**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


_____________________


**FORM
      10-Q**





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


For
      the
      Quarterly Period Ended March 31, 2006


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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filerx
            Accelerated
                filero
            Non-accelerated
                filero





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 May
      1, 2006 there were 50,054,212 shares of our common stock, par value $0.01 per
      share, outstanding.








**TABLE
                OF CONTENTS****Page****Part
                I**
            **Financial
                Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Balance Sheets at March 31, 2006 and
                December 31, 2005
            1Unaudited
                Consolidated Statements of Operations for the three
                months ended March 31, 2006 and March 31, 2005
            2Unaudited
                Consolidated Statement of Shareholders’ Equity for
                the three months ended March 31, 2006 and March 31,
                2005
            3Unaudited
                Consolidated Statements of Cash Flows for the
                three months ended March 31, 2006 and March 31, 2005
            4Notes
                to Unaudited Consolidated Financial
                Statements
            5Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            23Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            62Item
                4.
            Controls
                and Procedures
            66**Part
                II**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            68Item
                1A.
            Risk
                Factors
            69Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            72Item
                3.
            Defaults
                Upon Senior Securities
            72Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            72Item
                5.
            Other
                Information
            73Item
                6.
            Exhibits
            73Signatures
            
            74Exhibit
              Index
            
            75





Table
          of
          Contents


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


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


**Saxon
      Capital,
      Inc.**


**Consolidated
      Balance Sheets**


**(in
      thousands, except share data)**


**(unaudited)**





**March
                31, 2006**
            **December
                31, 2005****Assets:**Cash
            $14,190
            $6,053Trustee
                receivable
            133,085
            135,957Accrued
                interest receivable, net of allowance for past due interest losses
                of
                $13,921 and $16,086 respectively
            40,139
            38,182Mortgage
                loan portfolio
            6,554,332
            6,444,872Allowance
                for loan losses
            (31,663)
            (36,639)Net
                mortgage loan portfolio
            6,522,669
            6,408,233Restricted
                cash
            5,854
            147,473Servicing
                related advances
            204,106
            185,297Mortgage
                servicing rights, net
            143,748
            129,742Real
                estate owned
            37,804
            38,933Derivative
                assets
            32,765
            19,954Deferred
                tax asset
            52,973
            53,724Other
                assets, net
            63,405
            68,530Total
                assets
            $7,250,738
            $7,232,078**Liabilities
                and shareholders’ equity:****Liabilities:**Accrued
                interest payable
            $8,988
            $8,357Dividends
                payable
            25,437
            32,539Warehouse
                financing
            980,669
            378,144Securitization
                financing
            5,599,832
            6,182,389Derivative
                liabilities
            15,834
            8,589Other
                liabilities
            24,710
            28,925Total
                liabilities
            6,655,470
            6,638,943Commitments
                and contingencies - Note 10
            —
            —**Shareholders’
                equity:**Common
                stock, $0.01 par value per share, 100,000,000 shares authorized;
                shares
                issued and outstanding: 50,054,212 and 50,001,909 as of March 31,
                2006 and
                December 31, 2005, respectively
            501
            500Additional
                paid-in capital
            635,139
            634,023Accumulated
                other comprehensive loss, net of income tax of $(15) and $(16),
                respectively
            (334)
            (355)Accumulated
                deficit
            (40,038)
            (41,033)Total
                shareholders’ equity
            595,268
            593,135Total
                liabilities and shareholders’ equity
            $7,250,738
            $7,232,078





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




1
 Table
          of Contents


**Saxon
      Capital, Inc.**


**Consolidated
      Statements of Operations**


**(in
      thousands, except per share data)**


**(unaudited)**





**Three
                Months****Ended
                March 31,****2006**
            **2005
                (as restated - see Note 12)****Revenues
                and Gains:**Interest
                income
            $121,280
            $112,422Interest
                expense
            (85,767)
            (54,991)Net
                interest income
            35,513
            57,431Provision
                for mortgage loan losses
            (577)
            (2,308)Net
                interest income after provision for mortgage loan losses
            34,936
            55,123Servicing
                income, net of amortization and impairment
            19,640
            13,566Derivative
                gains
            10,639
            21,234(Loss)
                gain on sale of assets
            (1,422)
            1,701Total
                net revenues and gains
            63,793
            91,624**Expenses:**Payroll
                and related expenses
            17,749
            21,751General
                and administrative expenses
            13,426
            16,020Depreciation
            1,767
            1,507Other
                expense
            1,540
            1,704Total
                operating expenses
            34,482
            40,982Income
                before taxes
            29,311
            50,642Income
                tax expense (benefit)
            2,912
            (3,327)**Net
                income**
            $26,399
            $53,969**Earnings
                per common share:**Weighted
                average common shares - basic
            50,015
            49,850Weighted
                average common shares - diluted
            51,227
            50,463Basic
                earnings per common share
            $0.53
            $1.08Diluted
                earnings per common share
            $0.52
            $1.07Dividends
                declared per common share
            $0.50
            $0.55







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




2
 Table
          of Contents


**Saxon
      Capital, Inc.**


**Consolidated
      Statements of Shareholders’ Equity**


**Three
      Months Ended March 31, 2006 and 2005**


**(in
      thousands, except share and per share amounts)**


**(unaudited)**


**Common
                Shares Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **Accumulated**
              **Deficit**
            **Total****Balance
                as of January 1, 2006**
            50,001,909
            $500
            $634,023
            $(355)
            $(41,033)
            $593,135Issuance
                of common stock
            52,303
            1
            336
            —
            —
            337Compensation
                expense for restricted stock
            —
            —
            753
            —
            —
            753Share
                based compensation tax benefit
            
            
            27
            
            
            27Dividends
                declared ($0.50 per common share)
            —
            —
            —
            —
            (25,404)
            (25,404)**Comprehensive
                income:**
              Net
                income
            —
            —
            —
            —
            26,399Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            23
            —Reclassification
                adjustment
            —
            —
            —
            (1)
            —Tax
                effect
            —
            —
            —
            (1)
            —**Total
                comprehensive income**
            —
            —
            —
            21
            26,399
            26,420**Balance
                as of March 31, 2006**
            50,054,212
            $501
            $635,139
            $(334)
            $(40,038)
            $595,268







**Common
                Shares Outstanding**
            **Common**
              **Stock**
            **Additional**
              **Paid-in
                Capital**
            **Accumulated**
              **Other**
              **Comprehensive**
              **Loss**
            **(Accumulated
                Deficit) Retained Earnings**
            **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
            34,652
            1
            483
            —
            —
            484Compensation
                expense on restricted stock units
            —
            —
            657
            —
            —
            657Stock
                option exercise tax benefit
            —
            —
            3
            —
            —
            3**Comprehensive
                income:**
              Net
                income (as restated - see Note 12)
            —
            —
            —
            —
            53,969Mortgage
                bonds:Change
                in unrealized loss
            —
            —
            —
            (124)
            —Reclassification
                adjustment
            —
            —
            —
            138
            —Tax
                effect
            —
            —
            —
            —
            —**Total
                comprehensive income (as restated - see Note 12)**
            —
            —
            —
            14
            53,969
            53,983**Balance
                as of March 31, 2005 (as restated - see Note 12)**
            49,884,038
            $499
            $626,266
            $(460)
            $15,895
            $642,200




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





3
 Table
          of Contents


**Saxon
      Capital, Inc.**


**Consolidated
      Statements of Cash Flows**


**(in
      thousands)**


**(unaudited)**




**Three
                Months Ended March 31,****2006**
            **2005
                (as restated****-**
              **see
                Note 12)****Operating
                Activities:**Net
                income
            $26,399
            $53,969Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            23,832
            13,062Deferred
                income tax provision (benefit)
            751
            (5,479)Impairment
                of assets
            2,865
            2,996Non
                cash derivative gains
            (5,003)
            (9,073)Loss
                (gain) on sale of assets
            1,422
            (1,701)Provision
                for mortgage loan losses
            577
            2,308Provision
                for past due interest losses
            3,198
            3,554Compensation
                expense for share-based compensation plans
            753
            657Increase
                in servicing related advances
            (18,809)
            (4,113)Decrease
                in accrued interest receivable
            154
            514Increase
                in accrued interest payable
            631
            165Decrease
                (increase) in trustee receivable
            2,872
            (4,860)Purchases
                of derivative instruments
            (563)
            (2,519)Decrease
                in income tax receivable
            3,880
            5,823Net
                change in miscellaneous assets and liabilities
            (8,179)
            (1,577)Net
                cash provided by operating
                activities
            34,780
            53,726**Investing
                Activities:**Purchase
                and origination of mortgage loans
            (754,613)
            (814,261)Principal
                payments received on mortgage loan portfolio
            575,907
            536,681Proceeds
                from the sale of mortgage loans
            42,086
            165,957Proceeds
                from the sale of real estate owned
            15,233
            12,114Decrease
                in restricted cash
            141,619
            395Acquisition
                of mortgage servicing rights
            (30,728)
            (21,798)Capital
                expenditures
            (3,594)
            (1,977)Net
                cash used in investing
                activities
            (14,090)
            (122,889)**Financing
                Activities:**Proceeds
                from issuance of securitization financing-bonds
            —
            1,000,000Proceeds
                from issuance of securitization
                financing-certificates
            15,906
            8,680Debt
                issuance costs
            (69)
            (3,202)Principal
                payments on securitization financing-bonds
            (597,595)
            (572,491)Principal
                payments on securitization financing-certificates
            (1,118)
            —Proceeds
                from (repayment of) warehouse financing, net
            602,525
            (331,577)Proceeds
                received from issuance of stock
            337
            484Payment
                of dividends
            (32,539)
            (28,909)Net
                cash (used in) provided by financing activities
            (12,553)
            72,985Net
                increase in cash
            8,137
            3,822Cash
                at beginning of period
            6,053
            12,852Cash
                at end of period
            $14,190
            $16,674**Supplemental
                Cash Flow Information:**Cash
                paid for interest
            $(87,801)
            $(57,059)Cash
                received for income taxes
            $1,746
            $5,074**Non-Cash
                Financing Activities:**Transfer
                of mortgage loans to real estate owned
            $23,116
            $19,784





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


4
 Table
          of Contents


**Notes
      to 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 months ended March 31, 2006 are not necessarily indicative of the
      results that may be expected for any other interim periods or the entire year
      ending December 31, 2006. Certain information and footnote disclosures normally
      included in the audited consolidated financial statements prepared in accordance
      with GAAP have been omitted. The unaudited consolidated financial statements
      presented herein should be read in conjunction with the consolidated financial
      statements and related notes thereto included in Saxon Capital, Inc.’s Annual
      Report on Form 10-K for the year ended December 31, 2005, filed with the
      Securities and Exchange Commission. 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”), was formed on February 5, 2004
      for the purpose of effecting Old Saxon’s conversion to a real estate investment
      trust, or REIT. The REIT conversion was completed on September 24,
      2004.




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


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America, or 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 allowance for loan
      and past due interest losses, valuation of mortgage servicing
      rights, deferral of certain direct loan origination costs, amortization of
      yield
      adjustments to net interest income, and income taxes.


5
 Table
          of Contents




**(c)**
                **Stock
                      Options**


The
      Company adopted Statement of Financial Accounting Standard, or SFAS, No. 123(R), *Share
      Based Payment,* on April
      1, 2005 to account for its two share-based compensation plans, namely its 2001
      Stock Incentive Plan and its 2004 Employee Stock Purchase Plan. The Company
      opted to utilize the modified prospective method of transition in adopting
      SFAS
      No. 123(R), thus prior periods were not restated. Prior to adopting SFAS No.
      123(R), the Company accounted for its share based payments in accordance with
      Accounting Principles Board, or APB, Opinion No. 25, *Accounting
      for Stock Issued to Employees* .




The
      following table illustrates that 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 to options and restricted stock units
      granted to employees during the three months ended March 31, 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**
              **March
                31,****2005**Net
                income
            $53,969Add:
                share-based compensation expense included in net income, net of related
                tax effects
            694Deduct:
                total share-based compensation expense determined under fair value
                based
                method for all awards, net of related tax effects
            (694)Pro
                forma net income
            $53,969Earnings
                per share:Basic
                - as restated
            $1.08Basic
                - pro forma
            $1.08Diluted
                - as restated
            $1.07Diluted
                - pro forma
            $1.07







**(d)**
            **Recently
                Issued Accounting
                Standards**





In
      December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS
      No. 153, *Exchange
      of Nonmonetary Assets - An Amendment of APB Opinion No. 29.* This
      statement addresses the measurement of exchanges of similar productive assets
      in
      paragraph 21(b) of APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      and
      replaces it with an exception for exchanges that do not have commercial
      substance. The statement specifies that a nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The provisions of this statement
      are
      effective for nonmonetary asset




6
 Table
          of Contents




exchanges
      occurring in fiscal periods beginning after June 15, 2005. The adoption of
      SFAS
      No. 153 on January 1, 2006 did not have a material effect on the Company’s financial
      condition or results of operations .




In
      November 2005, the FASB issued FASB Staff Position, or FSP, FAS 115-1 and FAS
      124-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* .
      This
      FSP further clarified the provisions of EITF 03-1 and reverts to
      other-than-temporary impairment guidance that predated the original effective
      date of EITF 03-1. The FSP applies to reporting periods beginning after December
      15, 2005. The adoption of FSP FAS 115-1 and FAS 124-1 on January 1, 2006 did
      not
      have a material effect on the Company’s financial condition or results of
      operations.




In
      February 2006, t he
      FASB
      issued SFAS No. 15 5, *Accounting
      for Certain Hybrid Instruments* ,
      which
      allows financial instruments that have embedded derivatives to be accounted
      for
      as a whole (eliminating the need to bifurcate the derivative from its host)
      if
      the holder elects to account for the whole instrument on a fair value basis.
      SFAS No. 155 is effective for all financial instruments acquired or issued
      after the beginning of an entity’s first fiscal year that begins after September
      15, 2006. The adoption of this statement is not anticipated to have a
      significant impact on the Company’s financial condition or results of
      operations.




In
      March 2006, the FASB issued
      SFAS No. 156, *Accounting
      for Servicing of Financial Assets - An Amendment of FASB Statement No. 140.* This
      standard amends the guidance in FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.* Among
      other requirements, SFAS No. 156 requires an entity to recognize a
      servicing asset or servicing liability each time it undertakes an obligation
      to
      service a financial asset by entering into a servicing contract in any of the
      following situations: a transfer of the servicer’s financial assets that meets
      the requirements for sale accounting; a transfer of the servicer’s financial
      assets to a qualifying special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale securities or trading
      securities; or an acquisition or assumption of an obligation to service a
      financial asset that does not relate to financial assets of the servicer or
      its
      consolidated affiliates. SFAS No. 156 is effective the beginning of the first
      fiscal year beginning after September 15, 2006. At this time, management has
      not
      yet completed its assessment of the impact of the implementation of this
      statement.




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




On
      April
      27, 2006, the Company announced that it priced its private offering of $150
      million of senior notes due 2014. The notes will bear interest at a fixed rate
      of 12% per annum. The closing of the private offering occurred on May 4, 2006.
      The Company intends to use the net proceeds from the proposed offering for
      general corporate purposes, principally the acquisition of additional
      third-party mortgage servicing rights and whole loans in bulk.


7
 Table
          of Contents




On
      May 2,
      2006, the Company closed a $494.7 million asset-backed
      securitization.





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




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









**Three
                Months****Ended
                March 31,****2006**
            **2005**(in
                thousands, except per share data)**Basic:**Net
                income
            $26,399
            $53,969Weighted
                average common shares outstanding
            50,015
            49,850Earnings
                per share
            $0.53
            $1.08**Diluted:**Net
                income
            $26,399
            $53,969Weighted
                average common shares outstanding
            50,015
            49,850Dilutive
                effect of stock options, warrants and restricted stock
                units
            1,212
            613Weighted
                average common shares outstanding - diluted
            51,227
            50,463Earnings
                per share
            $0.52
            $1.07




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




Mortgage
      loans reflected on the Company’s consolidated balance sheets as of March 31,
      2006 and December 31, 2005 were comprised of the following:







**March
                31, 2006**
            **December
                31, 2005**($
                in thousands)Securitized
                mortgage loans - principal balance
            $5,448,404
            $5,894,780Unsecuritized
                mortgage loans - principal balance
            992,350
            439,632Premiums,
                net of discounts
            98,970
            95,634Deferred
                origination costs, net
            12,121
            12,100Purchase
                accounting fair value adjustments
            2,487
            2,726Total
            6,554,332
            6,444,872Less
                allowance for loan losses
            (31,663)
            (36,639)Net
                mortgage loan portfolio
            $6,522,669
            $6,408,233




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          of Contents


During
      the three months ended
      March 31, 2006, the Company completed the prefunding settlement of the Saxon
      Asset Securities Trust, or SAST, 2005-4 securitization of mortgage loans,
      totaling $140.4 million in principal balances and $1.6 million in unamortized
      basis adjustments.




The
      Company originates both fixed-rate and adjustable-rate fully-amortizing loans
      for periods up to 30 years. The Company originates balloon products -- 40/30
      fixed and adjustable rate first mortgage balloon loans and 30/20 fixed rate
      balloon loans on second liens. The underwriting guidelines for the Company’s
      fixed-rate and adjustable-rate fully-amortizing products allow loan-to-value
      ratios, or LTVs, and combined LTVs, or CLTVs, of up to 100%, and debt ratios
      of
      either 50% or 55% in circumstances where disposable income meets a specified
      threshold. No loans originated or purchased allow for negative amortization,
      nor
      does the Company offer a minimum payment option product that would result in
      a
      borrower’s monthly payment being less than the accrued interest amount or
      minimum principal and interest amount. Fixed-rate and adjustable-rate
      interest-only mortgage loans are also available to customers with credit scores
      in excess of 560. The interest-only period is for five years and debt ratios
      for
      interest-only products are restricted to a maximum of 50%.




The
      Company’s credit committee monitors the performance of each product originated
      and looks at characteristics of any loans that pose a concern from a performance
      standpoint. Adverse trends that share any common guideline characteristic are
      analyzed to determine if action needs to be taken from a guideline restriction
      or additional risk based pricing aspect. The Company also uses mortgage
      insurance to reduce its loss exposure in the event of borrower credit defaults.





The
      following table sets forth information about the Company’s mortgage loan
      portfolio composition based on product type as of March 31, 2006 and December
      31, 2005.





**March
                31, 2006 (1)**
            **December
                31, 2005 (1)**Floating
                adjustable rate mortgage loans
            0.27
                %
            0.27%Interest-only
                adjustable rate mortgage loans
            25.71
                %
            26.21%Two
                - five year hybrids (2)
            38.15
                %
            39.62%40/30
                adjustable rate mortgage loans (3)
            4.32
                %
            2.32%Total
                adjustable rate mortgage loans
            68.45
                %
            68.42%15
                and 30 year fixed rate mortgage loans
            24.44
                %
            24.49%Interest-only
                fixed rate mortgage loans
            1.68
                %
            1.75%Balloons
                and other (4)
            4.57
                %
            4.84%40/30
                fixed rate mortgage loans (3)
            0.86
                %
            0.50%Total
                fixed rate mortgage loans
            31.55
                %
            31.58%


_______________


(1)
            Excludes
                loans funded but not transmitted to the servicing system as of March
                31,
                2006 and December 31, 2005 of $144.0 million and $110.7 million,
                respectively.


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


(3)
            40/30
                mortgage loans are loans with payments calculated according to a
                40-year
                amortization schedule, but which require the entire unpaid principal
                and
                accrued interest to be paid in full on a specified date that is 30
                years
                after origination.


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(4)
            Balloon
                loans are loans with payments calculated according to a 30-year
                amortization schedule, but which require the entire unpaid principal
                and
                accrued interest to be paid in full on a specified date that is less
                than
                30 years after origination.





***Loan
      Sales***





From
      time
      to time, the Company’s subsidiaries may choose to sell certain mortgage loans
      rather than securitize them. The Company retains the servicing rights with
      respect to sales of conforming first lien mortgage loans, and releases the
      servicing on all other loan sales. The following chart summarizes the Company’s
      activity with respect to sold mortgage loans during the periods
      presented.





**Three
                Months****Ended
                March 31,****2006**
            **2005**Performing
                mortgage loans sold:Non
                conforming first lien mortgage loans
            $—
            $98,786Conforming
                first lien mortgage loans (1)
            25,313
            19,487Second
                lien mortgage loans
            16,940
            43,406Total
                mortgage loans sold
            42,253
            161,679Plus:
                basis adjustments
            1,255
            2,577Less:
                cash received
            42,086
            165,957(Loss)
                gain on sale of mortgage loans
            $(1,422)
            $1,701


___________


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








***Concentrations
      of Risk***




Properties
      securing the mortgage loans in the Company’s mortgage loan portfolio are
      geographically dispersed throughout the Unites States. At March 31, 2006, 30%,
      19%, and 17% of the unpaid principal balance of mortgage loans in the Company’s
      mortgage loan portfolio were secured by properties located in the Southern
      region, California region, and Mid-Atlantic region, respectively. At December
      31, 2005, 30%, 19%, and 16% of the unpaid principal balances were secured by
      properties located in these same regions, respectively. The remaining properties
      securing mortgage loans did not exceed 15% in any other region at either period
      end.





In
      recent
      years, mortgage loan production was also geographically concentrated in the
      Southern, Mid-Atlantic, and California regions. During the first quarter of
      2006, these regions accounted for 29%, 25%, and 16%, respectively, of the
      Company’s collateral for mortgage loan production. During the first quarter of
      2005, these regions accounted for 26%, 19%, and 27%, respectively, of the
      Company’s collateral for mortgage loan production.





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




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







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





**March
                31, 2006**
            **December
                31, 2005**($
                in thousands)Allowance
                for loan losses (1)
            $31,663
            $36,639Allowance
                for past due interest (2)
            13,921
            16,086Total
                allowance for loan and past due interest losses
            $45,584
            $52,725








**Three
                Months****Ended
                March 31,****2006**
            **2005**($
                in thousands)Beginning
                balance
            $52,725
            $37,310Provision
                for loan losses (1)
            577
            2,308Provision
                for past due interest (3)
            2,564
            2,455Charge-offs
            (10,282)
            (8,493)Ending
                balance
            $45,584
            $33,580


_________


(1)
              During
                  the three months ended March 31, 2006, $0.1 million of the Company’s
                  allowance for loan losses was reversed relating to Hurricane Katrina,
                  which left a remaining allowance for probable losses related to
                  Hurricane
                  Katrina of $4.3 million.(2)
              Provided for within accrued
                interest receivable on the consolidated balance sheets.(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.





An
      internally developed roll rate
      analysis, static pool analysis and historical losses are the primary tools
      used
      in analyzing the Company’s allowance for loan and past due interest losses. The
      Company’s roll rate analysis is defined as the historical progression of loans
      through the various delinquency categories. The Company’s 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 the
      Company within 90 days following the liquidation date. As of March 31, 2006,
      the
      Company is experiencing an 18-month average loss severity of 40% on its owned
      portfolio, and this is the assumption currently used in the loan loss allowance
      model. The 40% loss severity includes the following loss components: 12% for
      principal,
      14% for past due interest, and 14% for advances and other costs. This average
      loss severity has increased over time because loss severities typically increase
      as a portfolio gets older.


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





As
      of
      March 31, 2006, the fair value of the mortgage servicing rights, or MSRs, in
      total was $173.5 million compared to $156.1 million as of December 31, 2005.
      The
      fair value is estimated by discounting estimated future cash flows from the
      servicing assets using discount rates that approximate current market rates.
      The
      fair value as of March 31, 2006 was determined using prepayment assumptions
      ranging from 22% to 56% and discount rates ranging from 11% to 18%. The fair
      value as of December 31, 2005 was determined using prepayment assumptions
      ranging from 20% to 45% and discount rates ranging from 11% to 18%. The
      following table summarizes activity in mortgage servicing rights for the three
      months ended March 31, 2006 and 2005:





**Three
                Months****Ended
                March 31,****2006**
            **2005**($
                in thousands)Beginning
                balance of MSRs, gross
            $138,370
            $106,619Purchased
            30,728
            21,798Amortization
            (15,203)
            (9,188)Permanent
                impairment
            —
            (1,184)Ending
                balance of MSRs, gross
            $153,895
            $118,045Beginning
                balance of valuation allowance
            $(8,628)
            $(7,624)Impairment
            (1,519)
            (1,505)Permanent
                impairment
            —
            1,184Ending
                balance of valuation allowance
            (10,147)
            $(7,945)MSRs,
                net
            $143,748
            $110,100







As
      of
      March 31, 2006, the following table summarizes the remaining estimated projected
      amortization expense for the carrying value of the MSRs for each of the five
      succeeding years and thereafter:




**Years
                Ending December 31,**($
                in thousands)April
                2006 through December 2006
            $47,7342007
            45,1102008
            25,5012009
            14,5162010
            8,600Thereafter
            12,434Total
            $153,895


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




A
      summary
      of the amounts outstanding under these agreements as of March 31, 2006 and
      December 31, 2005 is as follows:





**March
                31, 2006**
            **December
                31, 2005**($
                in thousands)**Debt
                Outstanding**Warehouse
                financing - loans
            $223,924
            $154,339Warehouse
                financing - servicing rights
            36,600
            —Repurchase
                agreements - loans
            711,974
            215,158Repurchase
                agreements - retained bond (1)
            8,171
            8,383Repurchase
                agreements - mortgage bonds
            —
            264Total
                warehouse financing
            $980,669
            $378,144Securitization
                financing - servicing advances
            $210,717
            $195,929Securitization
                financing - loans and real estate owned
            5,389,115
            5,986,460Total
                securitization financing
            $5,599,832
            $6,182,389Total
            $6,580,501
            $6,560,533


___________________


(1)
            Class
                B-4 of the 2005-3 securitization was retained by the Company rather
                than
                being sold to third-party investors. The purchase price of the retained
                bond was financed using borrowing availability from the Company’s
                Greenwich repurchase agreement.





The
      following table summarizes the Company’s outstanding debt obligations as of
      March 31, 2006:




**As
                of March 31, 2006**
            **Total**
            **2006**
            **2007**
            **2008**
            **2009**
            **2010**
            **Thereafter**($
                in thousands)Warehouse
                financing - loans
            $223,924
            $223,924
            $—
            $—
            $—
            $—
            $—Warehouse
                financing - servicing rights
            36,600
            36,600Repurchase
                agreements - loans, retained bond and mortgage
              bonds
                (1)
            720,145
            720,145
            —
            —
            —
            —
            —Securitization
                financing - servicing advances
            210,717
            125,717
            —
            85,000
            —
            —
            —Securitization
                financing - net interest margin, loans and real estate owned
                (2)
            5,389,115
            2,240,854
            1,528,696
            860,055
            485,513
            273,997
            —Total
                outstanding debt obligations
            $6,580,501
            $3,347,240
            $1,528,696
            $945,055
            $485,513
            $273,997
            $—


________________


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




(2)
            Amounts
                shown are estimated bond payments based on anticipated receipt of
                principal and interest on underlying mortgage loan collateral using
                historical prepayment speeds.




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Interest
                on the warehouse financing and repurchase facilities is based on
                a margin
                over the London Interbank Offered Rate, or LIBOR, with the margin
                above
                LIBOR varying by facility and depending on the type of asset that
                is being
                financed.  As of March 31, 2006, these margins ranged from 0.6% to
                1.9%. The weighted average interest rate on these borrowings outstanding
                at March 31, 2006 and December 31, 2005 was 5.49% and 5.10%, respectively.
                Interest on the securitization financing is either based on a fixed
                rate
                or is based on a margin above LIBOR varying by securitization deal
                and the
                type of asset that is being financed. As of March 31, 2006, these
                fixed
                rates ranged from 3.5% to 6.7% and these margins above LIBOR ranged
                from
                0.09% to 4.0%.




A
      summary
      of interest expense and the weighted average cost of funds for the three months
      ended March 31, 2006, and 2005 is as follows:





**Three
                Months****Ended
                March 31,****2006**
            **2005**($
                in thousands)**Interest
                Expense**Warehouse
                financing - loans
            $893
            $1,166Warehouse
                financing - servicing rights
            73
            —Repurchase
                agreements
            5,704
            1,749Securitization
                financing
            77,841
            51,081Other
                (1)
            1,256
            995Total
            $85,767
            $54,991**Weighted
                Average Cost of Funds**Warehouse
                financing - loans
            1.77%
            2.71%Warehouse
                financing - servicing rights
            3.55%
            —Repurchase
                agreements
            5.28%
            3.27%Securitization
                financing
            5.23%
            3.56%Other
            —
            —Total
            5.20%
            3.59%


________________


(1)  
Represents
      primarily facility, commitment, and non-use fees as well as lender paid private
      mortgage insurance.







Under
      its
      borrowing agreements, the Company is subject to certain debt covenants and
      is
      required to maintain or satisfy specified financial ratios and tests, as well
      as
      other customary covenants, representations and warranties. In the event of
      default, the Company may be prohibited from paying dividends and making
      distributions under certain of its financing facilities without the prior
      approval of its lenders. As of March 31, 2006, the Company was in compliance
      with all its 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




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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 33 months. The
      Company has classified cash activity associated with derivatives as an operating
      activity in the consolidated statements of cash flows. Derivative gains totaled
      $10.6 million and $21.2 million for the three months ended March 31, 2006 and
      2005, respectively. The components of these derivative gains consist of the
      following:




**Three
                Months****Ended
                March 31,****2006**
            **2005**($
                in thousands)Non
                cash fair value gain
            $5,003
            $9,073Cash
                settlements, net
            5,747
            12,335Broker
                commissions
            (89)
            (194)Interest
                on margin
            (22)
            20Total
            $10,639
            $21,234





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





Compensation
      cost charged against income for the Company’s share-based compensation plans was
      $0.8 million and $0.7 million for the three months ended March 31, 2006 and
      March 31, 2005, respectively.




*Stock
      Options -* The
      following table summarizes the transactions relating to the Company’s stock
      options for the three months ended March 31, 2006:




**Number
                of Options**
            **Weighted
                Average**
              **Exercise
                Price**Options
                outstanding, January 1, 2006 (includes 6,000 exercisable options
                with a
                remaining contractual life of 5.8 years outstanding under the Stock
                Incentive Plan)
            6,000
            $10.10Options
                granted
            —
            —Options
                exercised
            (3,000)
            $10.10Options
                cancelled
            —
            —Options
                outstanding, March 31, 2006 (includes 3,000 exercisable options with
                a
                remaining contractual life of 5.6 years outstanding under the Stock
                Incentive Plan)
            3,000
            $10.10





Cash
      received from options exercised under all share-based payment arrangements
      for
      the three months ended March 31, 2006 and March 31, 2005 was $30.3 thousand
      and
      $50.5 thousand, respectively. The actual tax benefit realized for the tax
      deductions from option exercises under share-based payment arrangements were
      immaterial for the three months ended March 31, 2006 and March 31, 2005. The
      total intrinsic value of options exercised during the three months ended March
      31, 2006 and March 31, 2005 was $0.4 thousand and $34.5 thousand, respectively.
      The total intrinsic value of options outstanding and exercisable as of March
      31,
      2006 was $1.0 thousand.


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*Restricted
      Stock Units -* 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
      March 31, 2006, there was $10.0 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
      3.8 years.





A
      summary
      of the status of the Company’s nonvested restricted stock units as of March 31,
      2006, and changes during the three months ended March 31, 2006, is presented
      below:




**Number
                of Restricted**
              **Stock
                Units**
            **Weighted
                Average**
              **Grant-Date
                Fair Value**Nonvested
                at January 1, 2006
            840,000
            $20.19Granted
            —
            $—Vested
            (20,000)
            $20.29Forfeited
            —
            $—Nonvested
                at March 31, 2006
            820,000
            $20.19





*Employee
      Stock Purchase Plan* - The
      Company 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. As a result, the Company incurred $45.9
      thousand of expense during the three months ended March 31, 2006. The Company
      issued 29.3 thousand shares of common stock at $8.87 per share for a total
      of
      $0.3 million in proceeds during the first quarter of 2006.




**(10)**  **Commitments
      and Contingencies**




***Mortgage
      Loans***




As
      of
      March 31, 2006 and December 31, 2005, the Company’s subsidiaries had commitments
      to fund mortgage loans with agreed-upon rates of $261.4 million and $262.6
      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.





From
      May
      1996 to July 5, 2001, the Company securitized its mortgage loans in off balance
      sheet transactions, of which $354.5 million are still outstanding as of March
      31, 2006. In connection with these mortgage loans as well as 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 or expenses related to such breach. As
      of
      March 31, 2006 those subsidiaries did not have any material obligation to remove
      any such loans, or to provide any such indemnification.


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In
      the
      normal course of business, the Company is subject to indemnification obligations
      related to the sale of residential mortgage loans. Under these obligations,
      the
      Company is required to repurchase certain mortgage loans that fail to meet
      the
      standard representations and warranties included in the sales contracts. The
      Company accrues an estimate for the fair value of those obligations. The
      Company’s subsidiaries are also subject to premium recapture expenses in
      connection with the sale of residential mortgage loans. Premium recapture
      expenses represent repayment of a portion of certain loan sale premiums to
      investors on previously sold loans that are repaid within six months of the
      loan
      sale. The Company accrues an estimate of the potential refunds of premium
      received on loan sales based upon historical experience. As of March 31, 2006
      and December 31, 2005, the liability recorded for premium recapture expense
      and
      for obligations to repurchase mortgage loans was $0.3 million and $0.4 million,
      respectively and the associated expense was recorded within (loss) gain on
      sale
      of assets in the consolidated statements of operations.





***Mortgage
      Servicing Rights***




The
      Company is committed to purchasing third party servicing rights for an
      additional $0.9 billion unpaid principal balance of third party mortgage loans
      during the second quarter of 2006, of which $0.1 billion have been purchased
      as
      of April 30, 2006 for $0.7 million.





***Legal
      Matters***




Because
      the Company is 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. With respect to
      each matter in which class action status has been asserted, in the event class
      action status is certified, if there is an adverse outcome or we do not
      otherwise prevail in each of the following matters, we could suffer material
      losses, although we intend to vigorously defend each of these lawsuits. The
      following is a summary of litigation matters that could be significant. At
      this
      time, the Company cannot predict the outcome of these matters. Accordingly,
      no
      amounts have been accrued in the accompanying consolidated financial
      statements.





Bauer,
      et al., v. Saxon Mortgage Services, Inc., et al. is a
      matter filed on December 1, 2004 in the Civil District Court for the Parish
      of
      Orleans, State of Louisiana, Case No. 2004-17015. On January 26, 2005, the
      plaintiffs 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., v. 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. In the Bauer case, the Company is not a named defendant but may
      owe
      defense and indemnification to Deutsche Bank Trust Company Americas, N.A.,
      as
      custodian of a mortgage loan for which one named plaintiff is mortgagor. A
      subsidiary, Saxon Mortgage Services, Inc., is a named defendant in the Patterson
      case.


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In
      both cases, the named plaintiffs allege misrepresentation, fraud, conversion
      and
      unjust enrichment on the part of the lender defendants and law firm hired by
      a
      number of defendants, including Saxon Mortgage Services, Inc., to enforce
      mortgage loan obligations against borrowers who had become delinquent pursuant
      to the terms of their mortgage loan documents. Specifically, the plaintiffs
      alleged that the law firm quoted inflated court costs and sheriff’s fees on
      reinstatement proposals to the plaintiffs. In both cases, the Plaintiffs seek
      certification as a class action, compensatory damages, pre-judgment interest,
      attorneys’ fees, litigation costs, and other unspecified general, special and
      equitable relief. On January 24, 2006, the United States District Court for
      the
      Eastern District of Louisiana granted the Company’s motion to compel arbitration
      and stayed the court proceedings as to named plaintiffs Keenan and Karen
      Duckworth in Bauer,
      et al., v. Dean Morris, et al., filed as
      Case No. 05-2173 in the Civil District Court for the Parish of Orleans, State
      of
      Louisiana. On January 25, 2006, the United States District Court for the Eastern
      District of Louisiana granted the Company’s motion to compel arbitration and
      stayed the court proceedings as to named plaintiff Debra Herron in 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. The court subsequently remanded the underlying court proceedings
      in
      both the Bauer and Patterson cases to
      the Civil District Court for the Parish of Orleans, State of Louisiana.





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. There were no significant
      developments in this legal proceeding in the quarter ended March 31,
      2006.





Jumar
      Hooks and Diane Felder, et al., v. Saxon Mortgage, Inc. is a
      matter filed on 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. There were no significant
      developments in this legal proceeding in the quarter ended March 31,
      2006.





Brian
      Harris, et al., v.
      Capital Mortgage Company, et al .,
      is a matter filed in the Circuit Court of Cook County, County
      Department-Chancery Division, Illinois as Case No. 05CH 22369. The Company’s
      subsidiary, Saxon Mortgage Services, was served with a summons and complaint
      on
      March 1, 2006. The plaintiffs included a class action claim, alleging, on behalf
      of themselves and those similarly situated, that Saxon Mortgage Services and
      other named defendants engaged in unfair and deceptive acts and violated the
      Illinois Consumer Fraud Act in connection with originating and servicing the
      plaintiffs’ loans. The plaintiffs seek certification as a class and a judgment
      in favor of the




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plaintiffs
      for money damages, costs, attorneys’ fees, and other relief deemed appropriate
      by the court.




**(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
      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 the cost of
      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 eight 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 nonrefundable fees that are deferred and recognized over the life
      of
      the loan as an adjustment to interest income recorded in the portfolio segments.
      The production segment is also the legal entity named as master servicer for
      some third party loans, and as such, records fees received for these services
      as
      servicing income. The servicing segment services loans the production segment
      originates or purchases as well as third party loans, seeking to ensure that
      loans are repaid in accordance with their terms. The data presented below for
      “Gain (loss) on sale of mortgage assets” includes third party sales as well as
      intercompany gains (losses) on sales of mortgage assets such as loans and
      servicing advances. The intercompany gains (losses) are eliminated at the
      consolidated level.


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**Three
                Months Ended March 31, 2006****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $109,974
            $14,963
            —
            $(3,657)
            $121,280Interest
                expense
            (77,841)
            (7,853)
            (73)
            —
            (85,767)Intercompany
                interest
            (1,226)
            1,288
            (62)
            —
            —Net
                interest income (expense)
            30,907
            8,398
            (135)
            (3,657)
            35,513Provision
                for mortgage loan losses
            (153)
            (424)
            —
            —
            (577)Net
                interest income (expense) after provision for mortgage loan
                losses
            30,816
            7,912
            (135)
            (3,657)
            34,936Servicing
                income, net of amortization and impairment
            —
            752
            26,975
            (8,087)
            19,640Derivative
                gains
            8,778
            1,861
            —
            —
            10,639Loss
                on sale of mortgage assets
            (1,242)
            (1,621)
            (7,320)
            8,761
            (1,422)Total
                net revenues and gains
            38,290
            8,966
            19,520
            2,983
            63,793Payroll,
                general and administrative, and other expenses
            11,636
            17,471
            11,648
            (8,040)
            32,715DepreciationOperating
                expenses
            89
            1,133
            545
            —
            1,767Total
                operating expenses
            11,725
            18,604
            12,193
            (8,040)
            34,482Income
                (loss) before taxes
            26,565
            (9,638)
            7,327
            5,057
            29,311Income
                tax expense (benefit)
            1,129
            (3,827)
            2,839
            2,771
            2,912**Net
                income (loss)**
            $25,436
            $(5,811)
            $4,488
            $2,286
            $26,399





**Three
                Months Ended March 31, 2005****Portfolio**
            **Mortgage
                Loan**
              **Production**
            **Servicing**
            **Eliminations**
            **Total**($
                in thousands)Interest
                income
            $103,039
            $9,991
            $(23)
            $(585)
            $112,422Interest
                expense
            (51,081)
            (3,910)
            —
            —
            (54,991)Intercompany
                interest
            (942)
            863
            79
            —
            —Net
                interest income
            51,016
            6,944
            56
            (585)
            57,431Provision
                for mortgage loan losses
            (1,375)
            (933)
            —
            —
            (2,308)Net
                interest income after provision for mortgage loan losses
            49,641
            6,011
            56
            (585)
            55,123Servicing
                income, net of amortization and impairment
            —
            826
            19,223
            (6,483)
            13,566Derivative
                gains
            21,234
            —
            —
            —
            21,234Gain
                (loss) on sale of mortgage assets
            —
            17,428
            (3,242)
            (12,485)
            1,701Total
                net revenues and gains
            70,875
            24,265
            16,037
            (19,553)
            91,624Payroll,
                general and administrative, and other expenses
            5,378
            22,850
            11,247
            —
            39,475Depreciation
            —
            1,057
            450
            —
            1,507Total
                operating
                expenses
            5,378
            23,907
            11,697
            —
            40,982Income
                before taxes
            65,497
            358
            4,340
            (19,553)
            50,642Income
                tax expense (benefit)
            1,716
            142
            1,726
            (6,911)
            (3,327)**Net
                income (loss)**
            63,781
            216
            2,614
            (12,642)
            $53,969





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





**March
                31, 2006**
            **December
                31, 2005****Segment
                Assets:**Portfolio
            $6,739,551
            $6,768,778Servicing
            347,854
            315,039Total
                segment assets
            7,087,405
            7,083,817Corporate
                assets
            163,333
            148,261Total
                assets
            $7,250,738
            $7,232,078




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




Subsequent
      to the issuance of the Company's March 31, 2005 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 currently 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 statements of operations and cash flows for the three months ended
      March 31, 2005 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 for the three months ended March 31,
        2005.
 
 The
        following tables summarize the effects of the restatement.


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**2005****As
                  Previously Reported**
              **As
                  Restated****Statement
                  of Operations:****Three
                  Months Ended March 31:**Interest
                  income
              $114,063
              $112,422Interest
                  expense
              (55,172)
              (54,991)Net
                  interest income
              58,891
              57,431Provision
                  for loan losses
              (5,699)
              (2,308)Net
                  interest income after provision for mortgage loan losses
              53,192
              55,123Derivative
                  gains
              —
              21,234Total
                  net revenues and gains
              68,459
              91,624Other
                  expense
              1,411
              1,704Total
                  operating expenses
              40,689
              40,982Income
                  before taxes
              27,770
              50,642Income
                  tax benefit
              (3,965)
              (3,327)Net
                  income
              $31,735
              $53,969Earnings
                  per share - basic
              $0.64
              $1.08Earnings
                  per share - diluted
              $0.63
              $1.07**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
              $31,735
              $53,969Mortgage
                  bonds - tax effect
              (6)
              —Cash
                  flow hedging instruments - change in unrealized gain
              22,119
              —Cash
                  flow hedging instruments - reclassification adjustment
              (255)
              —Cash
                  flow hedging instruments - tax effect
              212
              —Total
                  comprehensive income
              $53,819
              $53,983**Balance
                  as of March 31, 2005:**Accumulated
                  other comprehensive income (loss)
              $18,242
              $(460)Retained
                  earnings
              28,885
              15,895Total
              $673,892
              $642,200**Statement
                  of Cash Flows:****Three
                  Months Ended March 31:****Operating
                  Activities:**Net
                  income
              $31,735
              $53,969Depreciation
                  and amortization
              18,688
              13,062Deferred
                  income tax benefit
              (6,324)
              (5,479)Impairment
                  of assets
              1,090
              2,996Non
                  cash derivative gains
              —
              (9,073)Provision
                  for mortgage loan losses
              5,699
              2,308(Recovery)
                  provision for advanced interest losses
              (536)
              3,554Compensation
                  expense for share-based compensation plans
              —
              657Purchases
                  of derivative instruments
              —
              (2,519)


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Decrease
                in income tax receivable
            —
            5,823Net
                change in miscellaneous assets and liabilities
            5,562
            (1,577)Net
                cash provided by operating activities
            $45,919
            $53,726**Investing
                Activities:**Principal
                payments received on mortgage loan portfolio
            $536,250
            $536,681Net
                cash used in investing activities
            $(123,320)
            $(122,889)**Financing
                Activities:**Debt
                issuance costs
            (3,441)
            (3,202)Proceeds
                from derivative instruments
            8,477
            —Net
                cash provided by financing activities
            $81,223
            $72,985**Supplemental
                Cash Flow Information:**Cash
                paid for interest
            $(55,121)
            $(57,059)








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




As
      discussed in Note 12 of the Notes to Consolidated Financial Statements, our
      consolidated statements of operations and cash flows for the three months ended
      March 31, 2005 have been restated to reflect the elimination of the use of
      hedge
      accounting treatment under SFAS No. 133 for our derivative instruments as well
      as to make certain other restatements and reclassifications on the consolidated
      statements of operations. The accompanying management’s discussion and analysis
      gives effect to this restatement.





This
      discussion should be read in conjunction with the unaudited consolidated
      financial statements, notes and tables included elsewhere in this report and
      in
      the Saxon Capital, Inc. Annual Report on Form 10-K for the year ended December
      31, 2005, or the 2005 Form 10-K, filed with the Securities and Exchange
      Commission. Certain information contained in this report constitutes
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Generally,
      forward-looking statements can be identified by the use of forward-looking
      terminology including, but not limited to, “may,” “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  23
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the
      forward-looking statements for a number of reasons, including, but not limited
      to, those addressed in “Part II - Item 1A. Risk Factors” and the following risks
      and uncertainties:





·
            decreases
                in residential real estate values, which could reduce both the credit
                quality of our mortgage loan portfolio and the ability of borrowers
                to use
                their home equity to obtain cash through mortgage loan refinancings,
                which
                would adversely impact our ability to produce new mortgage
                loans;





·
            changes
                in overall regional or local economic conditions or changes in interest
                rates, particularly those conditions that affect demand for new housing,
                housing resales or the value of
                houses;





·
            our
                ability to successfully implement our growth strategy throughout
                the
                various cycles experienced by our
                industry;





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





·
            our
                ability to sustain loan production growth at historical
                levels;





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





·
            our
                ability to securitize 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 if our existing
                sources of funding become
                unavailable;





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





·
            our
                ability to maintain our current servicer
                ratings;





·
            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 continue to qualify as
                qualified
                REIT subsidiaries for federal income tax
                purposes;


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·
            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;





·
            changes
                in mortgage loan prepayment speeds;





·
            decreased
                valuations of our mortgage loan portfolio and mortgage servicing
                rights,
                or MSRs, due to a variety of factors, including 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**
            **Page**Executive
                Summary
            25Description
                of Other Data
            28First
                Quarter 2006 Events and Outlook
            29Critical
                Accounting Policies
            30Consolidated
                Results
            35Business
                Segment Results
            47Financial
                Condition
            52Liquidity
                and Capital Resources
            53Off
                Balance Sheet Items and Contractual
                Obligations
            60Other
                Matters
            61







**Executive
      Summary**




25
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Company
      Overview




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





·  Mortgage
      loan production;





·  Portfolio;
      and





·  Mortgage
      loan servicing;





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,
      correspondent and retail channels, which we refer to collectively as our
“mortgage loan production segment”. We earn most of our revenues from the net
      interest income generated by those mortgage loans through our portfolio segment
      and from servicing loans for other companies through our mortgage loan 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, servicing rights
      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 and purchases through short-term warehouse lines
      of
      credit and through repurchase facilities, which are replaced by permanent
      financing when we securitize the loans. We structure our securitization
      transactions as financing transactions, with the mortgage loans and related
      debt
      to finance those loans remaining on our balance sheet.




We
      access
      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 lines of credit and repurchase agreement
      facilities. These loans are subsequently financed using asset-backed securities
      issued through securitization trusts. From May 1996 to March 31, 2006, we
      securitized $22.5 billion in mortgage loans. Since July 6, 2001, we have
      structured our securitizations as financing transactions for financial reporting
      purposes under accounting principles generally accepted in the United States
      of
      America, or GAAP. Accordingly, following a securitization: (1) the mortgage
      loans we produce remain on our consolidated balance sheet; (2) the
      securitization indebtedness replaces the warehouse and repurchase 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.


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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 Board of Governors of the Federal Reserve System, or FRB, the residential
      mortgage loan market is the largest consumer finance market in the United
      States. According to the Mortgage Bankers Association of America, or MBAA,
      website as of April 12, 2006, lenders in the United States originated more
      than
      $2.7 trillion in one-to-four family mortgage loans in 2005. A substantial
      portion of the loan originations in 2005 was attributable to mortgage loan
      refinancings, and we believe this was a result of customers taking advantage
      of
      strong housing appreciation and increased mortgage product offerings in the
      marketplace. Additionally, customers benefited from the increased competition
      within the mortgage loan industry which kept interest rates low in spite of
      a
      slightly rising interest rate environment. According to the MBAA website as
      of
      April 12, 2006, lenders are expected to originate $2.4 trillion in single-family
      mortgage loans in 2006, reflecting an anticipated decrease in refinancing
      activity. Generally, we believe sub-prime borrowers are not solely motivated
      by
      fluctuations in interest rates.




Generally,
      the mortgage loan industry is segmented by the size of the mortgage loans and
      the credit characteristics of the borrowers. Mortgage loans that conform to
      the
      guidelines of GSEs, such as Fannie Mae or Freddie Mac, which have guidelines
      for
      both size and credit characteristics, are called conforming mortgage loans.
      Our
      mortgage loans are considered non-conforming mortgage loans because of the
      size
      of the loans (generally referred to as jumbo mortgage loans), or the credit
      profiles of the borrowers (generally referred to as sub-prime mortgage loans),
      or both. We believe the mortgage loan originators in the non-conforming segment
      of the mortgage industry provide credit to a broad range of consumers who are
      underserved by the conforming mortgage loan market. In addition, we believe
      that
      many sub-prime mortgage loan products that have very low initial interest rates
      for a period of one or two years continue to present borrowers with economic
      incentives to refinance their existing mortgage loans when the low interest
      rate
      period expires, regardless of interest rate movements; therefore, we do not
      expect the same level of decline in loan demand in the non-conforming mortgage
      loan market as would be expected in the overall mortgage loan market as interest
      rates rise.




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
      will 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 mortgage loans tend to increase as borrowers look to realize the
      additional equity in their homes. If our forecasts are incorrect and housing
      prices fall dramatically, our future results of operations would be adversely
      affected by lower production and higher credit losses.


27
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**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 reconciliations 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 tax net 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:


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 Table
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·
            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 2005 Form 10-K.





**First
      Quarter****2006
      Events and Outlook**




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. 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. Toward the end of 2005 and at the beginning of the
      first
      quarter of 2006, lenders in the industry began to raise interest rates
      marginally; but not commensurate with market interest rates and for the latter
      half of the first quarter of 2006, lenders in the industry began decreasing
      their rates once again. As a result, we expect to continue to experience margin
      compression in 2006. 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.





Throughout
      the first quarter of 2006, we experienced an increase in short-term borrowing
      interest rates and a continued increase in competitiveness of pricing within
      our


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industry.
      We also experienced slower prepayment speeds during the first quarter of 2006
      as
      compared to the fourth quarter of 2005. This resulted in a substantial reduction
      in the net interest margin including prepayment penalty income on our mortgage
      loan portfolio. During the first quarter of 2006, we 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 derivatives gains.





We
      have
      made significant progress in implementing our 2006 strategic initiatives during
      the first quarter of 2006. Specifically, we saw decreased total operating
      expenses during the first quarter of 2006 due to management’s continued focus on
      maximizing operating efficiencies, reducing production costs, and enhancing
      profitability. We have also begun the process of bidding on conduit loan pools
      and plan to launch our conduit bulk purchase process during the remainder of
      2006. Finally, we plan to complete the implementation of our new web-based
      loan
      production system in the second quarter of 2006, which will improve our
      production process.





In
      summary, our production levels during the first quarter of 2006 were below
      our
      first quarter of 2005 production and were negatively impacted by intense pricing
      competition existing in the marketplace throughout the first quarter of 2006.
      In
      2006, we expect to increase our mortgage loan production over levels achieved
      in
      2005 through a more efficient process as a result of having adjusted to our
      new
      centralized loan production structure, the investments we have made in
      technology and our focus on controlling our general and administrative expenses.
      We also intend to continue to grow our mortgage loan portfolio and servicing
      portfolio in order to produce higher levels of net interest income and servicing
      income. However, we also expect short-term market interest rates to rise and
      competitive pressures to remain intense during 2006.





**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
      ongoing 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:


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·
            amortization
                of yield adjustments to net interest
                income;




·
            allowance
                for loan and past due interest
                losses;




·
            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 required by each loan contract in the calculation of amortization. Because
      we hold a large number of similar loans for which prepayments are probable,
      we
      currently use a prepayment model to project loan prepayment activity based
      upon
      loan age, loan type and remaining prepayment penalty coverage. Estimating
      prepayments and estimating the remaining lives of our mortgage loan portfolio
      requires management judgment, which involves consideration of possible future
      interest rate environments and an estimate of how borrowers will behave in
      those
      environments. Reasonableness tests are performed against past history, mortgage
      asset pool specific events, current economic outlook and loan age to verify
      the
      overall prepayment projection. If these mortgage loans prepay 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. The projections used in our interest method
      calculations are based on six-month LIBOR.




Mortgage
      loan prepayments generally increase on our adjustable rate mortgage loans 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. The majority of our penalties expire two to three years
      from origination. As of March 31, 2006, 72% of our mortgage loan portfolio
      had
      active prepayment penalty features. We anticipate that prepayment rates on
      a
      significant portion of our adjustable rate mortgage loan portfolio will increase
      as these adjustable rate mortgage loans reach their initial adjustments during
      2006 and 2007, due to the high concentration of two to three
      year


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hybrid
      loans we originated or purchased during 2003 and 2004. The constant prepayment
      rate, or CPR, currently used to project cash flows is 36% over twelve months.




Interest
      expense on our warehouse, repurchase and securitization financings is a
      combination of accruing interest based on the contractual terms of the financing
      arrangements and the amortization/accretion of premiums, discounts, and debt
      issuance costs. These yield adjustments are amortized against interest expense
      over the life of the debt in a manner similar to that described above for
      interest income, using the interest method adjusted for the effects of the
      estimated payments on the debt.




*Allowance
      for Loan and Past Due Interest Losses*





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 losses is charged to earnings through interest income. The
      accounting estimate of the allowance for loan and past due interest losses
      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 and past due interest losses and
      our results of operations. The assumptions used by management regarding these
      key estimates involve a great deal of judgment.





Provisions
      are made to the allowance for loan and past due interest losses 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 and past due interest losses 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 as well as 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 and past due interest losses.
      Our
      roll rate analysis is defined as the historical progression of our loans through
      the various delinquency categories. 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.




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The
      allowance for loan and past due interest losses was impacted in the first
      quarter of 2006 primarily by a decrease in overall delinquencies since December
      31, 2005. We are currently experiencing an 18-month average loss severity of
      40%
      on our owned portfolio, and this is the assumption currently used in our loan
      loss allowance model. We did not make any significant changes in our reserve
      methodologies or assumptions during the first quarter of 2006.





*Mortgage
      Servicing Rights*





The
      valuation of 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 generally differ from
      our initial estimates, and these differences are sometimes material. If actual
      prepayment and default rates were higher than those assumed, we would earn
      less
      mortgage servicing income, which would adversely affect the value of the MSRs.
      Significant changes in prepayment speeds, delinquencies, and losses may result
      in impairment of our MSRs. 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 mortgage
      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, such as prepayments, 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, and in
      the
      event the impairment is reversed, the related allowance amount is recognized
      in
      our income. When the Company determines that a portion of the mortgage servicing
      rights are not recoverable, the related mortgage servicing rights and the
      previously established valuation allowance are correspondingly reduced to
      reflect the permanent impairment.





As
      a
      result of increased actual prepayment speeds and future prepayment speed
      assumptions applied to our third party servicing portfolio, we recorded a
      temporary impairment of $1.5 million on our MSRs for the first quarter of 2006.
      It is possible that we may experience, in whole or in part, a reversal of the
      temporary impairment if actual future prepayments are lower than our future
      prepayment speed assumptions. Every quarter we value the third-party portion
      of
      our loan servicing portfolio using a


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prepayment
      speed assumption which management believes is appropriate given the product
      mix
      of the third-party servicing portfolio. The prepayment speed assumption used
      to
      value the servicing rights is an average of the CPR over the remaining life
      of
      the servicing rights and is therefore re-evaluated every quarter.





*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 policy with respect to accounting for net interest
      income.





We
      determine the amount of direct loan origination costs to be deferred based
      on an
      estimate of the standard cost per loan originated. The standard cost per loan
      is
      based on the amount of time spent and costs incurred by loan origination
      personnel in the performance of certain activities directly related to the
      origination of funded mortgage loans. These activities include evaluating the
      prospective borrower’s financial condition, evaluating and recording collateral
      and security arrangements, negotiating loan terms, processing loan documents
      and
      closing the loan. Management believes these estimates reflect an accurate cost
      estimate related to successful loan origination efforts for the three months
      ended March 31, 2006 based on existing facts and circumstances. Management
      evaluates its time and cost estimates quarterly to determine if updates and
      refinements to the deferral amounts are necessary. Updates will be necessary
      if
      it is determined that the time spent and/or costs incurred related to performing
      the above activities have significantly changed from the previous period. This
      estimate is made for all loans originated in 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. In the first quarter of 2006, we deferred $5.0 million
      in
      costs associated with originating loans and $4.6 million in nonrefundable fees
      related to mortgage loan originations. We also recorded net amortization of
      these deferred loan origination costs and fees of $0.6 million.




*Accounting
      for Income Taxes*




Significant
      management judgment is required in developing our provision for income taxes,
      including the determination of deferred tax assets and liabilities and any
      valuation allowances that might be required against the deferred tax asset.
      As
      of March 31, 2006, we recorded $56.0 thousand as a valuation allowance on our
      deferred tax assets for capital losses incurred by a qualified REIT subsidiary
      during the first quarter of 2006 based on management’s belief that it is more
      likely than not that capital gains will not be generated within the next five
      years by the qualified REIT subsidiary to realize the benefit of this asset.
      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


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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 additional
      valuation allowances 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 the remainder of our deferred tax
      assets.





We
      believe we have complied with the REIT provisions of the Internal Revenue Code
      for the three months ended March 31, 2006 and currently intend to continue
      to
      comply with such provisions in the future. Accordingly, we do not expect to
      be
      subject to federal or state income tax on net income that is distributed to
      shareholders as long as we continue to comply with the requirements necessary
      to
      maintain our qualification as a REIT. In the event that we do not qualify as
      a
      REIT in any year, we will be subject to federal and state 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 are 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 2005
      Form 10-K.




**Consolidated
      Results**





*Three
      Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005*





*Overview.* Net
      income decreased $27.6 million, or 51%, to $26.4 million for the three months
      ended March 31, 2006 from $54.0 million for the three months ended March 31,
      2005. This decrease was primarily the result of (1) a decrease of $21.9 million
      in net interest income due primarily to an increase in the cost of our
      borrowings, (2) a decrease in our derivative gains of $10.6 million, (3) a
      decrease in our gain on sale of assets of $3.1 million primarily due to the
      repurchase of mortgage loans previously sold that were paid off by the borrowers
      earlier than anticipated, and (4) a decrease in our income tax benefit of $6.2
      million. These decreases were offset by (1) an increase in our servicing income
      of $6.0 million, related to our acquisition of significant amounts of servicing
      rights for third-party mortgage loans and (2) a decrease in our total operating
      expenses of $6.5 million. The two most influential factors currently affecting
      our net income in 2006 are the rising interest rate environment, which causes
      our interest expense to increase significantly, and intense competitive pricing
      within our industry which causes the interest rates we charge on our new loan
      production to be substantially lower in relation to our cost of funds than
      has
      historically been the case. These two factors compressed interest margins
      compared to the more favorable interest margins that we had




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experienced
      in prior years. Competitive pricing pressures began to ease somewhat at the
      end
      of 2005 and initially in the first quarter of 2006; however, we saw a number
      of
      large competitors lower interest rates during the majority of the first quarter
      of 2006 while cost of funds increased.




**Revenues**





*Total
      Net Revenues and Gains.* Total
      net
      revenues and gains decreased $27.8 million, or 30%, to $63.8 million for the
      three months ended March 31, 2006 from $91.6 million for the three months ended
      March 31, 2005. The decrease in total net revenues and gains was also
      attributable to an increase in the cost of our borrowings and decreases in
      our
      derivative gains and gains on sale of assets offset by an increase in our
      servicing income.





*Interest
      Income.* Interest
      income increased $8.9 million, or 8%, to $121.3 million for the three months
      ended March 31, 2006 from $112.4 million for the three months ended March 31,
      2005. The increase in interest income was due primarily to the growth in our
      securitized mortgage loan portfolio and in increase of 11 basis points in the
      weighted average coupons on our mortgage loan portfolio.





As
      shown
      in the table below, for the three months ended March 31, 2006 compared to the
      three months ended March 31, 2005, our interest income increased $7.6 million
      due to an increase in the size of our mortgage loan portfolio, and increased
      $2.2 million as a result of higher interest rates earned on our mortgage loan
      portfolio.





*Rate/Volume
      Table For the Three Months Ended March 31, 2006 Compared to the Three Months
      Ended March 31, 2005*




**Three
                Months Ended March 31, 2006 Compared to**
              **Three
                Months Ended March 31, 2005******
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in**
              **Interest
                Income**(in
                thousands)Securitized
                loans
            $1,453
            $4,642
            $6,095Loans
                funded by warehouse and repurchase financing
            694
            2,972
            3,666Mortgage
                bonds
            91
            —
            91Other
            —
            (7)
            (7)Total
            $2,238
            $7,607
            9,845Prepayment
                penalty income
            
            
            (987)$8,858








*Interest
      Income Yield Analysis For the Three Months Ended March 31, 2006 and
      2005*




The
      following table presents the average yield on our interest-earning assets for
      the three months ended March 31, 2006 and for the three months ended March
      31,
      2005.


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 Table
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**Three
                Months Ended March 31, 2006**
            **Three
                Months Ended March 31, 2005******
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Income**
            **Average**
              **Yield**($
                in thousands)Gross
            $6,439,732
            $119,588
            7.43%
            $6,025,904
            $110,259
            7.32%Less
                amortization of yield adjustments (1)
            —
            (4,084)
            (0.25)%
            —
            (4,600)
            (0.31)%6,439,732
            115,504
            7.18%
            6,025,904
            105,659
            7.01%Add
                prepayment penalty income
            —
            5,776
            0.36%
            —
            6,763
            0.45%**Total
                interest-earning assets**
            $6,439,732
            $121,280
            7.54%
            $6,025,904
            $112,422
            7.46 _______________


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





The
      increase in interest income correlated with the growth of our mortgage loan
      portfolio. Our net mortgage loan portfolio increased $0.1 billion, or 2%, to
      $6.5 billion as of March 31, 2006 from $6.4 billion as of December 31, 2005.
      We
      anticipate that our interest income in dollars will continue to grow as our
      mortgage loan portfolio grows if interest rates rise. We also expect that our
      interest income may increase in 2006 if market-weighted average coupons
      increase.





Amortization
      expense of yield adjustments decreased $0.5 million, or 11%, to $4.1 million
      for
      the three months ended March 31, 2006 from $4.6 million for the three months
      ended March 31, 2005. This decrease was predominantly caused by an increase
      in
      the projected six-month LIBOR curve, which increases cash flows in the future
      as
      adjustable rate mortgage loans, or ARMs, enter their reset period. An increase
      in cash flows positively affects the retrospective adjustment component of
      our
      level yield amortization by increasing the internal rate of return used to
      calculate our net investment in the underlying mortgage loans.





Prepayment
      penalty income decreased $1.0 million, or 15%, to $5.8 million for the three
      months ended March 31, 2006 from $6.8 million for the three months ended March
      31, 2005. This decrease was primarily related to a 5.6% decline in the number
      of
      loans paying off in our portfolio which contained prepayment penalty features
      as
      well as a 2.5% decline in the average size of the prepayment penalty fees we
      collected. The decline in prepayment penalty income in 2006 also related to
      amendments to government regulations related to the Alternative Mortgage
      Transactions Parity Act, which became effective July 1, 2003. These amendments
      eliminated federal preemption of state restrictions on prepayment penalties
      on
      certain types of mortgage loans. Management expects that these amendments will
      continue to reduce our prepayment penalty income in future periods.





*Securitized
      Mortgage Loan Coupon and Prepayment Penalty Coverage*





Our
      securitized loan principal balance was composed of 67% adjustable rate mortgage
      loans and 33% fixed rate loans at March 31, 2006. The aggregate unpaid principal
      balances of our adjustable rate loans in their reset period was $525.1 million,
      or 14.22% of our portfolio, at March 31, 2006. As shown in the following tables,
      the weighted average coupon, or WAC, on the ARM portion of our securitizations
      increased as of March 31, 2006 compared to December 31, 2005, while the WAC
      on
      the fixed rate mortgage,
      or FRM, portion of our securitizations decreased slightly or remained constant
      as of March 31, 2006 compared to December 31, 2005. The WAC on future production
      could be negatively impacted by the intense pricing pressures and flattened
      yield curve if the current environment persists. The following tables set forth
      information about our securitized mortgage loan portfolio, by Saxon Asset
      Securities Trust, or SAST, deal, including those loans associated with our
      securitized REO properties as of March 31, 2006 and December 31,
      2005.


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 Table
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**Issue
                  date**
              **Original**
                **aggregate**
                **loan**
                **principal**
                **balance**
              **Current**
                **aggregate**
                **loan**
                **principal**
                **balance**
              **Fixed**
                **current**
                **aggregate**
                **loan**
                **principal**
                **balance**
              **ARM
                  current aggregate**
                **loan
                  principal balance**
              **Percentage
                  of portfolio**
              **Percentage
                  of original**
                **remaining**
              **Current
                  WAC fixed**
              **Current
                  WAC ARM**($
                  in thousands)March
                  31, 2006SAST
                  2001-2
              8/2/2001
              $650,410
              $88,507
              $63,430
              $25,077
              2%
              14%
              9.09%
              10.49%SAST
                  2001-3
              10/11/2001
              699,999
              75,853
              33,503
              42,350
              1%
              11%
              9.91%
              10.21%SAST
                  2002-1
              3/14/2002
              899,995
              128,790
              75,108
              53,682
              2%
              14%
              8.86%
              9.98%SAST
                  2002-2
              7/10/2002
              605,000
              91,397
              41,425
              49,972
              2%
              15%
              8.97%
              10.04%SAST
                  2002-3
              11/8/2002
              999,999
              167,688
              80,697
              86,991
              3%
              17%
              8.37%
              9.72%SAST
                  2003-1
              3/6/2003
              749,996
              165,139
              110,212
              54,927
              3%
              22%
              7.39%
              9.34%SAST
                  2003-2
              5/29/2003
              599,989
              144,970
              84,507
              60,463
              3%
              24%
              7.21%
              8.39%SAST
                  2003-3
              9/16/2003
              1,000,000
              304,439
              181,906
              122,533
              6%
              30%
              7.14%
              8.35%SAST
                  2004-1
              2/19/2004
              1,099,999
              397,806
              145,528
              252,278
              7%
              36%
              7.81%
              8.25%SAST
                  2004-2
              7/27/2004
              1,199,994
              650,742
              358,400
              292,342
              12%
              54%
              6.94%
              6.75%SAST
                  2004-3
              10/27/2004
              899,956
              511,849
              97,080
              414,769
              9%
              57%
              7.79%
              7.07%SAST
                  2005-1
              1/25/2005
              999,972
              636,397
              98,552
              537,845
              12%
              64%
              7.41%
              6.77%SAST
                  2005-2
              6//07/2005
              979,990
              722,001
              127,977
              594,024
              13%
              74%
              7.49%
              7.15%SAST
                  2005-3
              9/29/2005
              899,999
              794,604
              168,976
              625,628
              14%
              88%
              7.29%
              7.21%SAST
                  2005-4
              12/21/2005
              639,994
              614,713
              135,615
              479,098
              11%
              96%
              7.72%
              7.72%Total
              
              $12,925,292
              $5,494,895
              $1,802,916
              $3,691,979Less:
                  unpaid principal balance of securitized
                REO
                  properties
              (46,491)Total
                  securitized loans
              $5,448,404December
                  31, 2005SAST
                  2001-2
              8/2/2001
              $650,410
              $96,608
              $68,777
              27,831
              2%
              15%
              9.18%
              10.34%SAST
                  2001-3
              10/11/2001
              699,999
              84,561
              37,340
              47,221
              1%
              12%
              9.93%
              9.98%SAST
                  2002-1
              3/14/2002
              899,995
              142,946
              79,862
              63,084
              2%
              16%
              8.87%
              9.61%SAST
                  2002-2
              7/10/2002
              605,000
              102,646
              45,899
              56,747
              2%
              17%
              8.97%
              9.76%SAST
                  2002-3
              11/8/2002
              999,999
              189,019
              88,057
              100,961
              3%
              19%
              8.37%
              9.28%SAST
                  2003-1
              3/6/2003
              749,996
              194,274
              122,268
              72,006
              3%
              26%
              7.38%
              8.79%SAST
                  2003-2
              5/29/2003
              599,989
              160,949
              89,336
              71,613
              3%
              27%
              7.21%
              8.27%SAST
                  2003-3
              9/16/2003
              1,000,000
              344,009
              192,094
              151,915
              6%
              34%
              7.17%
              8.14%SAST
                  2004-1
              2/19/2004
              1,099,999
              477,122
              156,521
              320,601
              8%
              43%
              7.82%
              7.73%SAST
                  2004-2
              7/27/2004
              1,199,994
              710,671
              384,640
              326,031
              12%
              59%
              6.95%
              6.68%SAST
                  2004-3
              10/27/2004
              899,956
              563,859
              103,023
              460,836
              9%
              63%
              7.80%
              7.07%SAST
                  2005-1
              1/25/2005
              999,972
              711,372
              106,440
              604,932
              12%
              71%
              7.40%
              6.77%SAST
                  2005-2
              6//07/2005
              979,990
              808,742
              132,692
              676,050
              14%
              83%
              7.49%
              7.16%SAST
                  2005-3
              9/29/2005
              899,999
              857,855
              175,798
              682,057
              14%
              95%
              7.29%
              7.22%SAST
                  2005-4
              12/21/2005
              499,625
              496,839
              111,207
              385,633
              8%
              99%
              7.70%
              7.68%Total
              $12,784,923
              $5,941,472
              $1,893,954
              $4,047,518Less:
                  unpaid principal balance of securitized
                REO
                  properties
              (46,692)Total
                  securitized loans
              $5,894,780






38
 Table
          of Contents




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 of 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 as part of interest income on our consolidated
      statements of operations. In addition, if a loan prepays we fully expense any
      related deferred costs for that loan upon prepayment. We also reflect the
      amortization of these deferred costs as part of interest income on our
      consolidated statement of operations.





We
      experienced a decrease in prepayments of our mortgage loans and a decrease
      in
      our prepayment penalty income during the first quarter of 2006 compared to
      December 31, 2005 and to the first quarter of 2005. This was due to a decline
      in
      the size of the average prepayment penalty as well as decreases in the
      percentage of mortgage loans in our portfolio having prepayment penalty
      features. Additionally, we have experienced a decline in production of loans
      with prepayment penalties since amendments to the Alternative Mortgage
      Transactions Parity Act, which became effective on July 1, 2003, eliminated
      our
      ability to rely on federal preemption of state restrictions on prepayment
      penalties on certain types of mortgage loans. We expect our prepayment speeds
      to
      continue to decrease in future periods if refinancing activity and housing
      prices begin to decline.





**12
                Month Constant Prepayment Rate (Annual Percent)**
            **Life-to-date
                Constant Prepayment Rate (Annual Percent)****Issue
                Date**
            **Percent
                with**
              **Prepayment**
              **Penalty**
            **Fixed**
            **Arm**
            **Fixed**
            **Arm**March
                31, 2006SAST
                2001-2
            8/2/2001
            52.49%
            26.08%
            34.68%
            29.93%
            41.18%SAST
                2001-3
            10/11/2001
            30.15%
            30.45%
            43.33%
            34.38%
            43.07%SAST
                2002-1
            3/14/2002
            38.59%
            28.93%
            48.33%
            31.08%
            43.96%SAST
                2002-2
            7/10/2002
            14.34%
            38.27%
            49.74%
            34.13%
            43.37%SAST
                2002-3
            11/8/2002
            0.98%
            32.03%
            53.19%
            31.39%
            45.71%SAST
                2003-1
            3/6/2003
            21.93%
            30.92%
            53.91%
            28.51%
            47.93%SAST
                2003-2
            5/29/2003
            58.54%
            30.30%
            62.11%
            27.59%
            48.03%SAST
                2003-3
            9/16/2003
            54.05%
            28.95%
            56.96%
            24.17%
            45.23%SAST
                2004-1
            2/19/2004
            43.73%
            29.57%
            50.64%
            25.75%
            42.87%SAST
                2004-2
            7/27/2004
            63.15%
            27.15%
            42.92%
            23.44%
            37.28%SAST
                2004-3
            10/27/2004
            59.71%
            23.18%
            39.93%
            20.16%
            35.68%SAST
                2005-1
            1/25/2005
            61.74%
            20.13%
            36.21%
            19.02%
            34.07%SAST
                2005-2
            6/07/2005
            60.04%
            —
            —
            13.58%
            34.42%SAST
                2005-3
            9/29/2005
            57.09%
            —
            —
            10.70%
            25.10%SAST
                2005-4
            12/21/2005
            59.09%
            —
            —
            14.02%
            16.97%December
                31, 2005SAST
                2001-2
            8/2/2001
            51.36%
            28.82%
            36.73%
            30.34%
            41.58%SAST
                2001-3
            10/11/2001
            30.33%
            29.52%
            45.52%
            34.30%
            43.45%SAST
                2002-1
            3/14/2002
            37.03%
            32.32%
            51.35%
            31.59%
            44.02%SAST
                2002-2
            7/10/2002
            14.15%
            36.81%
            51.72%
            34.13%
            43.72%SAST
                2002-3
            11/8/2002
            14.81%
            33.0%
            52.65%
            31.39%
            45.12%SAST
                2003-1
            3/6/2003
            59.40%
            30.08%
            56.22%
            28.05%
            46.60%SAST
                2003-2
            5/29/2003
            57.73%
            32.01%
            59.97%
            28.44%
            47.53%SAST
                2003-3
            9/16/2003
            51.60%
            30.59%
            54.33%
            24.49%
            44.19%SAST
                2004-1
            2/19/2004
            57.64%
            29.80%
            45.96%
            25.35%
            39.91%SAST
                2004-2
            7/27/2004
            63.00%
            25.99%
            41.89%
            22.81%
            37.58%SAST
                2004-3
            10/27/2004
            58.56%
            21.63%
            37.56%
            19.21%
            35.58%


39
 Table
          of Contents





SAST
                2005-1
            1/25/2005
            61.53%
            —
            —
            16.78%
            33.40%SAST
                2005-2
            6/07/2005
            58.70%
            —
            —
            13.44%
            31.24%SAST
                2005-3
            9/29/2005
            56.23%
            —
            —
            8.87%
            22.95%SAST
                2005-4
            12/21/2005
            58.65%
            —
            —
            —
            —





*Interest
      Expense.* Interest
      expense increased $30.8 million, or 56%, to $85.8 million for the three months
      ended March 31, 2006 from $55.0 million for the three months ended March 31,
      2005. The table below presents the total change in interest expense for the
      three months ended March 31, 2006 compared to the three months ended March
      31,
      2005, and the amount of the total change that was attributable to increasing
      interest rates and an increase in our outstanding debt. Our interest expense
      increased $25.9 million for the three months ended March 31, 2006 compared
      to
      the three months ended March 31, 2005 as a result of higher interest rates
      on
      our interest-bearing liabilities and increased $4.9 million for the three months
      ended March 31, 2006 compared to the three months ended March 31, 2005 due
      to an
      increase in our borrowings.





*Rate/Volume
      Table For the Three Months Ended March 31, 2006 Compared to the Three Months
      Ended March 31, 2005*




**Three
                Months Ended March 31, 2006 Compared to**
              **Three
                Months Ended March 31, 2005******
            **Change
                in Rate**
            **Change
                in Volume**
            **Total
                Change in**
              **Interest
                Expense**(in
                thousands)Securitization
                financing
            $24,794
            $1,966
            $26,760Warehouse
                and repurchase financing:Lines
                of credit
            (421)
            222
            (199)Repurchase
                agreements
            1,490
            2,465
            3,955Other
            —
            260
            260Total
            $25,863
            $4,913
            $30,776





As
      seen
      in the table below, our average balance of borrowings increased $0.5 billion,
      or
      8%, to $6.6 billion for the three months ended March 31, 2006 from $6.1 billion
      for the three months ended March 31, 2005 as a result of the growth in our
      mortgage loan portfolio. Compensating balance credits increased $1.4 million,
      or
      280%, to $1.9 million for the three months ended March 31, 2006 from $0.5
      million for the three months ended March 31, 2005 as a result of increases
      in
      the underlying escrow balances and an increase in the LIBOR index rate, both
      of
      which served to increase the compensating balance credits. Additionally, our
      yield adjustments increased $4.9 million, or 223%, to $2.7 million net
      amortization for the three months ended March 31, 2006 from $2.2 million net
      accretion for the three months ended March 31, 2005. This increase was due
      primarily to a decrease of $4.9 million in the accretion of bond premium on
      the
      interest only classes of some of our bonds. Additionally, our amortization
      of
      bond issuance costs increased $0.2 million while our amortization of bond
      discount on other classes of our bonds decreased $0.2 million.


40
 Table
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*Interest
      Expense Yield Analysis For the Three Months Ended March 31, 2006 and For the
      Three Months Ended March 31, 2005*





**Three
                Months Ended March 31, 2006**
            **Three
                Months Ended March 31, 2005****Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**
            **Average**
              **Balance**
            **Interest**
              **Expense**
            **Average**
              **Yield**($
                in thousands)**Warehouse
                financing - loans**
            $201,213
            $2,841
            5.65%
            $172,091
            $1,616
            3.76%Less
                compensating balance credits (1)
            —
            (1,926)
            (3.83)%
            —
            (450)
            (1.05)%**Net
                warehouse financing**
            201,213
            915
            1.82%
            172,091
            1,166
            2.71%**Warehouse
                financing - servicing rights**
            8,475
            51
            2.43%
            —
            —
            —**Repurchase
                agreements**
            432,203
            5,704
            5.28%
            214,096
            1,749
            3.27%**Securitization
                financing:**Gross
            5,959,909
            75,175
            5.05%
            5,746,093
            53,314
            3.71%Add(subtract)
                net amortization (accretion) of yield adjustments
                (2)
            —
            2,666
            0.18%
            —
            (2,233)
            (0.16)%**Net
                securitization financing:**
            5,959,909
            77,841
            5.23%
            5,746,093
            51,081
            3.56%**Other
                expenses**
            —
            1,256
            —
            —
            995
            —**Total
                interest-bearing liabilities**
            $6,601,800
            $85,767
            5.20%
            $6,132,280
            $54,991
            3.59%


______________


(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 bonds.




*Net
      Interest Margin.* Our
      net
      interest margin decreased to 2.21% for the three months ended March 31, 2006
      from 3.81% for the three months ended March 31, 2005. The decline in our net
      interest margin was primarily attributable to an increase in the cost of our
      borrowings due to an increase of 197 basis points in one-month LIBOR from the
      first quarter of 2005 to the first quarter of 2006. At the same time,
      competitive pricing pressures were constraining us from charging higher interest
      rates on our mortgage loan production. 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. Therefore, we expect, based on the current interest rate environment,
      that our derivatives will positively impact our net revenues throughout the
      remainder of 2006.




*Provision
        for Mortgage Loan Losses.* Provision
        for mortgage loan losses decreased $1.7 million, or 74%, to $0.6 million
        for the
        three months ended March 31, 2006 from $2.3 million for the three months
        ended
        March 31, 2005. The changes in provision are impacted by the timing of
        charges-offs and by the seasonality of delinquency levels which are typically
        lower in the first quarter of the year. Although total delinquencies for
        the
        first quarter of 2005 were 18% lower at $557.4 million than total delinquencies
        for the first quarter of 2006 at $659.8 million, mortgage loans in the 90+
        and
        foreclosure categories were a higher percentage of total delinquencies in
        the
        first quarter of 2005 versus the first quarter of 2006. Because these loans
        require more reserve than other delinquent categories, the provision for
        the
        first quarter of 2005 was higher than the provision for the first quarter
        of
        2006.
  41
 Table
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We
      saw an
      overall increase in delinquency rates and loan loss experience in our owned
      servicing portfolio for the three months ended March 31, 2006 compared to
      delinquency rates and loan loss experience in our owned servicing portfolio
      for
      the three months ended March 31, 2005. This rise in delinquency levels in our
      owned servicing portfolio was due primarily to the seasoning of our assets.
      Although delinquencies increased, foreclosures and REO properties in our owned
      servicing portfolio decreased slightly and remained constant, respectively.
      This
      was primarily due to our strategy during 2005 and the first quarter of 2006
      of
      working out payment plans with borrowers that were 30 days delinquent. Our
      efforts to provide early mitigation efforts results in an increase in
      delinquencies as accounts remain contractually delinquent while in repayment
      rather than moving to foreclosure. We saw a decrease in loss severities from
      the
      first quarter 2005 to the first quarter of 2006 primarily as a result of higher
      valued collateral being liquidated as a result of foreclosure activity.





Two
      widely accepted methodologies of reporting delinquency data are the Mortgage
      Bankers Association, or MBA, and the Office of Thrift Supervision, or 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 sub-prime 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 of 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*


**March
                31,******
            **2006**
            **2005**Total
                Delinquencies and Loss Experience
            ($
                in thousands)Total
                outstanding principal balance (at period end)
            $6,496,358
            $6,035,444Delinquency
                (at period end):30-59
                days:Principal
                balance
            $273,044
            $237,332Delinquency
                percentage
            4.20%
            3.93%60-89
                days:Principal
                balance
            $82,061
            $49,412Delinquency
                percentage
            1.26%
            0.82%90
                days or more:Principal
                balance
            $58,311
            $51,861Delinquency
                percentage
            0.90%
            0.86%Bankruptcies
                (1):Principal
                balance
            $128,280
            $107,565Delinquency
                percentage
            1.97%
            1.78%Foreclosures:Principal
                balance
            $118,140
            $111,241


Delinquency
                percentage
            1.82%
            1.84%Real
                estate owned (2):Principal
                balance
            $50,039
            $46,248Delinquency
                percentage
            0.77%
            0.77%Total
                seriously delinquent including real estate owned (3) (4)
            $397,474
            $344,652Total
                seriously delinquent including real estate owned (3) (4)
            6.12%
            5.71%Total
                seriously delinquent excluding real estate owned (4)
            $347,435
            $298,404Total
                seriously delinquent excluding real estate owned (4)
            5.35%
            4.94%Securitization
                net losses on liquidated loans
            $11,184
            $11,273Percentage
                of securitization net losses on liquidated loans (5)
            0.69%
            0.75%Loss
                severity on liquidated loans for the 12-month period (6)
            37.22%
            41.84%Charge-offs
                (7)
            $10,282
            $8,493Percentage
                of charge-offs (5)
            0.63%
            0.56%


42
 Table
            of Contents


________________


(1)
            Bankruptcies
                include both non-performing and performing loans in which the related
                borrower is in bankruptcy. Amounts included for contractually current
                bankruptcies for the owned portfolio as of March 31, 2006 and 2005
                are
                $30.6 million and $17.6 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 and past due interest
                losses.




(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
                $309.0
                million, or 4.76% as of March 31, 2006, and $293.4 million, or 4.86%,
                as
                of March 31, 2005. Total seriously delinquent excluding REO using
                the OTS
                method would be $258.9 million, or 3.99% as of March 31, 2006 and
                $247.2
                million, or 4.10% as of March 31,
                2005.




(5)
            Annualized.




(6)
            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 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.




(7)
            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.






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





**Three
                Months Ended March 31,******
            **2006**
            **2005**(in
                thousands)Securitization
                net losses on liquidated loans
            $11,184
            $11,273Loan
                transfers to real estate owned
            8,359
            6,885Realized
                losses on real estate owned
            (8,742)
            (8,597)Timing
                differences between liquidation and claims processing
            (563)
            (198)Interest
                not advanced on warehouse loans
            (8)
            (75)Other
            52
            (795)Charge-offs
                (1)
            $10,282
            $8,493


________________


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




*Servicing
      Income, Net of Amortization and Impairment.* Servicing
      income, net of amortization and impairment, increased $6.0 million, or 44%,
      to
      $19.6 million for the three months ended March 31, 2006 from $13.6 million
      for
      the three months ended March
      31,
      2005. The increase in gross servicing income was primarily the result of the
      acquisition of additional third-party servicing rights as well as 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
      our total servicing portfolio grew and LIBOR increased during the first quarter
      of 2006 as compared to the first quarter of 2005, interest earned on the
      associated escrow balances increased $4.1 million, or 158%, to $6.7 million
      for
      the three months ended March 31, 2006 from $2.6 million for the three months
      ended March 31, 2005. These increases were offset by an increase of $6.0 million
      of amortization and impairment expense of MSRs for the three months ended March
      31, 2006 compared to the three months ended March 31, 2005. The increase in
      amortization and impairment expenses was due to increased prepayment speeds
      during the three months ended March 31, 2006 compared to the three months ended
      March 31, 2005 as well as growth in our servicing portfolio.


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We
      expect
      our servicing income, net of amortization and impairment, to increase as we
      grow
      our third-party servicing portfolio. To the extent prepayment speeds decline
      in
      the future, we would also anticipate a decline in our amortization and
      impairment expense assuming a constant level in our mortgage loan servicing
      portfolio. Information relating to our servicing income is shown in the table
      below:







*Servicing
      Income For the Three Months Ended March 31, 2006 Compared to the Three Months
      Ended March 31, 2005*




**Three
                Months Ended March 31,******
            **2006**
            **2005**
            **Variance**($
                in thousands)Average
                third-party servicing portfolio
            $19,955,088
            $14,474,027
            38%Average
                owned portfolio
            $6,350,182
            $5,959,432
            7%Average
                total servicing portfolio
            $26,305,271
            $20,433,459
            29%Gross
                servicing income
            $36,362
            $24,258
            50%Amortization
                and impairment
            $16,722
            $10,692
            56%Servicing
                fees - third-party portfolio (1)(2)
            50
            55Amortization
                and impairment- third-party portfolio(1)
            33
            29Other
                servicing income - total servicing portfolio(1)(3)
            17
            9Servicing
                income - total servicing portfolio(1)
            55
            47


___________


(1)
            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.




*Derivative
      gains.* Derivative
      gains decreased $10.6 million, or 50% to $10.6 million for the three months
      ended March 31, 2006 from $21.2 million for the three months ended March 31,
      2005. ** This
      decrease was primarily due to a decrease of $4.1 million in the change in fair
      value of our derivative instruments as well as a $6.6 million reduction in
      cash
      settlements. These two components decreased primarily as a result of a reduction
      in the notional amount of derivative instruments held during the first quarter
      of 2006 compared to the first quarter of 2005.




We
        expect
        that accounting for the derivative instruments as undesignated derivatives
        will
        result in increased volatility in our results of operations, as fluctuations
        in
        the market price of the derivative instruments will result in changes in
        the
        fair value of the derivatives being recorded in our consolidated statements
        of
        operations.


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*(Loss)
        gain on sale of assets.* (Loss)
        gain on sale of assets decreased $3.1 million, or 182% to a loss of $1.4
        million
        for the three months ended March 31, 2006 from a gain of $1.7 million for
        the
        three months ended March 31, 2005. This decrease was primarily due to
        repurchases of $1.5 million of loans previously sold that were paid off by
        the
        borrowers earlier than anticipated.


**Operating
      expenses**





During
      the first quarter of 2006, we made significant progress in reducing our
      operating expenses and increasing our efficiencies due to management’s continued
      focus in this area. Total operating expenses decreased $6.5 million, or 16%,
      to
      $34.5 million for the three months ended March 31, 2006 from $41.0 million
      for
      the three months ended March 31, 2005.





*Payroll
      and Related Expenses.* Payroll
      and related expenses decreased $4.1 million, or 19%, to $17.7 million for the
      three months ended March 31, 2006 from $21.8 million for the three months ended
      March 31, 2005. Specifically:





·
            Salary
                expense and associated payroll taxes decreased $2.0 million, or 13%,
                to
                $13.8 million for the three months ended March 31, 2006 from $15.8
                million
                for the three months ended March 31, 2005, primarily due to a 12%
                decline
                in headcount from 1,248 employees at March 31, 2005 to 1,098 employees
                at
                March 31, 2006.


·
            Bonus
                expense decreased $1.0 million, or 36%, to $1.8 million for the three
                months ended March 31, 2006 from $2.8 million for the three months
                ended
                March 31, 2005, primarily due to our decline in headcount and our
                revised
                bonus structure.


·
            Commission
                expense decreased $1.8 million, or 31%, to $4.0 million for the three
                months ended March 31, 2006 from $5.8 million for the three months
                ended
                March 31, 2005, primarily due to decreased mortgage loan production
                and
                revisions to the commission plan structure.


·
            Severance
                expense decreased $0.2 million, or 67%, to $0.1 million for the three
                months ended March 31, 2006 from $0.3 million for the three months
                ended
                March 31, 2005.


·
            Deferred
                payroll and related expenses, as they related to direct loan origination
                costs, decreased $0.9 million, or 16%, to $4.9 million for the three
                months ended March 31, 2006 from $5.8 million for the
                three


·
            months
                ended March 31, 2005, primarily due to decreased mortgage loan production.





*General
      and Administrative Expenses.* General
      and administrative expenses decreased $2.6 million, or 16%, to $13.4 million
      for
      the three months ended March 31, 2006, from $16.0 million for the three months
      ended March 31, 2005. The following factors contributed to the decrease in
      general and administrative expenses:





·
            a
                $1.6 million decrease in advertising expense due to the reduction
                in size
                of our retail platform since the first quarter of 2005; we expect
                these
                expenses to increase throughout the remainder of 2006 as staffing
                additions are made in line with the new retail growth
                plan;


·
            a
                $0.6 million decrease in employee relations, employee training and
                temporary office assistance
                expense;


·
            a
                $0.7 million decrease in conference, travel and entertainment
                expense;


·
            a
                $0.8 million decrease in miscellaneous office supplies and
                expenses;


·
            a
                $0.4 million decrease in consulting and outside
                services.


·
            These
                decreases were partially offset by a $0.7 million increase in rent
                and
                lease expense, primarily related to our new mortgage loan production
                facility and second servicing site in Glen Allen, Virginia; a $0.6
                million
                increase in accounting fees related to audit services; and a $0.3
                million
                decrease in our deferred direct loan origination costs, primarily
                due to
                decreased mortgage loan production.





*Income
      Tax Expense.* We
      recorded a $2.9 million tax expense during the three months ended March 31,
      2006.  The primary driver of this expense was intercompany activity between
      the taxable REIT subsidiaries and the qualified REIT subsidiary.





*Reconciliation
      of GAAP Net Income to Estimated Tax Net Income*





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The
      following table is a reconciliation of GAAP net income to estimated REIT taxable
      net income for the three months ended March 31, 2006:





**For
                the three months ended**
              **March
                31, 2006**($
                in thousands)Consolidated
                GAAP income before taxes
            $29,311Estimated
                tax adjustments:Plus:Provision
                for losses - REIT portfolio
            3,142Miscellaneous
            930Less:Taxable
                REIT subsidiary pre-tax net income (loss)
            765Elimination
                of intercompany pre-tax net income loss
            4,909Hedging
                income (1)
            2,993Securitized
                loan adjustments for tax
            987Estimated
                Qualified REIT taxable income
            $23,729Estimated
                Qualified REIT taxable income per basic common share
            $0.47




_______________
 (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.





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The
      estimated REIT taxable income for the three months ended March 31, 2006 set
      forth in the table above is an estimate only and is subject to change until
      we
      file our 2006 REIT federal tax returns.





**Business
      Segment Results**





We
      operate our business through three core business segments: mortgage loan
      production, portfolio and mortgage loan servicing. All segments except the
      portfolio segment are operated by our taxable REIT subsidiaries. In this
      section, we discuss performance and results of our business segments for the
      three months ended March 31, 2006 and for the three months ended March 31,
      2005.
      See Note 11 to our unaudited consolidated financial statements for additional
      information about the results of our business segments.





***Portfolio
      Segment***




In
      our
      portfolio segment, we use our equity capital and borrowed funds to invest in
      our
      mortgage loan portfolio to produce net interest income. We conduct certain
      mortgage loan table funding activities through our qualified REIT subsidiary
      in
      our portfolio segment. We also record servicing expense associated with
      servicing our mortgage loan portfolio in our portfolio segment. We evaluate
      the
      performance of our portfolio segment based on total net revenues and gains.
      Total net revenues and gains for the portfolio segment decreased $32.6 million,
      or 46%, to $38.3 million for the three months ended March 31, 2006 from $70.9
      million for the three months ended March 31, 2005. The decrease in total net
      revenues and gains was primarily due to the increase in our borrowing costs
      as
      well as volatility in derivative gains (losses) during those
      periods.





***Mortgage
      Loan Servicing Segment***




We
      service mortgage loans in our mortgage loan servicing segment, 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.
      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 mortgage loan servicing portfolio,
      including loans recorded on our consolidated balance sheets, increased $2.0
      billion, or 8%, to $26.8




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billion
      as of March 31, 2006 from $24.8 billion as of December 31, 2005. As of March
      31,
      2006, we serviced 126,180 loans with a principal balance of $20.3 billion for
      third-parties and 43,737 loans with a principal balance of $6.5 billion related
      to our owned portfolio. As of December 31, 2005, we serviced 119,311 loans
      with
      a principal balance of $18.4 billion for third-parties and 43,636 loans with
      a
      principal balance of $6.4 billion related to our owned portfolio. The increase
      during the first quarter of 2006 was due primarily to the acquisition of
      servicing rights related to $3.8 billion of mortgage loans owned by
      non-affiliated companies a well as the origination and purchase of $746.3
      million of mortgage loans. This increase was partially offset by prepayments
      and
      losses totaling $2.7 billion during the three months ended March 31, 2006.




We
      believe we can continue to grow our mortgage loan servicing portfolio because
      the non-conforming mortgage loan industry has been adversely affected by limited
      access to capital, lower than anticipated performance of seasoned portfolios,
      and industry consolidation. Competitors with limited access to capital have
      shifted their operations to selling loans, along with the related servicing
      rights, or have entered into strategic alliances with investment banks to
      increase their liquidity and access to the capital markets. We believe this
      has
      resulted in an increasing number of asset-backed securities being issued by
      entities that do not perform servicing, which presents opportunities for us
      to
      increase the size of our portfolio of loans serviced for third parties. We
      anticipate purchasing third-party servicing rights for an additional $0.9
      billion of mortgage loans during the second quarter of 2006, of which $0.1
      billion were purchased through April 2006 for $0.7 million.





*Our
      Delinquency and Loss Experience - Total Servicing Portfolio*




We
      experienced an increase in seriously delinquent accounts for our total servicing
      portfolio to 7.23% as of March 31, 2006 from 4.95% as of March 31, 2005. In
      the
      first quarter of 2006, we saw a rise in delinquency levels in our total
      servicing portfolio due primarily to the aging of the portfolio. Higher
      delinquencies on our third-party servicing portfolio will negatively impact
      our
      servicing income and the fair value of our MSRs and will cause us to pay more
      in
      servicing advances. The following tables set forth information about the
      delinquency and loss experience of the total mortgage loan portfolio 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.)




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**March
                31,******
            **2006**
            **2005****Total
                Delinquencies and Loss Experience (1)**
            **Total
                Servicing Portfolio**($
                in thousands)Total
                outstanding principal balance (at period end)
            $26,759,038
            $21,518,419Delinquency
                (at period end):30-59
                days:Principal
                balance
            $1,198,704
            $798,637Delinquency
                percentage
            4.48%
            3.71%60-89
                days:Principal
                balance
            $404,546
            $210,306Delinquency
                percentage
            1.51%
            0.98%90
                days or more:Principal
                balance
            $356,931
            $201,445Delinquency
                percentage
            1.33%
            0.94%


Bankruptcies
                (2):Principal
                balance
            $425,446
            $275,956Delinquency
                percentage
            1.59%
            1.28%Foreclosures:Principal
                balance
            $632,403
            $318,440Delinquency
                percentage
            2.36%
            1.48%Real
                estate owned:Principal
                balance
            $245,233
            $109,700Delinquency
                percentage
            0.92%
            0.51%Total
                seriously delinquent including real estate owned (3)(4)
            $1,935,501
            $1,064,924Total
                seriously delinquent including real estate owned (3)(4)
            7.23%
            4.95%Total
                seriously delinquent excluding real estate owned(3)(4)
            $1,690,268
            $955,224Total
                seriously delinquent excluding real estate owned(3)(4)
            6.32%
            4.44%Securitization
                net losses on liquidated loans
            $44,880
            $21,817Percentage
                of securitization net losses on liquidated loans (5)
            0.67%
            0.41%Loss
                severity on liquidated loans for the 12-month period (6)
            37.49%
            42.51% ________________


(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 the three months
                ended
                March 31, 2006 and for the three months ended March 31, 2005 are
                $103.3
                million and $39.2 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
                $1.5
                billion, or 5.65%, as of March 31, 2006 and $847.7 million, or 3.94%,
                as
                of March 31, 2005. Total seriously delinquent excluding REO using
                the OTS
                method would be $1.3 billion, or 4.74%, as of March 31, 2006 and
                $738.0
                million, or 3.43%, as of March 31, 2005.




(5)
            Annualized.




(6)
            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 and interest advances, fees,
                principal balances, all costs of liquidating and all other servicing
                advances for taxes, property insurance, and other servicing costs
                incurred
                and invoiced to us within 90 days following the liquidation
                date.




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*Losses
      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
            $8,623
            1%
            1.94%
            31.46%1997
            $1,769,538
            $35,140
            2%
            3.24%
            38.88%1998
            $2,084,718
            $76,907
            4%
            4.12%
            39.59%1999
            $2,381,387
            $156,746
            7%
            5.17%
            41.92%2000
            $2,078,637
            $166,780
            8%
            5.78%
            44.40%2001
            $499,879
            $49,868
            10%
            3.90%
            45.62%Post-divestiture:2001
            $1,833,357
            $209,799
            11%
            3.97%
            41.81%2002
            $2,484,074
            $360,409
            15%
            1.78%
            37.13%2003
            $2,842,942
            $709,902
            25%
            0.57%
            28.37%2004
            $3,764,628
            $1,767,195
            47%
            0.16%
            24.57%2005
            $3,349,035
            $2,590,487
            77%
            0.01%
            19.46%2006
            $746,301
            $574,953
            77%
            —
            —


_________________


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




(2)
            As
                of March 31, 2006.




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




(4)
              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 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.
                Excludes
                loss severity amounts on called
                loans.


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***Mortgage
      Loan Production Segment***




We
      evaluate the performance of our mortgage loan production segment based on the
      production levels of our three business channels. We believe that information
      about 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. We characterize our
      wholesale and correspondent channels as indirect lending sources and our retail
      channel as a direct lending source. Through our mortgage loan production
      segment, we originate and purchase non-conforming residential mortgage loans
      through relationships with various approved mortgage companies, mortgage
      brokers, and lenders; and we originate non-conforming residential mortgage
      loans
      directly to borrowers through our retail sales centers. We record interest
      income, interest expense, servicing expense and provision for mortgage loan
      losses on the mortgage loans held in our mortgage loan production segment prior
      to the sale of those loans to the portfolio segment. We also collect revenues
      in
      our mortgage loan production segment, 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 into three centralized lending facilities and
      strategically-located retail sales center locations, we expect to see continued
      improvements in our loan production efficiency in 2006, although we cannot
      be
      certain that we will.





Mortgage
      loan production was $746.3 million for the three months ended March 31, 2006,
      which represents a 7% decrease from the three months ended March 31, 2005
      production of $805.2 million. Our wholesale mortgage loan production was $363.6
      million for the three months ended March 31, 2006, an increase of 6% from the
      three months ended March 31, 2005. Our retail channel loan production was $138.5
      million for the three months ended March 31, 2006, a decrease of 31% from the
      three months ended March 31, 2005. Our correspondent flow mortgage loan
      production was $226.0 million for the three months ended March 31, 2006, an
      increase of 1% from the three months ended March 31, 2005. Our correspondent
      bulk mortgage loan production was $18.1 million for the three months ended
      March
      31, 2006, a decrease of 52% from the three months ended March 31, 2005.


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**Financial
      Condition**




*March
      31, 2006 Compared to December 31, 2005*





*Net
      Mortgage Loan Portfolio.* Our
      net
      mortgage loan portfolio increased $0.1 billion, or 2%, to $6.5 billion as of
      March 31, 2006 from $6.4 billion as of December 31, 2005. This increase was
      the
      result of the origination and purchase of $746.3 million of mortgage loans
      offset by principal payments of $575.9 million and loan sales of $42.3
      million.





*Allowance
      for Loan Losses.* Allowance
      for loan losses decreased $4.9 million, or 13%, to $31.7 million as of March
      31,
      2006 from $36.6 million as of December 31, 2005. This decrease was due to an
      18%
      decrease in delinquencies since the fourth quarter of 2005.





*Mortgage
      Servicing Rights, Net.* Mortgage
      servicing rights (MSRs), net increased $14.0 million, or 11%, to $143.7 million
      as of March 31, 2006 from $129.7 million as of December 31, 2005. This increase
      was primarily due to purchases of $30.7 million of rights to service $3.8
      billion of mortgage loans during the three months ended March 31, 2006. The
      increase in MSRs was partially offset by amortization of servicing rights of
      $15.2 million during the first quarter of 2006, which was higher than the
      amortization of servicing rights in the first quarter of 2005 of $9.2 due to
      growth in our servicing portfolio as well as an increase in prepayment speeds.
      Also, a temporary impairment of $1.5 million in the first quarter of 2006
      further offset the increase. The impairment of MSRs was primarily the result
      of
      increased prepayment speeds on mortgage loans in certain aged third-party
      servicing portfolios. 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.





*Servicing
      Related Advances.* Servicing related advances increased $18.8 million, or 10%, to $204.1 million
      as
      of March 31, 2006 from $185.3 million as of December 31, 2005. The increase
      was
      primarily due to the increase in our third-party servicing balances.





*Trustee
      Receivable.* Trustee
      receivable decreased $2.9 million, or 2%, to $133.1 million as of March 31,
      2006
      from $136.0 million as of December 31, 2005. 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 our trustee receivable balance to increase.





*Other
      Assets.* Other
      assets decreased $5.1 million, or 7%, to $63.4 million as of March 31, 2006
      from
      $68.5 million as of December 31, 2005. The decrease in other assets was
      primarily due to a decrease of $3.9 million in current tax receivable relating
      to


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our
      receipt of tax refunds for prior periods offset by our accrual of current period
      tax expense. Additionally, there was a decrease of $2.3 million in bond issuance
      costs, offset by an increase in property and equipment, net of $1.3
      million.





*Warehouse
      Financing.* Warehouse financing, which includes borrowings under our warehouse lines of
      credit and repurchase agreement facilities, increased $602.6 million, or 159%,
      to $980.7 million as of March 31, 2006 from $378.1 million as of December 31,
      2005 because we did not issue any asset-backed securitizations during the first
      quarter of 2006. 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 in relation to our mortgage loan production volumes.





*Securitization
      Financing.* Securitization financing decreased $0.6 billion, or 10%, to $5.6 billion as
      of
      March 31, 2006 from $6.2 billion as of December 31, 2005. This decrease resulted
      primarily from bond payments of $0.6 billion. In general, we expect increases
      in
      our securitization financing as we experience increases in mortgage loan
      production and continue to securitize our mortgage loans. We did not issue
      any
      additional asset-backed securitizations during the first quarter of 2006.





*Shareholders’
      Equity.* Shareholders’
      equity increased $2.2 million, or 0.4%, to $595.3 million as of March 31, 2006
      from $593.1 million as of December 31, 2005. The increase in shareholders’
equity was due primarily to (1) net income of $26.4 million, (2) additional
      paid-in capital of $0.3 million relating to the issuance of common stock, and
      (3) compensation expense related to restricted stock units of $0.8 million,
      all
      of which was partially offset by the declaration of $25.4 million in dividends.





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




**Liquidity
      and Capital Resources**




Cash
        increased $8.1 million for the three months ended March 31, 2006 and
        increased $3.8 million for the three months ended March 31, 2005. The overall
        change in cash consisted of the following:


**For
                the Three Months Ended March 31,******
            **2006**
            **2005**(in
                thousands)Cash
                provided by operating activities
            $34,780
            $53,726Cash
                used by investing activities
            (14,090)
            (122,889)Cash
                (used in) provided by financing activities
            (12,553)
            72,985


Increase
                in cash
            $8,137
            $3,822





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*Operating
      Activities* .
      Cash
      provided by operations decreased $18.9 million, or 35%, to $34.8 million for
      the
      three months ended March 31, 2006 from $53.7 million for the three months ended
      March 31, 2005. This change was the result of decreased net income from
      operations adjusted for non-cash items such as depreciation and amortization,
      deferred income taxes, and provision for mortgage loan losses. Our earnings
      are
      primarily from net interest income, servicing income, and derivative gains,
      offset by general and administrative expenses, derivative losses and income
      tax
      expense. Further details are discussed in “-- Consolidated
      Results.”





*Investing
      Activities* .
      Cash
      used for investing activities decreased $108.8 million, or 89%, to $14.1 million
      for the three months ended March 31, 2006 from $122.9 million for the three
      months ended March 31, 2005. Investing activities consist principally of the
      origination and purchase of mortgage loans as well as the acquisition of MSRs.
      The origination and purchase of mortgage loans including premiums totaled $754.6
      million for the three months ended March 31, 2006. In addition, MSRs were
      purchased totaling $30.7 million. These decreases to cash were partially offset
      by principal payments received on our mortgage loan portfolio of $575.9 million
      and mortgage loan and REO sales to third parties of $42.1 million and $15.2
      million, respectively. Capital expenditures during the three months ended March
      31, 2006 were $3.6 million and related primarily to computer equipment and
      leasehold improvements for the new mortgage loan origination facility and second
      servicing site as well as various information technology enhancements.





Restricted
      cash decreased $141.6 million to $5.9 million at March 31, 2006 from $147.5
      million at December 31, 2005 due to the timing of the receipt of cash related
      to
      prefunded securitizations. Prefunded amounts are held in a SAST trust account
      and made available once all required mortgage loans have been included in the
      securitization. During the first quarter of 2006, the prefunding settlement
      for
      the SAST 2005-4 securitization was closed, decreasing our restricted cash
      balance.




*Financing
      Activities* .
      Cash
      provided by (used in) financing activities decreased $85.6 million, or 117%,
      to
      $(12.6) million for the three months ended March 31, 2006 from $73.0 million
      for
      the three months ended March 31, 2005. Cash used in financing activities
      primarily consisted of $598.7 million related to principal payments on
      securitization financing, offset by $602.5 million in proceeds from warehouse
      and repurchase financing facilities and $15.9 million from the securitization
      of
      servicing advances. Fluctuations in warehouse, repurchase and securitization
      financing from period to period can occur due to the timing of securitizations
      and the related repayment of the warehouse and repurchase financings.





*Dividends.* During
      the first quarter of 2006, our Board of Directors declared a first quarter
      regular dividend in the amount of $0.50 per share payable on April 28, 2006
      to
      shareholders of record at April 3, 2006. The regular and special dividends
      declared in the fourth quarter of 2005, in the aggregate amount of $32.5
      million, were paid on


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January
      11, 2006. 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 or that would inhibit our ability to fund
      operations and capital commitments for the next 12 months.





***Working
      Capital***




We
      would
      use working capital to fund the cash flow needs of our operations in the event
      we were unable to generate sufficient cash flows from operations to cover our
      operating requirements. Under the commonly defined working capital definition,
      which is current assets less current liabilities, we calculated our working
      capital as of March 31, 2006 to be $397.4 million. Using our definition of
      working capital, we calculated our working capital as of March 31, 2006 to
      be
      $109.4 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 - March 31, 2006**
            **Saxon Defined Working Capital**
            **Commonly Defined Working Capital**($
                in thousands)Unrestricted
                cash
            14,190
            14,190Trustee
                receivable
            —
            133,085Accrued
                interest receivable
            —
            40,139Accrued
                interest payable
            —
            (8,988)Unsecuritized
                mortgage loans, MSRs, & mortgage bonds - payments less than one year
            355,742
            1,085,476Warehouse
                financing - payments less than one year
            (260,524)
            (260,524)Repurchase
                financing - payments less than one year
            —
            (720,145)Servicing
                advances
            —
            204,106Financed
                advances - payments less than one year
            —
            (125,717)Securitized
                loans - payments less than one year
            —
            2,276,672Securitized
                financing - payments less than one year
            —
            (2,240,854)Total
            $109,408
            $397,440





***Financing
      Facilities***





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


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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.





In
      addition, on May 4, 2006, we closed our private offering of $150 million of
      senior notes due 2014. The notes bear interest at a fixed rate of 12% per
      annum, commencing on May 4, 2006. We intend to use the net proceeds from the
      proposed offering for general corporate purposes, principally the acquisition
      of
      additional third-party mortgage servicing rights and whole loans in
      bulk.





***Committed
      Facilities***





Under
      certain of our warehouse lines of credit and repurchase facilities, we obtain
      advances of less than 100% of the principal balance of the mortgage loans,
      requiring us to use working capital to fund the remaining portion of the
      principal balance of the mortgage loans. Some of our warehouse lines of credit
      and repurchase facilities contain sub-limits that provide us with the ability
      to
      finance assets such as non-performing loans, mortgage bonds, mortgage servicing
      rights, advances that are required by our mortgage servicing contracts and
“wet”
loans. “Wet” loans are mortgage loans for which the collateral custodian has not
      yet received the related loan documentation.





Under
      our
      warehouse lines of credit and repurchase facilities, interest is payable monthly
      in arrears and outstanding principal is payable upon receipt of loan sale
      proceeds or transfer of a loan into a securitization trust. Outstanding
      principal is also repayable upon the occurrence of certain events, such as
      a
      mortgage loan which is in default for a period of time, a repaid mortgage loan,
      a mortgage loan obtained with fraudulent information or the failure to cure
      a
      defect in a mortgage loan’s documentation. In addition, our facilities contain
      terms requiring principal repayment if a loan remains funded by the facilities
      longer than a contractual period of time from the date of funding or on the
      maturity date of the facility.





Interest
      on our warehouse lines of credit and repurchase facilities is based on a margin
      over the London Interbank Offered Rate, or LIBOR, with the margin above LIBOR
      varying by facility and depending on the type of asset that is being financed.
      Dry funded loans carry the lowest rate and mortgage servicing rights carry
      the
      highest rate.





Loans,
      mortgage bonds and mortgage servicing rights financed under our warehouse lines
      of credit and repurchase facilities are subject to changes in market valuation
      and margin calls. The market value of our loans, mortgage bonds and mortgage
      servicing rights depends on a variety of economic conditions, including interest
      rates and demand for our asset-backed securities. To the extent the value of
      the
      loans, mortgage bonds or mortgage servicing rights declines significantly,
      we
      would be required to repay portions of the amounts we have
      borrowed.


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Our
      $375.0 million syndicated warehouse facility with JPMorgan Chase Bank was
      amended effective February 28, 2006. The amendment allows for the financing
      of
      our originated mortgage servicing rights and extended the termination date
      of
      the facility to May 25, 2006.





As
      of
      March 31, 2006, we had committed revolving warehouse and repurchase facilities
      in the amount of $1.7 billion. The table below summarizes our facilities and
      their expiration dates as of March 31, 2006. 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)JPMorgan
                Chase Bank, N.A.
            $375,000
            May
                25, 2006Greenwich
                Capital Financial Products, Inc.
            300,000
            September
                28, 2006Bank
                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
                20, 2006Total
                committed facilities
            $1,675,000Less:
                total outstanding at March 31, 2006
            $980,669Total
                available at March 31, 2006
            $694,331





Our
      $300.0 million Credit Suisse First Boston Mortgage Capital LLC repurchase
      facility was amended on April 26, 2006, extending the termination date of the
      facility to April 25, 2007.





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
      $980.7 million of warehouse and repurchase borrowings collateralized by
      residential mortgage loans, mortgage servicing rights, and mortgage bonds
      outstanding as of March 31, 2006. 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 $980.7 million we had outstanding as
      of
      March 31, 2006, as our mortgage production and securitization programs continue.
      In addition, on May 4, 2006, we closed our private offering of $150 million
      of
      senior notes due 2014. The notes bear interest at a fixed rate of 12% per
      annum, commencing on May 4, 2006.




Our
      financing facilities require us to comply with
      various customary operating and financial covenants, including, without
      limitation, tests relating to our tangible net worth and liquidity, leverage
      requirements and restrictions on guarantees and the granting of liens. In
      addition, some of the facilities may subject us to cross default features.
      In
      the event of default, we may be prohibited from paying dividends and making
      distributions under certain of our financing facilities without the prior
      approval of our lenders. We do not believe that these existing financial
      covenants currently 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 for the three months ended March 31,
      2006.


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***Senior
        Notes***
 
 On
        May 4,
        2006, we closed a private offering of $150 million of 12% senior notes due
        2014.
        The notes bear interest at a fixed rate of 12% per annum, commencing on May
        4,
        2006, and will mature on May 1, 2014. Interest on the notes will be payable
        on
        May 1 and November 1 of each year, beginning November 1, 2006. The notes
        are
        guaranteed by certain of our subsidiaries (the “Guarantees”). We plan to use the
        net proceeds from the sale of the notes for general corporate purposes,
        principally the acquisition of additional third-party mortgage servicing
        rights
        and whole loans in bulk. Pending such application, we intend to use the net
        proceeds to temporarily reduce outstanding debt under one or more of our
        committed facilities. The notes are general unsecured, senior obligations
        and
        rank senior to all of our future debt that is expressly subordinated in right
        of
        payment to the notes.




We
        may
        redeem some or all of the notes at any time at a price equal to 100% of the
        aggregate principal amount thereof plus accrued and unpaid interest and a
        make-whole premium. We may also redeem at any time up to May 1, 2009 (which
        may
        be more than once) up to 35% of the aggregate principal amount of the notes
        using the proceeds of certain equity offerings at a redemption price of 112%
        of
        the principal amount outstanding plus accrued and unpaid interest. We must
        offer
        to purchase the notes at a purchase price of 101% of the principal amount
        plus
        accrued and unpaid interest to the date of purchase if we experience certain
        specific kinds of changes of control. We must offer to purchase the notes
        at a
        purchase price of 100% of the principal amount plus accrued and unpaid interest
        to the date of purchase if we sell assets under certain circumstances. We
        also
        must offer to repurchase up to $10 million in aggregate principal amount
        of
        notes at a purchase price of 100% of the principal amount plus accrued and
        unpaid interest to the date of purchase if we have Excess Cash Flow (as defined
        in the indenture governing the notes) for the six months ended March 31,
        2007,
        and each six-month period thereafter.
 
 The
        indenture governing the notes contains certain covenants that restrict the
        ability of our company and certain subsidiaries to, among other things: incur
        additional indebtedness; make certain distributions, investments, and certain
        other payments; sell certain assets; agree to restrictions on the ability
        of
        certain subsidiaries from making payments to us; create certain liens; merge,
        consolidate, or sell substantially all of our assets; and enter into certain
        transactions with affiliates. In addition, the indenture includes a covenant
        relating to the maintenance of unencumbered assets. The indenture also contains
        certain exceptions from and qualifications to such covenants; it does not
        restrict the ability to incur Funding Indebtedness (as defined in the
        indenture); and it does not restrict us from paying dividends on our common
        stock to the extent necessary to maintain our status as a REIT absent a default
        with respect to the notes. The indenture also contains customary default
        provisions.


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***Securitization
      Financing***





*Mortgage
      Loan Securitization Facilities.* We have
      historically financed, and expect to continue to finance, our mortgage loan
      portfolio on a long-term basis by issuing asset-backed securities. We believe
      that issuing asset backed securities provides us 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.





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





*Servicing
      Advance Facility.* As of
      March 31, 2006 we had $210.7 million of borrowings outstanding and an additional
      $74.3 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.





Our
      servicing advance facility contains two series of notes, the Series 2004-1
      Notes
      and the Series 2005-A Notes. The Series 2004-1 Notes have one remaining class
      of
      term notes outstanding with a face value of $55.0 million. 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 an original maximum face value of $90.0
      million. On March 16, 2006, the maximum face value of the variable funding
      notes
      related to the Series 2005-A Notes was increased from $90.0 million to $145.0
      million. As a result, the total borrowing capacity of our servicing advance
      facility increased from $230.0 million to $285.0 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
      months ended March 31, 2006.


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As
      of
      March 31, 2006, securitization financing related to mortgage loans and servicing
      advances on our consolidated balance sheet was $5.6 billion.





**Off-Balance
      Sheet Items and Contractual
      Obligations**





***Off-Balance
      Sheet Items***





Prior
      to
      July 6, 2001, our predecessor sold mortgage loans, while retaining certain
      residual interests, through securitizations structured as sales, with a
      corresponding one-time recognition of gain or loss, under GAAP. All such
      residual interests were retained by Dominion Capital in connection with our
      July
      6, 2001 acquisition of the issued and outstanding shares of capital stock of
      our
      predecessor from Dominion Capital. Mortgage loans with an unpaid principal
      balance of $354.5 million that were securitized in off-balance sheet
      transactions by our predecessor from May 1996 to July 5, 2001 were still
      outstanding as of March 31, 2006. In connection with those loans and in
      connection with the sales of mortgage loans to nonaffiliated parties, our
      subsidiaries have 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 or expenses related
      to such breach. As of March 31, 2006 our subsidiaries neither had nor expected
      to incur any material obligation to remove any loans from any securitizations,
      or to provide any such indemnification to any party.





In
      the
      normal course of business, we are subject to indemnification obligations related
      to the sale of residential mortgage loans. Under these obligations, we are
      required to repurchase certain mortgage loans that fail to meet the standard
      representations and warranties included in the sales contracts. We accrue an
      estimate for the fair value of those obligations. Our subsidiaries are also
      subject to premium recapture expenses in connection with the sale of residential
      mortgage loans. Premium recapture expenses represent repayment of a portion
      of
      certain loan sale premiums to investors on previously sold loans that are repaid
      within six months of the loan sale. We accrue an estimate of the potential
      refunds of premium received on loan sales based upon historical experience.
      As
      of March 31, 2006 and December 31, 2005, the liability recorded for premium
      recapture expenses and for obligations to repurchase mortgage loans was $0.3
      million and $0.4 million, respectively and the associated expense was recorded
      within (loss) gain on sale of assets in the consolidated statements of
      operations.





Our
      subsidiaries had commitments to fund mortgage loans with agreed upon rates
      of
      $261.4 million and $262.6 million as of March 31, 2006 and December 31, 2005, respectively.
        These 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.


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***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
      as
      of March 31, 2006 and December 31, 2005 totaled $61.0 million and $67.5 million,
      respectively. We have one capital lease for equipment with total future minimum
      rental payments of $1.8 million.





We
      are
      committed to purchasing third-party servicing rights of an additional $0.9
      billion unpaid principal balance of third-party mortgage loans during the second
      quarter of 2006, of which $0.1 billion had been purchased as of April 30, 2006
      for $0.7 million.





**Other
      Matters**





***Related
      Party Transactions***





On
      June
      16, 2005, we purchased the home of W. Michael Head, our former Vice President
      and Director of Human Capital, and his wife for $0.5 million, in connection
      with
      Mr. Head’s hiring by us and relocation to Richmond, Virginia. We determined the
      purchase price based on the lower of the price at which the property was listed
      for sale, and the market value as determined by a licensed appraiser, which
      determination was approved by senior management at the time. At March 31, 2006,
      the home was for sale at a listing price of $0.4 million, and was recorded
      at
      its net realizable value of $0.4 million on our consolidated balance sheets.
      On
      April 28, 2006, we entered into a contract to sell the home for $0.4
      million.





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





In
      December 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standard, or SFAS, No. 153, *Exchange
      of Nonmonetary Assets - An Amendment of APB Opinion No. 29.* This
      statement addresses the measurement of exchanges of similar productive assets
      in
      paragraph 21(b) of APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      and
      replaces it with an exception for exchanges that do not have commercial
      substance. The statement specifies that a nonmonetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The provisions of this statement
      are
      effective for nonmonetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. The adoption of SFAS No. 153 on January 1, 2006 did not
      have a material effect on our financial condition or results of operations.




In
      November 2005, the FASB issued FASB Staff Position, or FSP, FAS 115-1 and FAS
      124-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* .
      This
      FSP resolved the accounting controversy generated by EITF 031 and reverts to
      other-than-temporary impairment guidance that pre-dated the original
      effective date of EITF 03-1. The FSP applies to reporting periods beginning
      after December 15, 2005. The adoption of FSP FAS 115-1 and FAS 124-1 on January
      1, 2006 did not have a material effect on our financial condition or results
      of
      operations.




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In
      February 2006, t he
      FASB
      issued SFAS No. 15 5, *Accounting
      for Certain Hybrid Instruments* ,
      which
      allows financial instruments that have embedded derivatives to be accounted
      for
      as a whole (eliminating the need to bifurcate the derivative from its host)
      if
      the holder elects to account for the whole instrument on a fair value basis.
      SFAS No. 155 is effective for all financial instruments acquired or issued
      after
      the beginning of an entity’s first fiscal year that begins after September 15,
      2006. The adoption of this statement is not anticipated to have a significant
      impact on our financial condition or results of operations.




In
      March
      2006, the FASB issued SFAS No. 156, *Accounting
      for Servicing of Financial Assets - An Amendment of FASB Statement No. 140.* This
      standard amends the guidance in SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.* Among
      other requirements, SFAS No. 156 requires an entity to recognize a
      servicing asset or servicing liability each time it undertakes an obligation
      to
      service a financial asset by entering into a servicing contract in any of the
      following situations: a transfer of the servicer’s financial assets that meets
      the requirements for sale accounting; a transfer of the servicer’s financial
      assets to a qualifying special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale securities or trading
      securities; or an acquisition or assumption of an obligation to service a
      financial asset that does not relate to financial assets of the servicer or
      its
      consolidated affiliates. SFAS No. 156 is effective the beginning of the first
      fiscal year beginning after September 15, 2006. At this time, management has
      not
      yet completed its’ assessment of the impact of the implementation of this
      statement.







**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.




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Maturity
      and Repricing Information




As
      shown
      in the tables below, there was a slight increase in our derivative activity
      at
      March 31, 2006 compared to December 31, 2005 due to additional existing and
      forecasted debt and the belief that interest rates will continue to increase
      in
      the future. The following tables summarize the notional amounts, expected
      maturities and weighted average strike rates for interest rate floors, caps,
      swaps, options and futures that we held as of March 31, 2006 and December 31,
      2005.


**As
                  of March 31, 2006******
              **2006**
              **2007**
              **2008**
              **2009**
              **2010**
              **Thereafter**($
                  in thousands)Caps
                  bought - notional:
              $1,163,222
              $18,167
              —
              —
              —
              —Weighted
                  average rate
              3.89
              3.25
              —
              —
              —
              —Caps
                  sold - notional:
              $1,163,222
              $18,167
              —
              —
              —
              —Weighted
                  average rate
              4.71
              5.00
              —
              —
              —
              —Futures
                  bought - notional:
              $8,333
              —
              —
              —
              —
              —Weighted
                  average rate
              4.88
              —
              —
              —
              —
              —Futures
                  sold - notional:
              $66,667
              $743,750
              $203,750
              —
              —
              —Weighted
                  average rate
              5.03
              4.59
              4.57
              —
              —
              —Swaps
                  bought - notional:
              —
              $600,000
              —
              —
              —
              —Weighted
                  average rate
              —
              4.17
              —
              —
              —
              —Puts
                  bought - notional:
              $5,483,333
              —
              —
              —
              —
              —Weighted
                  average rate
              5.19
              —
              —
              —
              —
              —Total
                  notional:
              $7,884,777
              $1,380,084
              $203,750
              —
              —
              $—
   **As
                  of December 31, 2005******
              **2006**
              **2007**
              **2008**
              **2009**
              **2010**
              **Thereafter**($
                  in thousands)Caps
                  bought - notional:
              $1,186,583
              $18,167
              —
              —
              —
              —Weighted
                  average rate
              3.86%
              3.25%
              —
              —
              —
              —Caps
                  sold - notional:
              1,186,583
              18,167
              —
              —
              —
              —Weighted
                  average rate
              4.69%
              5.00%
              —
              —
              —
              —Futures
                  bought - notional:
              30,250
              —
              —
              —
              —
              —Weighted
                  average rate
              3.75%
              —
              —
              —
              —
              —Futures
                  sold - notional:
              118,750
              293,750
              103,750
              —
              —
              —Weighted
                  average rate
              4.49%
              4.38%
              4.49%
              —
              —
              —Swaps
                  bought - notional:
              —
              600,000
              —
              —
              —
              —Weighted
                  average rate
              —
              4.17%
              —
              —
              —
              —Puts
                  bought - notional:
              4,487,500
              —
              —
              —
              —
              —Weighted
                  average rate
              5.22%
              —
              —
              —
              —
              —Puts
                  sold - notional:
              58,250
              —
              —
              —
              —
              —Weighted
                  average rate
              3.75%
              —
              —
              —
              —
              —Total
                  notional:
              $7,067,916
              $930,084
              $103,750
              $—
              $—
              $—





*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
      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


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in
      our
      debt costs and offsetting values of derivative instruments under the four
      different analysis scenarios that we used as of March 31, 2006 and the four
      scenarios that we used as of December 31, 2005. The change in values represented
      under each of the scenarios depicts value improvements, or declines, relative
      to
      the rate scenario depicted by the forward curve. If the forward curve at the
      end
      of the period depicts two potential rate increases by the FRB and the scenario
      only depicts one increase, the cost in forward liabilities may actually decline
      while interest rates are going up.  The
      change from March 31, 2006 to December 31, 2005 represents our change in
      forecasted transactions, changes in forward rates during the period, and
      assumptions for each scenario as described below.




**Effect
                on Interest Expense of Assumed Changes in Interest Rates Over a Three
                Year
                Period******
            **March
                31, 2006**
            **December
                31, 2005******
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**(in
                thousands)Change
                in interest expense
            $13,954
            $(1,740)
            $(20,137)
            $11,533
            $22,620
            $(1,170)
            $(25,519)
            $12,665Impact
                from derivative instruments:Futures
            (2,793)
            (78)
            2,593
            (377)
            (2,292)
            (990)
            1,655
            (165)Swaps
            (1,533)
            102
            1,715
            (542)
            (2,740)
            (1,084)
            2,064
            (203)Puts
            (1,834)
            1,224
            3,560
            (6,007)
            (661)
            265
            428
            (1,699)Caps
            (268)
            (291)
            1,396
            (330)
            (1,117)
            949
            1,036
            (990)Total
                impact from derivative instruments
            $(6,428)
            $957
            $9,264
            $(7,256)
            $(6,810)
            $(860)
            $5,183
            $(3,057)Net
                change
            $7,526
            $(783)
            $(10,873)
            $4,277
            $15,810
            $(2,030)
            $(20,336)
            $9,608




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 assumed a hypothetical interest rate increase of 50 basis points
      over a five-month period. Such an increase provides us with a view of the
      interest expense changes assuming a comparable rise in financing rates. Making
      these assumptions as of March 31, 2006, we estimated that our interest expense
      would increase by $14.0 million. However, we estimated that this amount would
      be
      partially offset by a decline in our derivative instruments of $6.4 million.
      The
      net effect of this scenario would be a potential decrease of $7.5 million in
      our
      net revenues. At December 31, 2005, assuming a hypothetical interest rate
      increase of 75 basis points over a five-month period, we estimated at that
      time
      that our net revenues would decrease by $15.8 million.






Scenario
      2 - In this scenario we assumed a slightly less severe hypothetical rise in
      interest rates compared to Scenario 1. Under this scenario, we assumed that
      interest rates have the potential to rise 25 basis points over a three-month
      period. Making these assumptions as of March 31, 2006, we estimated that our
      interest expense would decrease




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by
      $1.7
      million offset by an increase in our derivative instruments of $0.9 million,
      for
      a net increase of $0.8 million in our net revenues. At December 31, 2005,
      assuminginterest rates had the potential to rise 50 basis points over a
      three-month period, we estimated at that time that our net revenues would
      decrease by $2.0 million.






Scenario
      3 - In this scenario we assumed relatively stable hypothetical short-term rates.
      This scenario assumed that the FRB pauses its increasing rate scenario to assess
      the lagging impact of previous rate increases on the domestic and global
      economy. Given these assumptions as of March 31, 2006, we estimated that our
      interest expense would decrease by $20.1 million. However, we estimated that
      this amount would be partially offset by an increase in the impact of our
      derivative instruments of $9.2 million. The net effect of this scenario would
      be
      a potential increase of $10.9 million in our net revenues. As of December 31,
      2005, assuming interest rates remained relatively stable, we estimated at that
      time that our net revenues would decline by $20.3 million.






Scenario
      4 -This scenario assumed that the FRB continues to increase rates in an effort
      to avert continued growth in inflation by increasing rates 75 basis points
      over
      the next five months. The scenario further assumed that, by the fourth quarter
      of 2006, signs of a slowing economy alert the FRB that it increased rates too
      dramatically and, as a result, the FRB lowers rates 50 basis points over the
      following six months. Given these assumptions, at March 31, 2006, we estimated
      that our interest expense would increase by $11.5 million, which would be
      partially offset by an estimated decline in our derivative instruments of $7.2
      million, for a total potential decrease in net revenues of $4.3 million. At
      December 31, 2005, assuming interest rates increased 125 basis points over
      an
      eight-month period, and then decreased 100 basis points over the following
      six
      months, we estimated at that time that our net revenues would increase by $9.6
      million.






The
      hypothetical yield curve data for each scenario at March 31, 2006 and December
      31, 2005 are as follows:




**March
                31, 2006****Month**
            **Current
                Market (1)**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**Apr-06
            4.96
            5.02
            5.01
            4.89
            5.02Jun-06
            5.21
            5.28
            5.15
            4.89
            5.40Sep-06
            5.27
            5.41
            5.15
            4.90
            5.66Dec-06
            5.26
            5.43
            5.16
            4.90
            5.68Mar-07
            5.21
            5.44
            5.17
            4.91
            5.31Jun-07
            5.17
            5.45
            5.18
            4.91
            5.07Sep-07
            5.14
            5.46
            5.19
            4.92
            5.08Dec-07
            5.14
            5.47
            5.19
            4.92
            5.19Mar-08
            5.15
            5.48
            5.20
            4.93
            5.20Jun-08
            5.16
            5.50
            5.21
            4.93
            5.22Sept-08
            5.18
            5.51
            5.22
            4.94
            5.23Dec-08
            5.22
            5.52
            5.23
            4.94
            5.24Mar-09
            5.23
            5.53
            5.24
            4.95
            5.25


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________________


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





**December
                31, 2005****Month**
            **Current
                Market (1)**
            **Scenario
                1**
            **Scenario
                2**
            **Scenario
                3**
            **Scenario
                4**Jan-06
            4.49
            4.52
            4.39
            4.39
            4.51Mar-06
            4.78
            4.90
            4.52
            4.39
            4.89Jun-06
            4.85
            5.16
            4.65
            4.40
            5.40Sep-06
            4.84
            5.18
            4.79
            4.40
            5.53Dec-06
            4.80
            5.19
            4.92
            4.41
            5.13Mar-07
            4.75
            5.20
            4.93
            4.41
            4.76Jun-07
            4.74
            5.21
            4.94
            4.42
            4.64Sep-07
            4.74
            5.22
            4.94
            4.42
            4.64Dec-07
            4.75
            5.23
            4.95
            4.43
            4.65Mar-08
            4.75
            5.25
            4.96
            4.43
            4.65Jun-08
            4.77
            5.26
            4.97
            4.44
            4.66Sept-08
            4.79
            5.27
            4.98
            4.44
            4.66Dec-08
            4.83
            5.28
            4.99
            4.45
            4.67


________________


(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.




On
      March
      16, 2006, we announced that we would restate our audited financial statements
      for the years ended December 31, 2004 and 2003, and our unaudited financial
      statements for each of the first three quarters of 2005, to eliminate the use
      of
      hedge accounting treatment under SFAS No. 133 for our derivative instruments
      held during these periods. The resulting accounting for our derivatives does
      not
      affect our underlying economics of our risk management strategies and has no
      impact on the timing or amount of operating cash flows or cash flows under
      any
      derivative contract. It does not affect our ability to make required payments
      on
      our outstanding debt obligations. Finally, our economic risk management
      strategies as described above have not required amendment. Full details of
      the
      restatement are set out in Note 12 in the accompanying consolidated financial
      statements.




**Item
      4. Controls and Procedures**




***Conclusion
      Regarding the Effectiveness of Disclosure 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




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




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




On
      March
      14, 2006, we concluded that the designation of our derivative instruments as
      cash flows hedges for the period October 1, 2002 to September 30, 2005 did
      not
      meet the requirements of SFAS No. 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 No. 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
      restated our consolidated balance sheets as of December 31, 2004 and 2003,
      and
      the related consolidated statements of operations, shareholders’ equity, and
      cash flows for the years then ended 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 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
      was a
      material weakness in internal control over financial reporting as of December
      31, 2005.




As
      of 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.




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Other
      than the changes discussed above, 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.






**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. With respect to
      each matter in which class action status has been asserted, in the event class
      action status is certified, if there is an adverse outcome or we do not
      otherwise prevail in each of the following matters, we could suffer material
      losses, although we intend to vigorously defend each of these lawsuits. The
      following is a summary of litigation matters that could be significant. At
      this
      time, we cannot predict the outcome of these matters. Accordingly, no amounts
      have been accrued in our accompanying consolidated financial
      statements.





Bauer,
      et al., v. Saxon Mortgage Services, Inc., et al. is a
      matter filed on December 1, 2004 in the Civil District Court for the Parish
      of
      Orleans, State of Louisiana, Case No. 2004-17015. On January 26, 2005, the
      plaintiffs 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., v. 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. In the Bauer case, we are not a named defendant but may owe defense
      and indemnification to Deutsche Bank Trust Company Americas, N.A., as custodian
      of a mortgage loan for which one named plaintiff is mortgagor. Our subsidiary,
      Saxon Mortgage Services, is a named defendant in the Patterson case. In both
      cases, the named plaintiffs allege misrepresentation, fraud, conversion and
      unjust enrichment on the part of the lender defendants and a law firm hired
      by a
      number of defendants, including our subsidiary, Saxon Mortgage Services, to
      enforce mortgage loan obligations against borrowers who had become delinquent
      pursuant to the terms of their mortgage loan documents. Specifically, the
      plaintiffs alleged that the law firm quoted inflated court costs and sheriff’s
      fees on reinstatement proposals to the plaintiffs. In both cases, the plaintiffs
      seek certification as a class action, compensatory damages, pre-judgment
      interest, attorneys’ fees, litigation costs, and other unspecified general,
      special and equitable relief. On January 24, 2006, the United States District
      Court for the Eastern District of Louisiana granted our motion to compel
      arbitration and stayed the court proceedings as to named plaintiffs Keenan
      and
      Karen Duckworth in Bauer,
      et al., v. Dean Morris, et al., filed as
      Case No. 05-2173 in the Civil District Court for the Parish of Orleans, State
      of
      Louisiana. On January 25, 2006, the United States District Court for the


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Eastern
      District of Louisiana granted our motion to compel arbitration and stayed the
      court proceedings as to named plaintiff Debra Herron in 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. The court subsequently remanded the underlying court proceedings
      in
      both the Bauer and Patterson cases to
      the Civil District Court for the Parish of Orleans, State of Louisiana.





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. There were no significant
      developments in this legal proceeding in the quarter ended March 31,
      2006.





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 our 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. There were no significant developments in this legal
      proceeding in the quarter ended March 31, 2006.





Brian
      Harris, et al., v. Capital Mortgage Company, et al .,
      is a
      matter filed in the Circuit Court of Cook County, County Department-Chancery
      Division, Illinois as Case No. 05CH 22369. Our subsidiary, Saxon Mortgage
      Services, was served with a summons and complaint on March 1, 2006. The
      plaintiffs included a class action claim, alleging, on behalf of themselves
      and
      those similarly situated, that our subsidiary Saxon Mortgage Services, Inc.
      and
      other named defendants engaged in unfair and deceptive acts and violated the
      Illinois Consumer Fraud Act in connection with 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.





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
      1A. Risk Factors**





*Risk
      factors contained herein consist of new risks or risks that have materially
      changed since December 31, 2005. Please refer to a complete listing of our
      risk
      factors in our 2005 Form 10-K. You should carefully consider the risks described
      below. If any of the following risks actually occurs, our business, financial
      condition, liquidity and *results
      of operations could suffer. You should also refer to the other information
      contained in this report, including the information provided under “Part 1, Item
      1 - Financial Statements” and “Part 1, Item 2 - Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations”.**


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***The
      incurrence of indebtedness under our senior notes due 2014 may amplify certain
      liquidity and other risks we face and create additional
      risks***






We
      have a
      substantial amount of indebtedness. On May 4, 2006 we closed our private
      offering of $150 million of unsecured senior notes due 2014, which we refer
      to
      as our “unsecured notes”. The unsecured notes will bear interest at a fixed rate
      of 12% per annum. Our substantial indebtedness could have important
      consequences. For example, it may:






·
            limit
                our ability to invest operating cash flows in our business due to
                debt
                service requirements;




·
            increase
                our vulnerability to economic downturns and changing market conditions;




·
            make
                it more difficult for us to meet our debt service requirements if
                we
                experience a substantial decrease in our revenues or an increase
                in our
                expenses or a decline in the market value of the mortgage loans securing
                our borrowings;




·
            increase
                our vulnerability to fluctuations in market interest rates, to the
                extent
                that the spread we earn between the interest we receive on our mortgage
                loans and the interest we pay under our indebtedness is
                reduced.




·
            limit
                our ability to obtain short-term credit, including warehouse lines
                of
                credit or repurchase facilities, and to securitize our mortgage
                loans;




·
            limit
                our ability to obtain additional financing to fund growth, working
                capital, acquisitions, capital expenditures, debt service requirements,
                including relating to the notes, or other cash
                requirements;




·
            limit
                our operational flexibility in planning for and reacting to changes
                in our
                business, the industry in which we operate and the economy in general;
                and




·
            position
                us at a competitive disadvantage compared to competitors that are
                not as
                highly leveraged and that may be better positioned to withstand economic
                downturns.




The
      agreements and instruments
      governing our unsecured notes contain restrictions and limitations that could
      significantly affect our ability to operate our business, as well as
      significantly affect our liquidity. Our
      warehouse lines of credit and repurchase facilities and the indenture governing
      the unsecured notes contain a number of significant covenants that could
      adversely affect our ability to operate our business, as well as significantly
      affect our liquidity. These covenants may restrict our ability to:incur
      additional debt, except for warehouse lines of credit, repurchase facilities,
      securitizations and other funding indebtedness;




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·
            repurchase
                or redeem debt;




·
            repurchase
                or redeem stock;




·
            make
                certain investments or
                acquisitions;




·
            receive
                distributions from subsidiaries;




·
            dispose
                of assets or merge;




·
            enter
                into related party transactions;
                and




·
            grant
                liens.




Furthermore,
      our warehouse lines of credit and repurchase facilities require us to, among
      other things, comply with specified financial ratio requirements, meet specified
      financial tests and provide audited financial statements. Our ability to comply
      with these provisions may be affected by events beyond our control.




The
      breach of any covenants or obligations in the foregoing indebtedness, not
      otherwise waived or amended, could result in a default under the applicable
      debt
      agreement or instrument and could trigger acceleration of the related debt,
      which in turn could trigger defaults under other agreements governing our
      indebtedness. Our warehouse lines of credit and repurchase facilities prohibit
      our subsidiaries from making distributions to us if a default has occurred
      and
      is continuing under those agreements. In addition, the secured lenders under
      our
      facilities could foreclose on their collateral and exercise other rights of
      secured creditors. Any default under those facilities or the indenture governing
      the notes or our debt could adversely affect our growth, our financial condition
      and our results of operations.




If
      our
      cash flow from operations is not sufficient to enable us to manage our debt
      levels, our interest expense could be materially higher than anticipated and
      our
      financial performance could be adversely affected and we may be required to
      refinance our debt, sell assets, borrow additional money or raise equity. Our
      ability to generate the funds necessary to pay our expenses (in addition to
      the
      cash dividends to our shareholders required to maintain our status as a REIT)
      and to pay the principal and interest on our unsecured notes and our other
      outstanding debt, from the net interest earned on our mortgage loan portfolio,
      our servicing income and our other operations depends on many factors, some
      of
      which are beyond our control. Our ability to meet our expenses and debt service
      obligations will depend on our future performance, which will be affected by
      financial, business, economic, legislative, regulatory and other factors,
      including the demand for our mortgage loans, interest rate levels, our ability
      to securitize or otherwise monetize our inventory of mortgage loans, regulatory
      developments, prepayment speeds on our servicing portfolio and pressure from
      competitors. Any factor that negatively affects our results of operations,
      including cash flow, may also negatively affect our ability to pay the principal
      and interest on our outstanding debt. If we are unable to manage our debt
      levels, our interest expense could be materially higher than anticipated and
      our
      financial performance could be adversely affected. We also may not be able
      to
      raise additional equity.




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If
      we do
      not have enough funds to pay our debt service obligations, we may be required
      to
      refinance all or part of our existing debt, sell assets, borrow more money
      or
      raise equity. We may not be able to refinance any of our indebtedness, including
      the notes, on commercially reasonable terms or at all.




We
      issued
      our unsecured notes in reliance upon exemptions from registration under the
      Securities Act and applicable state securities laws. Therefore, the notes may
      be
      transferred or resold only in a transaction registered under or exempt from
      the
      Securities Act and applicable state securities laws. The registration rights
      agreement we are entering into with the initial purchaser will require us to
      use
      our commercially reasonable efforts to consummate an offer to exchange the
      unsecured notes for equivalent registered securities or to register the resale
      of the notes under the Securities Act. If we do not satisfy this requirement
      on
      or before January 29, 2007, then as liquidated damages the annual interest
      rate
      borne by the unsecured notes will be increased by 0.25% per annum with respect
      to the first 90 days after January 29, 2007, and by an additional 0.25% per
      annum during each of the subsequent 90-day periods for so long as this
      requirement remains unsatisfied, and accruing thereafter at the rate of 1.0%
      per
      annum until the exchange offer is completed or the shelf registration statement
      is declared effective.




***The
      unsecured notes contain various restrictions that could cause us to fail the
      REIT tests.***




The
      financing agreements in connection with our unsecured notes contain a special
      "tax distribution provision," which permits us to make certain distributions
      that are necessary to maintain our REIT status so long as no Default or Event
      of
      Default (as defined in the indenture) has occurred and is continuing with
      respect to the notes. However, if there is a continuing Event of Default or
      payment Default under the unsecured notes, the tax distribution provision would
      not apply and we generally would be prohibited from making any distribution
      to
      our shareholders, even if the failure to make such distribution would cause
      us
      to lose our REIT status. Furthermore, the tax distribution provision provides
      us
      with only limited protection with respect to the 4% REIT excise tax. In any
      given year, if the distributions required to avoid the 4% excise tax exceed
      the
      distributions required to maintain our REIT status, then the tax distribution
      provision would permit us only to make distributions that would reduce the
      amount of excise tax incurred, but would not allow us to entirely avoid the
      imposition of excise tax. Accordingly, we would likely be subject to the 4%
      excise tax in such a situation unless distributions sufficient in amount to
      avoid the excise tax are otherwise permitted under the terms of the unsecured
      notes. The loss of REIT status would subject us to significant corporate-level
      tax.




**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.


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**Item
      5. Other Information**




(a)
            None.




(b)
            None.




**Item
      6. Exhibits**




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




3.2
            Amended
                and Restated Bylaws of Saxon Capital,
                Inc.




4.1
            Form
                of Common Stock Certificate of Saxon Capital,
                Inc.




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.




4.3
            Indenture,
                dated as of May 4, 2006, among Saxon Capital, Inc., as issuer, Saxon
                Capital Holdings, Inc., SCI Services, Inc., Saxon Mortgage, Inc.,
                Saxon
                Mortgage Services, Inc., Saxon Holding, Inc., and Saxon Funding
                Management, Inc., as guarantors, and Deutsche Bank Trust Company
                Americas,
                as trustee.




4.4
            Registration
                Rights Agreement, dated as of May 4, 2006, among Saxon Capital, Inc.,
                Saxon Capital Holdings, Inc., SCI Services, Inc., Saxon Mortgage,
                Inc.,
                Saxon Mortgage Services, Inc., Saxon Holding, Inc., and Saxon Funding
                Management, Inc., and J.P. Morgan Securities,
                Inc.




10.1
            Sale
                and Servicing Agreement, dated as of April 1, 2006, among Saxon Asset
                Securities Trust 2006-1, as issuer, Deutsche Bank Trust Company Americas,
                as indenture trustee, Saxon Asset Securities Company, as depositor,
                Saxon
                Funding Management, Inc., as master servicer and Saxon Mortgage Services,
                Inc., as servicer.




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.






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**SIGNATURES**




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





SAXON
                CAPITAL, INC.Dated:
                May 9, 2006
            By:/s/
                Michael L.
                SawyerName:
                Michael L. SawyerTitle:
                Chief Executive Officer (authorizedofficer
                of registrant)Dated:
                May 9, 2006
            By:/s/
                Robert B.
                EastepName:
                Robert B. EastepTitle:
                Chief Financial Officer (principalfinancial
                officer)





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          Contents


**EXHIBIT
        INDEX**
 
 Exhibit
        No.  Description
 
 3.1
            Amended
                and Restated Certificate of Incorporation of Saxon Capital, Inc.
                (Incorporated herein by reference to our Annual Report on Form 10-K
                for
                the year ended December 31, 2005, filed with the Securities and Exchange
                Commission on March 31, 2006. Our Commission file number is
                001-32447.)  3.2
            Amended
                and Restated Bylaws of Saxon Capital, Inc. (Incorporated herein by
                reference to our Current Report on Form 8-K filed with the Securities
                and
                Exchange Commission on March 4, 2005.)  4.1
            Form
                of Common Stock Certificate of Saxon Capital, Inc. (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.)  4.2
            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.  4.3
            Indenture,
                dated as of May 4, 2006, among Saxon Capital, Inc., as issuer, Saxon
                Capital Holdings, Inc., SCI Services, Inc., Saxon Mortgage, Inc.,
                Saxon
                Mortgage Services, Inc., Saxon Holding, Inc., and Saxon Funding
                Management, Inc., as guarantors, and Deutsche Bank Trust Company
                Americas,
                as trustee. (Incorporated herein by reference to our Current Report
                on
                Form 8-K filed with the Securities and Exchange Commission on May
                5,
                2006.)  4.4
            Registration
                Rights Agreement, dated as of May 4, 2006, among Saxon Capital, Inc.,
                Saxon Capital Holdings, Inc., SCI Services, Inc., Saxon Mortgage,
                Inc.,
                Saxon Mortgage Services, Inc., Saxon Holding, Inc., and Saxon Funding
                Management, Inc., and J.P. Morgan Securities, Inc. (Incorporated
                herein by
                reference to our Current Report on Form 8-K filed with the Securities
                and
                Exchange Commission on May 5, 2006.)  10.1
              Sale
                  and Servicing Agreement, dated as of April 1, 2006, among Saxon
                  Asset
                  Securities Trust 2006-1, as issuer, Deutsche Bank Trust Company
                  Americas,
                  as indenture trustee, Saxon Asset Securities Company, as depositor,
                  Saxon
                  Funding Management, Inc., as master servicer and Saxon Mortgage
                  Services,
                  Inc., as servicer.
                  (Incorporated
                    herein by reference to our Current Report on Form 8-K filed with
                    the
                    Securities and Exchange Commission on May 8, 2006).
  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.
  
 75