261
            1,099
            2.10%**Repurchase
                agreements**
            302,438
            3,258
            4.22%
            392,017
            2,354
            2.35%**Securitization
                financing:**Gross
            5,745,518
            61,855
            4.31%
            5,044,790
            42,117
            3.34%Plus
                (less) net amortization (accretion) of yield adjustments
                (2)
            —
            2,470
            0.17%
            —
            (7,200)
            (0.57)%**Net
                securitization financing:**
            5,745,518
            64,325
            4.48%
            5,044,790
            34,917
            2.77%**Notes
                payable**
            —
            —
            —
            22,043
            448
            8.00%**Other
                expenses**
            —
            1,098
            —
            —
            1,212
            —**Total
                interest-bearing liabilities**
            $6,223,830
            $68,807
            4.42%
            $5,663,111
            $40,030
            2.83%**Nine
                Months Ended September 30, 2005**
            **Nine
                Months Ended September 30, 2004******
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**($
                in thousands)**Warehouse
                financing**
            $179,333
            $4,961
            3.65%
            $158,219
            $2,958
            2.46%Less
                compensating balance credits (1)
            —
            (2,654)
            (1.95)%
            —
            (649)
            (0.54)%**Net
                warehouse financing**
            $179,333
            $2,307
            1.70%
            $158,219
            $2,309
            1.92%**Repurchase
                agreements**
            $255,098
            $7,357
            3.80%
            $371,511
            $5,676
            2.01%**Securitization
                financing:**Gross
            5,725,673
            171,777
            4.00%
            4,726,198
            116,965
            3.30%Plus
                (less) net amortization (accretion) of yield adjustments
                (2)
            —
            642
            0.01%
            —
            (23,753)
            (0.67)%**Net
                securitization financing:**
            $5,725,673
            $172,419
            4.01%
            $4,726,198
            $93,212
            2.63%**Notes
                payable**
            —
            —
            —
            24,014
            1,443
            8.00%**Other
                expenses**
            —
            3,202
            —
            —
            2,912
            —**Total
                interest-bearing liabilities**
            $6,160,104
            $185,285
            4.01%
            $5,279,942
            $105,552
            2.67%


___________________


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




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




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







*Net
      Interest Margin* .
      Our net
      interest margin decreased to 3.1% for the three months ended September 30,
      2005,
      from 4.6% for the three months ended September 30, 2004, and decreased to 3.4%
      for the nine months ended September 30, 2005, from 5.2% for the nine months
      ended September 30, 2004. The decline in our net interest margin was primarily
      attributable to an increase in the cost of our borrowings due to an increase
      in
      one-month LIBOR, competitive pricing pressures, as well as our shift in credit
      mix to loans with lower WACs and prepayments of higher WAC loans. We use
      derivative instruments to manage our exposure to changes in interest rates.
      Changes in one-month LIBOR may have an immediate impact on our borrowing costs
      and our net interest margin, while the impact of such changes on derivative
      instruments is reflected in derivatives gains (losses), which is not a component
      of net interest margin. Over the term of the debt, we believe the derivatives
      should effectively protect our net revenues and gains.




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




**September
                30, 2005**
            **December
                31, 2004**(in
                thousands)Collateral:Fixed
            $1,902,459
            $1,960,514Arm
            4,069,509
            3,204,816Total
            $5,971,968
            $5,165,330Financing:Fixed
            $695,109
            $921,745Arm
            5,336,311
            4,212,421Total
            $6,031,420
            $5,134,166







*Provision
      for Mortgage Loan Losses* .
      Provision for mortgage loan losses increased $8.3 million, or 77%, to $19.1
      million for the three months ended September 30, 2005, from $10.8 million for
      the three months ended September 30, 2004, and increased $8.8 million, or 40%,
      to $30.8 million for the nine months ended September 30, 2005, from $22.0
      million for the nine months ended September 30, 2004. We did not make any
      significant changes in our reserve methodologies or assumptions during the
      nine
      months ended September 30, 2005.




During
      the third quarter of 2005, we recorded a reserve of $6.8 million in connection
      with estimated losses in our mortgage loan portfolio due to the damage caused
      by
      Hurricane Katrina during August 2005. This amount was determined based on an
      analysis of the specific pool of mortgage loans within the federally declared
      disaster areas segmented into categories based on an estimation of the extent
      of
      flooding in each such area. The pool was further segmented to exclude loans
      for
      properties covered by flood insurance and loans for which we had received
      correspondence from the borrower and/or actual property inspection reports
      indicating damage was less severe than expected. The remaining pool of loans’
unpaid principal balances and their associated basis adjustments, advances
      and
      accrued interest were accumulated and a range of estimated percentage of loss
      severity was applied using different insurance coverage scenarios. This analysis
      yielded a range of possible loss estimates from $1.4 million to $9.4 million,
      with a best estimate of $6.8 million calculated using the most probable loss
      severity and insurance coverage scenarios. This estimate is imprecise, and
      if
      different loss severities had been applied or if estimates of the extent of
      flooding had been altered, numerous different estimates may have been obtained.
      As additional information is obtained and processed over the coming months
      and
      quarters, this reserve will be revised accordingly.





The
      increase in the provision for the nine months ended September 30, 2005 as
      compared to the nine months ended September 30, 2004 was also attributable
      to an
      increase in delinquencies in the 30-59 day delinquent category of $0.1 million,
      or 21%. Serious delinquencies remained relatively constant over this time period
      even as the mortgage loan portfolio continues to season. Also, by looking at
      the
      portfolio on a static pool basis, or each year’s production over time, we are
      experiencing a decrease in overall losses on our 2005, 2004 and 2003 production
      as compared to our 2002 and 2001 production, as losses from production in the
      earlier years were charged-off and replaced with loans of higher credit quality.
      We saw a decrease in serious delinquency rates and loss severities in our owned
      portfolio in the first nine months of 2005 compared to the first nine months
      of
      2004. We believe this decrease was the result of the improved credit quality
      of
      our portfolio.




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




*Delinquency
      and Loss Experience Of Our Owned Portfolio*








**September
                30,******
            **2005**
            **2004**Total
                Delinquencies and Loss Experience
            ($
                in thousands)Total
                outstanding principal balance (at period end)
            $6,185,969
            $5,575,386Delinquency
                (at period end):30-59
                days:Principal
                balance
            $357,960
            $295,202Delinquency
                percentage
            5.79%
            5.29%60-89
                days:Principal
                balance
            $85,159
            $81,062Delinquency
                percentage
            1.38%
            1.45%90
                days or more:Principal
                balance
            $40,316
            $34,515Delinquency
                percentage
            0.65%
            0.62%Bankruptcies
                (1):Principal
                balance
            $125,780
            $101,492Delinquency
                percentage
            2.03%
            1.82%Foreclosures:Principal
                balance
            $128,253
            $122,074Delinquency
                percentage
            2.07%
            2.19%Real
                estate owned (2):Principal
                balance
            $46,310
            $48,295Delinquency
                percentage
            0.75%
            0.87%Total
                seriously delinquent including real estate owned (3)(4)
            $393,843
            $369,488Total
                seriously delinquent including real estate owned (3)(4)
            6.37%
            6.63%Total
                seriously delinquent excluding real estate owned (4)
            $347,533
            $321,193Total
                seriously delinquent excluding real estate owned (4)
            5.62%
            5.76%Securitization
                net losses on liquidated loans - quarter ended
            $9,496
            $10,862Charge-offs
                - quarter ended (5)
            $8,618
            $10,988Percentage
                of securitization net losses on liquidated loans (6)
            0.61%
            0.78%Percentage
                of charge-offs on liquidated loans (6)
            0.56%
            0.79%Loss
                severity on liquidated loans (7)
            37.32%
            40.47%


________________


(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, 2005 and 2004
                are
                $24.5 million and $13.6 million, respectively.




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




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




(4)
            Total
                seriously delinquent including REO using the OTS method would be
                $303.3
                million, or 4.90% as of September 30, 2005 and $289.4 million, or
                5.19% as
                of September 30, 2004. Total seriously delinquent excluding REO using
                the
                OTS method would be $257.0 million, or 4.16% as of September 30,
                2005, and
                $243.1 million, or 4.36% as of September 30,
                2004.




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




(6)
            Annualized.




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






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





**For
                the Three Months Ended September 30,******
            **2005**
            **2004**(in
                thousands)Securitization
                net losses on liquidated loans
            $9,496
            $10,862Loan
                transfers to real estate owned
            7,530
            9,900Realized
                losses on real estate owned
            (7,789)
            (9,139)Timing
                differences between liquidation and claims processing
            (258)
            (497)Interest
                not advanced on warehouse
            (157)
            (78)Other
            (204)
            (60)Charge-offs
                (1)
            $8,618
            $10,988


________________


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









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




**September
                30, 2005**
            **September
                30, 2004**
            **September
                30, 2005**
            **September
                30, 2004**
            **September
                30, 2005**
            **September
                30, 2004******
            **Seriously
                Delinquent**
              **Outstanding
                Principal Balance (1)**
            **Seriously
                Delinquent Percentage (1)**
            **Cumulative
                Charge-Offs**($
                in thousands)2001
                Securitizations
            $55,056
            $84,200
            27.65%
            25.59%
            $52,006
            $40,7642002
                Securitizations
            89,513
            133,014
            17.65%
            14.29%
            38,848
            26,8962003
                Securitizations
            77,780
            96,925
            9.62%
            6.55%
            14,277
            5,2142004
                Securitizations
            111,326
            43,757
            5.61%
            2.10%
            5,907
            1712005
                Securitizations
            51,380
            —
            2.08%
            —
            506
            —Warehouse
            8,788
            11,592
            4.11%
            1.54%
            5,332
            4,909Total
            $393,843
            $369,488
            6.37%
            6.63%
            $116,876
            $77,954


_______________


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




*Servicing
      Income, Net of Amortization and Impairment* .
      Servicing income, net of amortization and impairment increased $12.5 million,
      or
      189%, to $19.1 million for the three months ended September 30, 2005 from $6.6
      million for the three months ended September 30, 2004, and increased $33.3
      million, or 201%, to $49.9 million for the nine months ended September 30,
      2005
      from $16.6 million for the nine months ended September 30, 2004. The increase
      in
      gross servicing income was primarily the result of a higher average total
      servicing portfolio due to the continued growth in our owned portfolio, which
      generates servicing income in the form of ancillary fees, as well as the
      acquisition of additional third party servicing rights. This increase was offset
      by an increase of $9.6 million and $20.1 million of amortization and impairment
      expense of MSRs for the three and nine months ended September 30, 2005, compared
      to the three and nine months ended September 30, 2004, respectively. The
      increase in MSR amortization expense was due to an increase in the third party
      servicing rights balance from $81.6 million at September 30, 2004 to $148.0
      million at September 30, 2005. The increase in MSR impairment was primarily
      a
      result of increased prepayment speeds and decreased valuations of MSR assets
      in
      the marketplace.




Due
      to
      the damage caused by Hurricane Katrina during August of 2005, we have recorded
      an additional MSR impairment of $0.4 million. This amount was determined based
      on an analysis of the specific pool of serviced mortgage loans within the
      federally declared disaster areas segmented into categories based on an
      estimation of the extent of flooding in each such area. The pool of serviced
      loans’ unpaid principal balances were accumulated and a percentage of loss was
      then applied to each segment to determine the amount of loan principal at risk.
      The resulting amount of loan principal at risk was then applied to the total
      MSR
      balance to determine the impact of impairment. This analysis yielded a range
      of
      possible loss estimates from $0.4 million to $0.5 million, with the lowest
      end
      of the range representing what we believe to be the best estimate within the
      range, given the uncertain nature of the final outcome. This estimate is
      imprecise, and if different loss severities had been applied or if estimates
      of
      the extent of flooding had been altered, numerous different estimates may have
      been obtained. As additional information is obtained and processed over the
      coming months and quarters, this estimate will be revised accordingly.





We
      expect
      our servicing income to increase as we continue to 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, 2005 Compared to the
      Three and Nine months ended September 30, 2004*




**Three
                Months Ended September 30,**
            **Nine
                Months Ended September 30,******
            **2005**
            **2004**
            **Variance**
            **2005**
            **2004**
            **Variance**($
                in thousands)Average
              third party servicing portfolio
            $20,282,597
            $8,448,838
            140%
            $17,673,359
            $6,457,661
            174%Average
                owned portfolio
            $5,981,671
            $5,298,164
            13%
            $5,983,204
            $4,952,886
            21%Average
                total servicing portfolio
            $26,264,268
            $13,747,002
            91%
            $23,656,563
            $11,410,547
            107%Gross
                servicing income
            $35,889
            $13,888
            158%
            $88,632
            $35,209
            152%Amortization
                and impairment
            $16,826
            $7,252
            132%
            $38,779
            $18,635
            108%Servicing
                fees - third party portfolio (1) (2)
            51
            56
            
            52
            57Amortization
                and impairment- third party portfolio (1)
            33
            34
            
            30
            39Other
                servicing income - total servicingportfolio
                (1)(3)
            15
            6
            
            15
            16Servicing
                income - total servicing portfolio (1)
            55
            40
            
            50
            41


___________




(1)
            Annualized
                and in basis points.




(2)
            Includes
                master servicing fees.




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









**Expenses**





*Payroll
      and Related Expenses* .
      Payroll
      and related expenses increased $1.2 million, or 6%, to $21.3 million for the
      three months ended September 30, 2005 from $20.1 million for the three months
      ended September 30, 2004. Specifically:





·
            Salary,
                bonus, and related payroll expenses increased $1.6 million, or 10%,
                to
                $18.4 million for the three months ended September 30, 2005, from
                $16.8
                million for the three months ended September 30, 2004. This increase
                was
                primarily attributable to an increase in our average headcount during
                the
                three months ended September 30,
                2005.





·
            Severance
                expense increased $1.1 million, or 1100%, to $1.2 million for the
                three
                months ended September 30, 2005, from $0.1 million for the three
                months
                ended September 30, 2004. The severance expense increase reflects
                the
                departures of our Executive Vice President, Capital Markets and our
                Senior
                Vice President and Corporate Strategies Director in July 2005.





·
            Deferred
                payroll and related expenses, as they related to direct loan origination
                costs, decreased $1.7 million, or 22%, to $5.9 million for the three
                months ended September 30, 2005, from $7.6 million for the three
                months
                ended September 30, 2004, due to lower production volume during the
                third
                quarter of2005
                combined with the closing of fifteen retail branches since the third
                quarter of 2004 and the consequently lower deferred payroll
                costs.





·
            The
                increase in payroll and related expenses for the three months ended
                September 30, 2005 was partially offset by a decrease in 1) commission
                expense of $1.1 million due to lower production volume during the
                third
                quarter of 2005 and 2) stock compensation expense of $2.2 million
                due to
                the vesting of all restricted stock units and options as a result
                of the
                REIT conversion in the third quarter of
                2004.





Payroll
      and related expenses increased $4.3 million, or 8%, to $59.3 million for the
      nine months ended September 30, 2005 from $55.0 million for the nine months
      ended September 30, 2004. Specifically:





·
            Salary,
                bonus, and related payroll expenses increased $4.0 million, or 8%
                to $55.1
                million for the nine months ended September 30, 2005 from $51.1 million
                for the nine months ended September 30, 2004. This increase was primarily
                attributable to an increase in our average headcount during the nine
                months ended September 30, 2005.





·
            Our
                401(k) company match expense increased $0.2 million, or 20%, to $1.2
                million for the nine months ended September 30, 2005, from $1.0 million
                for the nine months ended September 30, 2004, as a result of increased
                employee participation in the 401(k) retirement
                plan.





·
            Deferred
                payroll and related expenses, as they related to direct loan origination
                costs, decreased $3.8 million, or 17%, to $18.7 million for the nine
                months ended September 30, 2005, from $22.5 million for the nine
                months
                ended September 30, 2004, due to lower production volume during the
                nine
                months ended September 30, 2005 combined with the closing of fifteen
                retail branches since the third quarter of 2004 and the consequently
                lower
                deferred payroll costs.





·
            The
                increase in payroll and related expenses for the nine months ended
                September 30, 2005 was partially offset by a decrease in 1) commission
                expense of $1.8 million due to lower production volume during the
                third
                quarter of 2005 and 2) stock compensation expense of $1.9 million
                due to
                the vesting of all restricted stock units and options as a result
                of the
                REIT conversion in the third quarter of
                2004.




*General
      and Administrative Expenses* .
      General
      and administrative expenses increased $3.1 million, or 22%, to $16.9 million
      for
      the three months ended September 30, 2005, from $13.8 million for the three
      months ended September 30, 2004. The increase was due primarily to an increase
      in accounting and consulting/outside services expense of $1.5 million, an
      increase of $1.1 million in rent expense, and a decrease in capitalized costs,
      as they related to direct loan origination costs, of $0.1 million.





General
      and administrative expenses increased $10.0 million, or 26%, to $48.3 million
      for the nine months ended September 30, 2005, from $38.3 million for the nine
      months ended September 30, 2004. The increase was due primarily to an increase
      in accounting, and consulting/outside services expense of $5.6 million, an
      increase of $2.4 million in lease and rental expenses, and a decrease in
      capitalized costs, as they related to direct loan origination costs, of $0.7
      million.





The
      increase in lease and rental expenses for the three and nine months ended
      September 30, 2005 is primarily attributable to our new mortgage loan
      origination facility and second servicing site in Glen Allen, Virginia.
      Additionally, the term of our lease agreement for our principal executive
      facility has been extended to correspond to the term of our lease agreement
      for
      our new mortgage loan origination facility and second servicing site, which
      terminates in the third quarter of 2017.





*Income
      Tax (Benefit) Expense* .
      We
      recorded a $5.8 million tax benefit for the three months ended September 30,
      2005 compared to a $9.3 million tax benefit for the three months ended September
      30, 2004. We recorded a $6.2 million tax benefit for the nine months ended
      September 30, 2005 compared to an $18.1 million tax expense for the nine months
      ended September 30, 2004. The significant income tax benefit recorded for the
      three months ended September 30, 2004 was the result of the impact of the
      structure and formation transactions related to our REIT conversion.


During
      the third quarter of 2005, we recorded a cumulative adjustment to increase
      income tax benefit and increase deferred tax asset of approximately $3.7 million
      to correct the amortization of the net prepaid liability created by the tax
      on
      intercompany gains and losses related to the sales of mortgage loans and
      servicing advance receivables from the taxable REIT subsidiary to the qualified
      REIT subsidiary. We do not believe that the impact of the correction for the
      adjustment is material to the financial statements as of and for the quarters
      ended September 30, 2004; December 31, 2004; March 31, 2005 and June 30, 2005;
      as of and for the year ended December 31, 2004; nor is the cumulative adjustment
      recorded in the third quarter of 2005 expected to be material, in the aggregate,
      to the financial statements as of and for the year ending December 31, 2005.
      The
      adjustment had no impact on cash flows, taxable income or the amount of
      dividends declared for any of these periods.





***REIT
      Taxable Income***





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





**Three
                months ended**
              **September
                30, 2005**
            **Nine
                months ended**
              **September
                30, 2005**($
                in thousands)Consolidated
                GAAP income before taxes, including cumulative effect of change in
                accounting principle (SFAS 123(R))
            $26,113
            $86,696Estimated
                tax adjustments:Plus:Provision
                for mortgage loan losses
            22,148
            40,547Elimination
                of intercompany income before taxes
            2,095
            15,577Securitized
                loan adjustments for tax
            3,351
            —Miscellaneous
            —
            907Less:Taxable
                REIT subsidiary income before taxes
            3,840
            16,281Hedging
                income (1)
            20,300
            30,163Securitized
                loan adjustments for tax
            —
            5,901Miscellaneous
            99
            —Estimated
                REIT taxable income
            $29,468
            $91,382Estimated
                REIT taxable income per common share
            $0.59
            $1.83


________________


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





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





**Business
      Segment Results**





We
      operate our business through three core business segments: portfolio; servicing;
      and mortgage loan production. All segments except the portfolio segment are
      operated by our taxable REIT subsidiaries. In this section, we discuss
      performance and results of our business segments for the three and nine months
      ended September 30, 2005 and 2004. See Note 11 to our unaudited consolidated
      financial statements for additional information about the results of our
      business segments.





***Portfolio
      Segment***




The
      portfolio segment uses our equity capital and borrowed funds to invest in our
      mortgage loan portfolio, which produces net interest income. The portfolio
      segment also records servicing expense associated with servicing its mortgage
      loan portfolio. We evaluate the performance of our portfolio segment based
      on
      total net revenues. Total net revenues and gains for the portfolio segment
      increased $18.8 million, or 104%, to $36.9 million for the three months ended
      September 30, 2005 from $18.1 million for the three months ended September
      30,
      2004. This increase was due primarily to a $19.9 million gain on derivatives
      trading for the three months ended September 30, 2005 compared to a $(15.8)
      million loss on derivatives trading for the three months ended September 30,
      2004. Alternatively, the net interest margin after provision for mortgage loan
      losses for the portfolio segment decreased to $18.3 million for the three months
      ended September 30, 2005 from $33.8 million for the three months ended September
      30, 2004. Total net revenues and gains for the portfolio segment increased
      $7.3
      million, or 7%, to $118.0 million for the nine months ended September 30, 2005
      from $110.7 million for the nine months ended September 30, 2004. The increase
      in total net revenues and gains was due primarily to a $26.0 million gain on
      derivatives trading for the nine months ended September 30, 2005 compared to
      a
      $(5.0) million loss on derivatives trading for the nine months ended September
      30, 2004. Alternatively, the net interest margin after provision for mortgage
      loan losses for the portfolio segment decreased to $93.6 million for the nine
      months ended September 30, 2005 from $115.8 million for the nine months ended
      September 30, 2004. The decreases in the net interest margin after provision
      for
      mortgage loan losses for the portfolio segment for both the three and nine
      months ended September 30, 2005 were primarily due to margin compression
      resulting from intense pricing pressures and the increase in our borrowing
      costs
      due to the increase in one-month LIBOR.





***Servicing
      Segment***




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




*Our
      Mortgage Loan Servicing Portfolio*





In
      addition to servicing mortgage loans that we originate or purchase through
      our
      taxable REIT subsidiaries and retain in our portfolio, we also service mortgage
      loans for other lenders and investors.





Our
      loan
      servicing portfolio as of September 30, 2005 is summarized below:





**Number
                of Loans**
            **Principal
                Balance**
            **Percent
                of Total**
            **Average
                Loan Balance**($
                in thousands)**Owned
                Portfolio:**Saxon
                Capital, Inc.(1)
            42,912
            $6,185,969
            23%
            $144**Third
                Party Servicing:**Greenwich
                Capital, Inc.
            59,279
            $8,734,018
            
            $147Credit
                Suisse First Boston
            36,288
            5,997,350
            
            165Barclays
                Bank, PLC.
            13,542
            2,654,208
            
            196Bank
                of America
            6,763
            1,190,697
            
            176Dominion
                Capital
            6,537
            433,630
            
            66IXIS
            3,313
            597,968
            
            180Lehman
                Brothers
            2,582
            464,922
            
            180Fannie
                Mae
            534
            61,273
            
            115Dynex
                Capital, Inc.
            311
            27,290
            
            88Other
                investors
            283
            9,445
            
            33**Total
                third party servicing**
            129,432
            $20,170,801
            77%
            $156Total
            172,344
            $26,356,770
            
            $153


_________________




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




Our
      mortgage loan servicing portfolio, including loans recorded on our consolidated
      balance sheets, increased $6.2 billion, or 31%, to $26.4 billion as of September
      30, 2005, from $20.2 billion as of December 31, 2004. The increase was due
      primarily to the origination and purchase of $2.4 billion of mortgage loans
      as
      well as the acquisition of servicing rights related to $16.0 billion of mortgage
      loans owned by non-affiliated companies during the first nine months of 2005.
      This increase was partially offset by prepayments and losses totaling $7.4
      billion and principal payments on, and sales of loans from, our mortgage
      portfolio totaling $2.2 billion.





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




*Delinquency
      and Loss Experience Of Our Total Servicing Portfolio*




We
      experienced an increase in seriously delinquent accounts for our mortgage loan
      servicing portfolio to 6.26% for the three months ended September 30, 2005
      from
      5.83% for the three months ended September 30, 2004. This was mainly a result
      of
      the increased use of forbearance plans to mitigate losses, which causes us
      to
      carry accounts in a delinquent category for the duration of the repayment plan,
      as well as the seasoning of the portfolio. The
      following tables set forth information about the delinquency and loss experience
      of the mortgage loans we service for the periods indicated using the MBA method.
      (See footnote (4) below the table for disclosure of seriously delinquent data
      using the OTS method.)





**September
                30,******
            **2005**
            **2004**Total
                Delinquencies and Loss Experience (1)
            ($
                in thousands)Total
                outstanding principal balance (at period end)
            $26,356,770
            $16,098,212Delinquency
                (at period end):30-59
                days:Principal
                balance
            $1,515,753
            $796,261Delinquency
                percentage
            5.75%
            4.95%60-89
                days:Principal
                balance
            $414,500
            $223,377Delinquency
                percentage
            1.57%
            1.39%90
                days or more:Principal
                balance
            $248,530
            $112,732Delinquency
                percentage
            0.94%
            0.70%Bankruptcies
                (2):Principal
                balance
            $397,545
            $261,979Delinquency
                percentage
            1.51%
            1.63%Foreclosures:Principal
                balance
            $542,642
            $286,823Delinquency
                percentage
            2.06%
            1.78%Real
                estate owned:Principal
                balance
            $157,192
            $99,032Delinquency
                percentage
            0.60%
            0.62%Total
                seriously delinquent including real estate owned (3)(4)
            $1,649,245
            $939,282Total
                seriously delinquent including real estate owned (3)(4)
            6.26%
            5.83%Total
                seriously delinquent excluding real estate owned (4)
            $1,492,053
            $840,249Total
                seriously delinquent excluding real estate owned (4)
            5.66%
            5.22%Securitization
                net losses on liquidated loans - quarter ended
            $23,111
            $22,060Percentage
                of securitization net losses on liquidated loans (5)
            0.35%
            0.55%Loss
                severity on liquidated loans (6)
            36.99%
            46.49%





__________


(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,
                2005 and
                2004 are $87.8 million and $32.1 million, respectively.




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




(4)
            Total
                seriously delinquent including REO using the OTS method would be
                $1.2
                billion, or 4.63% as of September 30, 2005 and $711.5 million, or
                4.42% as
                of September 30, 2004. Total seriously delinquent excluding REO using
                the
                OTS method would be $1.1 billion, or 4.04% as of September 30, 2005,
                and
                $614.9 million, or 3.82% as of September 30,
                2004.




(5)
            Annualized.




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









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




**Year**
            **Original
                Balance**
            **Balance
                Outstanding**
            **Percentage
                of Original Remaining**
            **Cumulative
                Loss Percentage (3)**
            **Loss
                Severity (4) (5)**($
                in thousands)Pre-divestiture:1996
            $741,645
            $10,467
            1%
            1.94%
            31.30%1997
            $1,769,538
            $41,798
            2%
            3.23%
            38.91%1998
            $2,084,718
            $91,152
            4%
            4.09%
            39.52%1999
            $2,381,387
            $188,299
            8%
            5.05%
            41.72%2000
            $2,078,637
            $207,628
            10%
            5.49%
            43.69%2001
            $499,879
            $60,123
            12%
            3.52%
            68.25%Post-divestiture:2001
            $1,833,357
            $253,859
            14%
            3.58%
            40.21%2002
            $2,484,074
            $478,499
            19%
            1.47%
            35.02%2003
            $2,842,942
            $975,928
            34%
            0.34%
            24.21%2004
            $3,764,628
            $2,217,248
            59%
            0.04%
            20.48%2005
            $2,440,750
            $1,917,430
            79%
            —
            18.55%


_________________




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




(2)
            As
                of September 30, 2005.




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




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




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







***Mortgage
      Loan Production Segment***




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





Mortgage
      loan production was $847.8 million for the three months ended September 30,
      2005, which represents a 15% decrease from the three months ended September
      30,
      2004 production of $999.6 million, which included $50.4 million in called loans.
      Mortgage loan production was $2.4 billion for the nine months ended September
      30, 2005, which represents an 11% decrease from the nine months ended September
      30, 2004 production of $2.7 billion, which included $0.2 million in called
      loans. We did not exercise any clean-up call options during the first nine
      months of 2005. Our wholesale mortgage loan production was decreased 2% from
      the
      three months ended September 30, 2004 to $404.6 million for the three months
      ended September 30, 2005, and was $1.1 billion for the first nine months of
      2005
      as well as the first nine months of 2004. Our retail channel loan production
      was
      $170.2 million for the three months ended September 30, 2005, a decrease of
      31%
      from the three months ended September 30, 2004, and was $550.6 million during
      the first nine months of 2005, a decrease of 22% from the first nine months
      of
      2004. Our correspondent flow mortgage loan production was $228.7 million for
      the
      three months ended September 30, 2005, a decrease of 14% from the three months
      ended September 30, 2004, and was $650.8 million during the first nine months
      of
      2005, an increase of 11% from the first nine months of 2004. Our correspondent
      bulk mortgage loan production was $44.2 million for the three months ended
      September 30, 2005, a decrease of 5% from the three months ended September
      30,
      2004, and was $115.4 million during the first nine months of 2005, a decrease
      of
      2% from the first nine months of 2004. In our correspondent channel, we continue
      to focus on growing the flow business while pursuing the bulk business when
      we
      consider market conditions to be advantageous.





**Financial
      Condition**




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





*Net
      Mortgage Loan Portfolio.* Our
      net
      mortgage loan portfolio increased $0.2 billion, or 3%, to $6.2 billion as of
      September 30, 2005 from $6.0 billion as of December 31, 2004. This increase
      was
      the result of the origination and purchase of $2.4 billion of mortgage loans
      offset by principal payments of $2.0 billion and loan sales of $0.2 million.
      We
      expect that our mortgage loan portfolio will continue to grow as we continue
      to
      originate and purchase mortgage loans. However, we anticipate the growth rate
      will be slower than historical growth rates as our portfolio ages, more seasoned
      mortgage loans are paid off, and as competition in our industry remains intense.





*Allowance
      for Loan Loss.* The
      allowance for loan loss increased $9.9 million, or 40%, to $34.8 million as
      of
      September 30, 2005 from $24.9 million as of December 31, 2004. The increase
      in
      the allowance for loan loss was attributable to a specific reserve recorded
      for
      Hurricane Katrina losses of $6.8 million as well as additional provisions of
      $24.0 million due to an increase in delinquencies, offset by charge-offs
      primarily from our 2001 and 2002 securitizations, which were provided for in
      previous periods. We expect our allowance for loan loss may increase in the
      future as our portfolio continues to grow.





*Mortgage
      servicing rights, net.* Mortgage
      servicing rights (MSRs), net increased $39.9 million, or 40%, to $138.9 million
      as of September 30, 2005 from $99.0 million as of December 31, 2004. This
      increase was primarily due to purchases of $78.7 million of rights to service
      $16.0 billion of mortgage loans during the first nine months of 2005. The
      increase in MSRs was partially offset by amortization of servicing rights of
      $33.9 million during the first nine months of 2005. Also, our valuation
      allowance increased $4.8 million as the result of: 1) decreased valuations
      of
      MSRs in the marketplace; 2) actual prepayment speeds being greater than
      projected during the first nine months of 2005 on certain aged third party
      servicing pools, and 3) probable losses relating to Hurricane Katrina. We have
      sought to strategically position ourselves to take advantage of the increased
      supply of servicing assets in the marketplace and have been able to purchase
      servicing assets at what we believe to be favorable prices. We anticipate that
      the demand for non-conforming servicing will continue and that we will continue
      to purchase servicing rights in the future, which would increase our net
      servicing income. We have committed to purchasing the rights to service an
      additional $1.1 billion unpaid principal balance of third party mortgage loans
      during the remainder of 2005, of which $0.2 billion have been purchased in
      October 2005 for approximately $1.1 million.





*Servicing
      Related Advances.* Servicing related advances increased $42.5 million, or 39%, to $152.3 million
      as
      of September 30, 2005 from $109.8 million as of December 31, 2004. The increase
      was primarily due to the increase in our third party servicing balances, an
      increase in delinquencies in the third party servicing pools, and increased
      delinquencies related to Hurricane Katrina.





*Trustee
      Receivable.* Trustee
      receivable increased $18.0 million, or 16%, to $130.1 million as of September
      30, 2005 from $112.1 million as of December 31, 2004. The increase was primarily
      due to the completion of three securitizations during the first nine months
      of
      2005, as well as increased collections after the applicable trust cut-off date
      as a result of higher prepayment activity. On each payment date, the trust
      distributes securitization loan payments to the related bondholders. These
      loan
      payments are collected by the trust before the cut-off date, which is typically
      the 17 th of each
      month. Therefore, all principal payments received after the cut-off date are
      recorded as a trustee receivable and reduce our mortgage loan portfolio on
      our
      consolidated balance sheet. The trustee retains these principal payments until
      the following payment date. As we continue to securitize mortgage loans, we
      anticipate that our trustee receivable balance will increase.





*Other
      Assets.* Other
      assets decreased $16.6 million, or 20%, to $67.3 million as of September 30,
      2005 from $83.9 million as of December 31, 2004. The decrease in other assets
      is
      primarily the result of a decrease in our net current tax receivable balance
      of
      $24.3 million. This decrease was partially offset by an increase in net capital
      expenditures of $4.4 million and an increase in deferred issuance costs of
      $2.7
      million.





*Warehouse
      Financing.* Warehouse financing decreased $456.5 million, or 76%, to $144.1 million as
      of
      September 30, 2005 from $600.6 million as of December 31, 2004. We expect our
      warehouse financing to continue to fluctuate from one reporting period to the
      next as a result of the timing of our securitizations and mortgage loan
      production.





*Securitization
      Financing.* Securitization financing increased $0.9 billion, or 17%, to $6.2 billion as
      of
      September 30, 2005 from $5.3 billion as of December 31, 2004. This increase
      resulted primarily from the execution of three asset-backed securitizations,
      which resulted in debt being issued in the amount of $1.0 billion during the
      first quarter of 2005, $1.0 billion during the second quarter of 2005, and
      $0.9
      billion during the third quarter of 2005. This increase was partially offset
      by
      debt and certificate payments of $2.1 billion. In general, we expect increases
      in our securitization financing as we experience increased mortgage loan
      production and continue to securitize our mortgage loans.





*Shareholders’
      Equity.* Shareholders’
      equity increased $44.9 million, or 8%, to $632.0 million as of September 30,
      2005, from $587.1 million as of December 31, 2004. The increase in shareholders’
equity was due primarily to net income of $92.9 million, partially offset by
      the
      declaration of $55.8 million in dividends.





**Liquidity
      and Capital
      Resources**




Cash
      decreased by $3.4 million during the nine months ended September 30, 2005 and
      increased by $221.6 million during the nine months ended September 30, 2004.
      The
      overall change in cash consisted of the following:





**Nine
                months ended September 30,******
            **2005**
            **2004**($
                in thousands)Cash
                provided by operating activities
            $117,882
            $
                81,609Cash
                used by investing activities
            (515,764)
            (1,050,131)Cash
                provided by financing activities
            394,523
            1,190,084Increase
                (decrease) in cash
            $(3,359)
            $
                221,562





*Operating
      Activities* .
      Cash
      provided by operating activities for the nine months ended September 30, 2005
      was $117.9 million, reflecting an increase of $36.3 million, or 44%, compared
      to
      the first nine months of 2004. Although our net interest margin decreased due
      to
      the increase in the cost of our borrowings, our servicing income and gains
      from
      derivatives trading increased during the nine months ended September 30, 2005
      compared to the nine months ended September 30, 2004. Additionally, adjustments
      to net income for noncash items such as depreciation and amortization as well
      as
      provision for mortgage loan losses increased by 364% and 40%, respectively.
      Further details are discussed in “-- Consolidated Results.”





*Investing
      Activities* .
      Cash
      used for investing activities was $515.8 million for the nine months ended
      September 30, 2005. Investing activities consist principally of the origination
      and purchase of mortgage loans as well as the acquisition of MSRs. The
      origination and purchase of mortgage loans including basis adjustments totaled
      $2.5 billion for the nine months ended September 30, 2005. In addition, MSRs
      were purchased totaling $78.7 million. These decreases to cash were partially
      offset by cash received from principal payments on our mortgage loan portfolio
      totaling $1.9 billion and proceeds from the sale of mortgage loans and REO
      which
      totaled $251.3 million and $41.8 million, respectively.





Restricted
      cash increased $140.7 million to $142.2 million at September 30, 2005 due to
      the
      timing of the receipt of cash related to prefunded securitizations. Prefunded
      amounts are held in a trust account and made available once all required
      mortgage loans have been included in the securitization. During the third
      quarter of 2005, the SAST 2005-3 securitization was closed, requiring a
      prefunding settlement. Because settlement had not occurred as of September
      30,
      2005, restricted cash increased.




Capital
      expenditures during the nine months ended September 30, 2005 were $9.1 million
      and were primarily related to the new mortgage loan origination facility and
      second servicing site as well as various information technology enhancements.





*Financing
      Activities* .
      Cash
      provided by financing activities during the nine months ended September 30,
      2005
      was $394.5 million and was the result of proceeds from the issuance of
      securitization financing of $3.0 billion partially offset by principal payments
      on securitization financings of $2.1 billion, net repayment of warehouse
      financing of $456.5 million, payment of dividends of $84.7 million, and debt
      issuance costs of $10.7 million relating to the completion of three
      securitizations during the nine months ended September 30, 2005. Fluctuations
      in
      warehouse and securitization financing period over period can occur due to
      the
      timing of securitizations and the related repayment of the warehouse financing
      facilities.





*Dividends.* On July
      19, 2005, we declared a dividend of $0.55 per common share payable on August
      11,
      2005 to stockholders of record as of the close of business on July 29, 2005.
      On
      October 18, 2005, we declared a dividend of $0.50 per common share payable
      on
      November 10, 2005 to shareholders of record as of the close of business on
      October 28, 2005. Due to our election to be treated as a REIT, we expect to
      continue making quarterly distributions to shareholders, the amount and timing
      of which will be determined by our Board of Directors.





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





***Working
      Capital***




We
      intend
      to maintain sufficient working capital to fund the cash flow needs of our
      operations in the event we are unable to generate sufficient cash flows from
      operations to cover our operating requirements. Using our definition of working
      capital, we calculated our working capital as of September 30, 2005 to be
      approximately $154.0 million. Under the commonly defined working capital
      definition, we calculated our working capital as of September 30, 2005 to be
      $253.5 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, 2005**
            **Saxon
                Defined Working**
              **Capital
                (1)**
            **Commonly
                Defined Working Capital (2)**($
                in thousands)Unrestricted
                cash
            $9,493
            $9,493Borrowing
                availability
            73,650
            —Trustee
                receivable
            —
            130,117Accrued
                interest receivable
            —
            36,755Current
                tax receivable
            —
            10,833Accrued
                interest payable
            —
            (7,044)Other
                current liabilities
            —
            (25,493)Unsecuritized
                mortgage loans - payments less than one year
            193,295
            216,311Warehouse
                financing facility - payments less than one year
            (122,473)
            (144,100)Servicing
                advances
            —
            152,299Financed
                advances - payments less than one year
            —
            (25,147)Securitized
                loans - payments less than one year
            —
            2,300,057Securitized
                financing - payments less than one year
            —
            (2,400,559)Total
            $153,965
            $253,522


_________________




(1)
            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.




(2)
            Current
                assets less current liabilities.







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





·  Our
      $175.0 million facility with Greenwich Capital Financial Products,  Inc.
      was
      amended on August 29, 2005 to extend the termination date to  September
      29, 2005 and was subsequently amended on September 29,  2005
      to
      extend the termination date to October 28, 2005.





·  Our
      $150.0 million facility with Greenwich Capital Financial Products,  Inc.
      was
      amended on August 29, 2005 to extend the termination date to  September
      29, 2005 and was subsequently amended on September 29,  2005
      to
      extend the termination date to October 28, 2005.








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








**Counterparty
                Committed Lines**
            **Facility
                Amount**
            **Expiration
                Date**($
                in thousands)JP
                Morgan Chase Bank
            $
                375,000
            March
                29, 2006Greenwich
                Capital Financial Products, Inc.
            175,000
            October
                28, 2005Greenwich
                Capital Financial Products, Inc.
            150,000
            October
                28, 2005Bank
                of America, N.A.
            300,000
            June
                22, 2006CS
                First Boston Mortgage Capital, LLC
            300,000
            April
                28, 2006Merrill
                Lynch Bank USA
            400,000
            November
                21, 2005Total
                committed facilities
            $1,700,000





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





We
      had
      $144.1 million of warehouse borrowings collateralized by residential mortgages
      outstanding as of September 30, 2005. As we complete securitization
      transactions, a portion of the proceeds from the long-term debt issued in the
      securitization will be used to pay down our short-term borrowings. Therefore,
      the amount of short-term borrowings will fluctuate from quarter to quarter,
      and
      could be significantly higher or lower than the $144.1 million we held as of
      September 30, 2005, as our mortgage production and securitization programs
      continue.




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





On
      October 27, 2005 we entered into a new $300.0 million repurchase facility with
      Greenwich Capital Financial Products, Inc. due to expire on September 28, 2006.
      The new facility provides us with the ability to finance first and second lien
      loans on a wet or dry basis and to finance mortgage bonds. In conjunction with
      entering into the new facility, the existing $150.0 million and $175.0 million
      facilities with Greenwich Capital Financial Products, Inc. were both
      terminated.




***Securitization
      Financing***





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





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





*Servicing
      Advance Facility.* As of
      September 30, 2005 we had $165.1 million of borrowings outstanding and an
      additional $64.9 million of available borrowing capacity under a facility that
      allows for the issuance of notes to finance principal, interest and other
      servicing advances that we are required to make for our owned portfolio as
      well
      as those related to certain third party servicing contracts.





During
      the quarter, our servicing advance facility issued a new series of notes, called
      the Series 2005-A Notes. These notes include two classes, which replaced two
      retired classes of the original Series 2004-1 Notes and increased the total
      borrowing capacity of the facility. The Series 2005-A Notes include a class
      of
      term notes with a face value of $85.0 million and a class of variable funding
      notes with a maximum face value of $95.0 million. The Series 2004-1 Notes have
      one remaining class outstanding, term notes with a face value of $55.0
      million.





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





As
      of
      September 30, 2005, securitization financing related to mortgage loans and
      servicing advances on our consolidated balance sheet was approximately $6.2
      billion.






**Off
      Balance Sheet Items and Contractual
      Obligations**




***Off
      Balance Sheet Items***





In
      connection with mortgage loans securitized in off balance sheet transactions
      from May 1996 to July 5, 2001, of which $433.6 million were still outstanding
      as
      of September 30, 2005, and in connection with the sales of mortgage loans to
      nonaffiliated parties, our subsidiaries made representations and warranties
      about certain characteristics of the loans, the borrowers, and the underlying
      properties. In the event of a breach of these representations and warranties,
      our subsidiaries may be required to remove loans from a securitization and
      replace them with cash or substitute loans, and to indemnify parties for any
      losses related to such breach. As of September 30, 2005 our subsidiaries neither
      had nor expected to incur any material obligation to remove any such loans,
      or
      to provide any such indemnification.





Our
      subsidiaries had commitments to fund mortgage loans with agreed upon rates
      of
      approximately $261.8 million and $240.3 million as of September 30, 2005 and
      December 31, 2004, respectively. Commitments do not necessarily represent future
      cash requirements, as some portion of the commitments are likely to expire
      without being drawn upon or may be subsequently declined for credit or other
      reasons.




***Contractual
      Obligations and Commitments***





Our
      subsidiaries are obligated under non-cancelable operating leases for property
      and equipment. Future minimum rental payments for all of our operating leases
      increased to $64.3 million as of September 30, 2005 from $22.7 million as of
      December 31, 2004. In 2005, we began lease payments for our new mortgage loan
      origination facility and second servicing site in Glen Allen, Virginia.
      Additionally, the term of our lease agreement for our principal executive
      facility has been extended to correspond to the term of our lease agreement
      for
      our new mortgage loan origination facility and second servicing site, which
      terminates in the third quarter of 2017.





We
      have
      committed to purchase the rights to service an additional $1.1 billion unpaid
      principal balance of third party mortgage loans during the remainder of 2005,
      of
      which $0.2 billion were purchased during July 2005 for approximately $1.1
      million.




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






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




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




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






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




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






**As
                of September 30, 2005******
            **2005**
            **2006**
            **2007**
            **2008**
            **2009**
            **Thereafter**($
                in thousands)Caps
                bought - notional:
            $830,519
            $1,186,583
            $18,167
            —
            —
            —Weighted
                average rate
            3.97%
            3.86%
            3.25%
            —
            —
            —Caps
                sold - notional:
            $819,519
            $1,186,583
            $18,167
            —
            —
            —Weighted
                average rate
            5.20%
            4.69%
            5.00%
            —
            —
            —Futures
                sold - notional:
            —
            $771,250
            $313,750
            $127,500
            $20,000
            $7,500Weighted
                average rate
            —
            4.27%
            4.38%
            4.51%
            4.87%
            4.78%Swaps
                bought - notional:
            $2,500,000
            $1,650,000
            $600,000
            —
            —
            —Weighted
                average rate
            3.28%
            3.77%
            4.17%
            —
            —
            —Puts
                bought - notional:
            $9,525,000
            $500,000
            —
            —
            —
            —Weighted
                average rate
            4.50%
            4.75%
            —
            —
            —
            —Puts
                sold - notional:
            $2,000,000
            $125,000
            —
            —
            —
            —Weighted
                average rate
            4.25%
            3.75%
            —
            —
            —
            —Calls
                bought - notional:
            —
            $50,000
            —
            —
            —
            —Weighted
                average rate
            —
            3.75%
            —
            —
            —
            —Total
                notional:
            $15,675,038
            $5,469,416
            $950,084
            $127,500
            $20,000
            $7,500









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








*Analyzing
      Rate Shifts*




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






**Effect
                on Interest Expense of Assumed Changes in Interest Rates Over a Three
                Year
                Period******
            **September
                30, 2005**
            **December
                31, 2004******
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**($
                in thousands)Change
                in interest expense
            $7,985
            $(10,075)
            $(26,429)
            $(42,476)
            $65,786
            $40,758
            $(219)
            $(40,701)Impact
                from derivative instruments:Futures
            (1,831)
            1,893
            5,025
            9,792
            (12,302)
            (11,698)
            (1,322)
            5,834Swaps
            (3,212)
            3,672
            10,485
            16,388
            (11,753)
            (7,866)
            (276)
            6,766Puts
            (1,077)
            134
            (272)
            (83)
            1,702
            1,178
            (19)
            (310)Calls
            (2)
            (10)
            (33)
            (49)
            —
            —
            —
            —Caps
            (357)
            512
            1,647
            2,846
            (6,885)
            (3,967)
            168
            661Total
                impact from derivative instruments
            $(6,479)
            $6,201
            $16,852
            $28,894
            $(29,238)
            $(22,353)
            $(1,449)
            $12,951Net
                change
            $1,506
            $(3,874)
            $(9,577)
            $(13,582)
            $36,548
            $18,405
            $(1,668)
            $(27,750)




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





Scenario
      1 - Under this scenario we show mortgage loan and derivative valuations based
      upon an assumed aggressive response from the Board of Governors of the FRB,
      with
      the assumption that the economy is growing at a pace inconsistent with the
      FRB
      desire to maintain a stable or declining inflation environment. Under this
      scenario, we assume a hypothetical interest rate increase of approximately
      100
      basis points over a fifteen-month period. Such an increase provides us with
      a
      view of the interest expense changes assuming a comparable rise in financing
      rates. Making these assumptions as of September 30, 2005, we estimated that
      our
      interest expense would increase by $8.0 million over the life of our existing
      liabilities. However, we estimated that this amount would be partially offset
      by
      a decrease from our derivative instruments of $6.5 million over the same period.
      The net effect of this scenario would be a potential decrease of $1.5 million
      in
      our net revenues and gains. At December 31, 2004, assuming a hypothetical
      interest rate increase of approximately 225 basis points over a twelve-month
      period, we estimated at that time that our net revenues and gains would decrease
      by approximately $36.5 million.




Scenario
      2 - In this scenario we assume a slightly less severe hypothetical rise in
      interest rates compared to Scenario 1, but a relatively aggressive rise over
      the
      next six months. Under this scenario, we assume that interest rates have the
      potential to rise approximately 50 basis points over a six month period. Making
      these assumptions as of September 30, 2005, we estimated that our interest
      expense would decline by $10.1 million over the life of our liabilities.
      However, we estimated that this amount would be partially offset by an increase
      in our derivative instruments of $6.2 million. The net effect of this scenario
      would be a potential increase of $3.9 million in our net revenues and gains.
      At
      December 31, 2004, assuming interest rates had the potential to rise
      approximately 250 basis points over a two year period, we estimated at that
      time
      that our net revenues and gains would decrease by approximately $18.4 million.




Scenario
      3 - In this scenario we assume relatively stable hypothetical short-term rates.
      This scenario assumes that the FRB temporarily stops raising interest rates
      to
      assess any lag in the impact of previous rate increases on the domestic and
      global economy. Given these assumptions as of September 30, 2005, we estimated
      that our interest expense from changes in borrowing costs would decrease by
      $26.4 million. However, we estimated that this amount would be partially offset
      by an increase in our derivative instruments of $16.8 million. The net effect
      of
      this scenario would be a potential increase in net revenues and gains of $9.6
      million. At December 31, 2004, assuming interest rates increased another 100
      basis points over a 12 month period, we estimated at that time that our net
      revenues and gains would increase by approximately $1.7 million.




Scenario
      4 -This scenario assumes that the FRB increases rates another 25 basis points
      and then becomes concerned about the future prospects of economic growth and
      by
      mid 2006 reduces rates by 75 basis points to stimulate economic growth again.
      Given these assumptions as of September 30, 2005, we estimated that our interest
      expense would decrease by approximately $42.5 million, which would partially
      be
      offset by an estimated increase in our derivative instruments of approximately
      $28.9 million, for a total potential increase in net revenues and gains of
      approximately $13.6 million. At December 31, 2004, assuming interest rates
      remained steady for one year and then increased 150 basis points over a two
      year
      period, we estimated at that time that our net revenues and gains could increase
      by approximately $27.8 million.




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




**September
                30, 2005****Month**
            **Current
                Market (1)**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**Oct-05
            4.00
            4.02
            3.89
            3.76
            3.89Dec-05
            4.39
            4.40
            4.27
            4.02
            4.14Mar-06
            4.55
            4.41
            4.40
            4.15
            4.15Jun-06
            4.61
            4.55
            4.41
            4.15
            4.03Sep-06
            4.61
            4.81
            4.42
            4.16
            3.66Dec-06
            4.61
            4.95
            4.43
            4.16
            3.41Mar-07
            4.58
            4.96
            4.44
            4.17
            3.42Jun-07
            4.57
            4.97
            4.44
            4.17
            3.42Sept-07
            4.57
            4.98
            4.45
            4.18
            3.43Dec-07
            4.60
            5.00
            4.46
            4.18
            3.43Mar-08
            4.60
            5.01
            4.47
            4.19
            3.56Jun-08
            4.61
            5.02
            4.48
            4.19
            3.69Sep-08
            4.64
            5.03
            4.49
            4.20
            3.70Dec-08
            4.67
            5.04
            4.49
            4.20
            3.70Mar-09
            4.68
            5.06
            4.50
            4.21
            3.71








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


________________


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







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





**Item
      4. Controls and Procedures**





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




***Remediation
      of Material Weakness***




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




*Changes
      in Internal Control over
      Financial Reporting*




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




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






**PART
      II**




**Item
      1. Legal Proceedings**





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





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





Cechini,
      et al., v. America’s MoneyLine, Inc .
      is a
      matter filed on August 10, 2005 in the United States District Court for the
      Northern District of Illinois, Eastern Division, as Case No. 05C 4570. The
      Plaintiff filed the case as a class action, alleging violation of the Fair
      Credit Reporting Act in connection with the use of pre-approved offers of credit
      by our subsidiary, America’s MoneyLine, Inc. The plaintiff seeks certification
      as a class, statutory damages, injunctive relief, costs, attorneys’ fees, and
      other relief deemed appropriate by the court. As with other pending litigation,
      if a class is certified and there is an adverse outcome or we do not otherwise
      prevail in the matter, we could suffer material losses, although we intend
      to
      vigorously defend this lawsuit. At the present time, we cannot predict the
      outcome of this case.





Jumar
      Hooks and Diane Felder, et al., v. Saxon Mortgage, Inc. is a matter filed
      o n
      October
      12, 2005 in the Common Pleas Court for Cuyahoga County, Ohio as Case No. CV
      05
      574577. The plaintiffs filed this case as a class action on behalf of themselves
      and similarly situated Ohio borrowers, alleging that the Company’s subsidiary
      engaged in unlawful practices in originating and servicing the plaintiffs’
loans. The plaintiffs seek certification as a class and a judgment in favor
      of
      the plaintiffs for money damages, costs, attorneys’ fees, and other relief
      deemed appropriate by the court. As with other pending litigation, if a class
      is
      certified and there is an adverse outcome or we do not otherwise prevail in
      the
      matter, we could suffer material losses, although we intend to vigorously defend
      this lawsuit. At the present time, we cannot predict the outcome of this
      case.




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





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




None.




**Item
      3. Defaults Upon Senior Securities**




None.




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




None.





**Item
      5. Other Information**




(a)
            None.




(b)  None.





**Item
      6. Exhibits**





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




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




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




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




10.1
            Sale
                and Servicing Agreement, dated as of September 1, 2005, among Saxon
                Asset
                Securities Trust 2005-3, as issuer, Saxon Asset Securities Company,
                as
                depositor, Saxon Funding Management, Inc., as master servicer, Saxon
                Mortgage Services, Inc., as servicer and Deutsche Bank Trust Company
                Americas, as indenture trustee. (4)




31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under
                the
                Securities Exchange Act of 1934.




31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under
                the
                Securities Exchange Act of 1934.




32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Rule
                13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and
                18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.




___________________




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




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




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




(4)  Incorporated
      herein by reference to Saxon Asset Securities Trust 2005-3’s (SEC File No.
      333-111832-06) Current Report on Form 8-K filed with the Securities and Exchange
      Commission on October 13, 2005.







**SIGNATURES**




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





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