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UNITEDSTATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C.20549

FORM10-Q

|        |                                                                                       |
|--------|---------------------------------------------------------------------------------------|
|   | QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the quarterly period ended: September30,  2006

OR

|        |                                                                                        |
|--------|----------------------------------------------------------------------------------------|
|   | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 |

For the transition period from                    to    

Commission FileNumber: 001-32213

MORTGAGEIT HOLDINGS,INC.(Exact name of registrant as specified in itscharter)

|                                                             |  |  |            |  |                                              |   |
|-------------------------------------------------------------|--|--|------------|--|----------------------------------------------|---|
| Maryland                                                    |  |  | 20-0947002 |
| (Stateor other jurisdiction ofincorporation ororganization) |  |  |            |  | (IRS EmployerIdentification Number | ) |
|                                                        |  |  |            |  |                                         |   |
| 33Maiden Lane New York, NewYork                             |  |  | 10038      |
| (Addressof principal executiveoffices)                      |  |  | (ZipCode)  |
|                                                             |

Registrant's telephone number,including area code: (212) 651-7700

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

Yes    No 

Indicate by check markwhether the Registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of‘‘accelerated and large accelerated filer’’in Rule 12b-2 of the Exchange Act. (Check one):

Largeaccelerated filer             Accelerated filer            Non-accelerated filer

Indicate by check mark whether the Registrant isa shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes       No   

Indicatethe number of shares outstanding of each of the issuer's classesof common stock, as of the latest practicable date:

COMMONSTOCK, $0.01 PAR VALUE PER SHARE: 29,185,984 SHARES OUTSTANDING AS OFOCTOBER 31,2006.

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TABLE OFCONTENTS

|                           |  |  |                                                                                     |  |   |      |  |        |  |
|---------------------------|--|--|-------------------------------------------------------------------------------------|--|---|------|--|--------|--|
|                      |  |  |                                                                                |  |   | PAGE |
| Forward-LookingStatements |  |  |                                                                                     |  | 3 |      |
| PartI                     |  |  | FinancialInformation                                                                |  |   |      |  | 4      |  |
| Item1.                    |  |  | FinancialStatements                                                                 |  |   |      |  | 4      |  |
|                      |  |  | Consolidated BalanceSheets                                                          |  |   |      |  | 4      |  |
|                      |  |  | Consolidated Statements ofOperations(Unaudited)                                     |  |   |      |  | 5      |  |
|                      |  |  | ConsolidatedStatements of Comprehensive Income (Loss)(Unaudited)                    |  |   |      |  | 6      |  |
|                      |  |  | ConsolidatedStatements of Changes in Stockholders' Equity(Unaudited)                |  |   |      |  | 7      |  |
|                      |  |  | ConsolidatedStatements of Cash Flows(Unaudited)                                     |  |   |      |  | 8      |  |
|                      |  |  | Notes to ConsolidatedFinancial Statements                                           |  |   |      |  | 9      |  |
| Item2.                    |  |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations |  |   |      |  | 31     |  |
| Item3.                    |  |  | Quantitative and Qualitative Disclosures About MarketRisk                           |  |   |      |  | 57     |  |
| Item 4.                   |  |  | ControlsAnd Procedures                                                              |  |   |      |  | 62     |  |
| PartII.                   |  |  | OtherInformation                                                                    |  |   |      |  | 63     |  |
| Item1.                    |  |  | LegalProceedings                                                                    |  |   |      |  | 63     |  |
| Item1A.                   |  |  | Risk Factors                                                                        |  |   |      |  | 64     |  |
| Item2.                    |  |  | Unregistered Sales of Equity Securities and Use ofProceeds                          |  |   |      |  | 64     |  |
| Item3.                    |  |  | Defaults Upon SeniorSecurities                                                      |  |   |      |  | 64     |  |
| Item4.                    |  |  | Submission of Matters to a Vote of SecurityHolders                                  |  |   |      |  | 64     |  |
| Item 5.                   |  |  | OtherInformation                                                                    |  |   |      |  | 64     |  |
| Item6.                    |  |  | Exhibits                                                                            |  |   |      |  | 64     |  |
|                      |  |  | Signatures                                                                          |  |   |      |  |   |  |
|                           |

2

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FORWARD-LOOKINGSTATEMENTS

This quarterly report on Form 10-Q containscertain ‘‘forward-looking statements,’’which are based on management's current expectations. Suchforward-looking statements include information concerning possible orassumed future results of operations, trends, financial results andbusiness plans, including, among other things, the ability ofMortgageIT Holdings, Inc. (the ‘‘Company’’)to fund a fully-leveraged, self-originated loan portfolio, itsanticipated loan funding volume and its ability to pay dividends. Forthese statements, the Company claims the protection of the safe harborfor forward-looking statements contained in Section 21E of theSecurities Exchange Act of 1934, as amended. Forward-looking statementsare statements that relate to future events and are generallyidentifiable by use of forward-looking terminology such as‘‘may,’’‘‘will,’’‘‘should,’’‘‘potential,’’‘‘intend,’’‘‘expect,’’‘‘endeavor,’’‘‘seek,’’‘‘anticipate,’’‘‘estimate,’’‘‘overestimate,’’‘‘underestimate,’’‘‘believe,’’‘‘could,’’‘‘project,’’‘‘predict,’’‘‘continue’’ or other similar words orexpressions. Forward-looking statements are based on the currenteconomic environment and management's current expectations andbeliefs, and are subject to a number of trends and uncertainties thatcould cause actual results to differ materially from those described inthe forward-looking statements. Forward-looking statements areinherently subject to significant economic, competitive, and othercontingencies that are beyond the control of management. The Companycan give no assurance that its expectations will be attained. Factorsthat could cause actual results to differ materially from theCompany's expectations include, but are not limited to: itsmortgage bank subsidiary’s continued ability to originate newloans, including loans that the Company deems suitable for itssecuritization portfolio; changes in the capital markets, includingchanges in interest rates and/or credit spreads; and the risk factorsor other uncertainties described from time to time in theCompany's filings with the Securities and Exchange Commission,including the Company’s annual report on Form 10-K and thisquarterly report on Form 10-Q.

Readers are cautioned notto place undue reliance on any of these forward-looking statements,which reflect management's views as of the date of this report.Although the Company believes that the expectations reflected in theforward-looking statements are reasonable, the Company cannot guaranteefuture results, levels of activity, performance or achievements. TheCompany does not undertake, and specifically disclaims, any obligationto update or revise any of the forward-looking statements after thedate of this quarterly report on Form 10-Q, to conform theseforward-looking statements to actual results or to update the reasonswhy actual results could differ from those projected in theforward-looking statements.

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PART I.    FINANCIALINFORMATION

ITEM 1.    FINANCIALSTATEMENTS

MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED BALANCE SHEETS (Dollars inthousands)

|                                                                                                                                                                      |  |  |                  |   |           |                  |  |  |  |   |           |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|------------------|---|-----------|------------------|--|--|--|---|-----------|---|
|                                                                                                                                                                 |  |  | September30,2006 |   |           | December 31,2005 |
|                                                                                                                                                                 |  |  | (Unaudited)      |   |           |             |
| ASSETS                                                                                                                                                               |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Cashand cashequivalents                                                                                                                                              |  |  |                  | $ | 43,860    |                  |  |  |  | $ | 36,757    |   |
| Restrictedcash                                                                                                                                                       |  |  |                  |   | 2,641     |                  |  |  |  |   | 712       |   |
| Marketable securitiesheld tomaturity                                                                                                                                 |  |  |                  |   | —   |                  |  |  |  |   | 3,675     |   |
| PortfolioARM Loans                                                                                                                                                   |  |  |                  |   |      |                  |  |  |  |   |      |   |
| ARM loanscollateralizing debt obligations,net                                                                                                                        |  |  |                  |   | 4,642,282 |                  |  |  |  |   | 4,681,554 |   |
| ARMloans held for securitization,net                                                                                                                                 |  |  |                  |   | —   |                  |  |  |  |   | 282       |   |
| TotalPortfolio ARMLoans                                                                                                                                              |  |  |                  |   | 4,642,282 |                  |  |  |  |   | 4,681,836 |   |
| Mortgageloans held forsale                                                                                                                                           |  |  |                  |   | 3,499,918 |                  |  |  |  |   | 3,378,197 |   |
| Mortgage-backedsecurities – available forsale                                                                                                                  |  |  |                  |   | 20,982    |                  |  |  |  |   | 23,357    |   |
| Hedginginstruments                                                                                                                                                   |  |  |                  |   | 46,639    |                  |  |  |  |   | 54,472    |   |
| Accountsreceivable, net ofallowance                                                                                                                                  |  |  |                  |   | 140,936   |                  |  |  |  |   | 146,043   |   |
| Prepaidsand otherassets                                                                                                                                              |  |  |                  |   | 44,373    |                  |  |  |  |   | 31,262    |   |
| Goodwill                                                                                                                                                             |  |  |                  |   | 11,639    |                  |  |  |  |   | 11,639    |   |
| Propertyand equipment,net                                                                                                                                            |  |  |                  |   | 16,607    |                  |  |  |  |   | 13,941    |   |
| Totalassets                                                                                                                                                          |  |  |                  | $ | 8,469,877 |                  |  |  |  | $ | 8,381,891 |   |
| LIABILITIESAND STOCKHOLDERS'EQUITY                                                                                                                                   |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Liabilities:                                                                                                                                                         |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Collateralizeddebtobligations                                                                                                                                        |  |  |                  | $ | 4,442,590 |                  |  |  |  | $ | 4,485,197 |   |
| Warehouselinespayable                                                                                                                                                |  |  |                  |   | 3,318,868 |                  |  |  |  |   | 3,177,990 |   |
| Repurchaseagreements                                                                                                                                                 |  |  |                  |   | 94,692    |                  |  |  |  |   | 87,058    |   |
| Hedginginstruments                                                                                                                                                   |  |  |                  |   | 7,422     |                  |  |  |  |   | 8,801     |   |
| Juniorsubordinateddebentures                                                                                                                                         |  |  |                  |   | 128,871   |                  |  |  |  |   | 77,324    |   |
| Notespayable and otherdebt                                                                                                                                           |  |  |                  |   | 15,000    |                  |  |  |  |   | 15,000    |   |
| Accounts payable,accrued expenses and otherliabilities                                                                                                               |  |  |                  |   | 130,767   |                  |  |  |  |   | 176,619   |   |
| Totalliabilities                                                                                                                                                     |  |  |                  |   | 8,138,210 |                  |  |  |  |   | 8,027,989 |   |
| STOCKHOLDERS'EQUITY:                                                                                                                                                 |  |  |                  |   |      |                  |  |  |  |   |      |   |
| Common stock, $.01 parvalue: 125,000,000 shares authorized; 29,276,384 issued and 29,185,984outstanding in 2006; 28,889,540 issued and 28,799,140 outstanding in2005 |  |  |                  |   | 293       |                  |  |  |  |   | 289       |   |
| Treasurystock                                                                                                                                                        |  |  |                  |   | (1,178    | )                |  |  |  |   | (1,178    | ) |
| Additionalpaid-in capital                                                                                                                                            |  |  |                  |   | 395,016   |                  |  |  |  |   | 393,304   |   |
| Unearnedcompensation – restrictedstock                                                                                                                         |  |  |                  |   | (3,174    | )                |  |  |  |   | (5,889    | ) |
| Accumulatedother comprehensive income(loss)                                                                                                                          |  |  |                  |   | 8,189     |                  |  |  |  |   | 13,225    |   |
| Accumulateddeficit                                                                                                                                                   |  |  |                  |   | (67,479   | )                |  |  |  |   | (45,849   | ) |
| Totalstockholders' equity                                                                                                                                            |  |  |                  |   | 331,667   |                  |  |  |  |   | 353,902   |   |
| Totalliabilities and stockholders'equity                                                                                                                             |  |  |                  | $ | 8,469,877 |                  |  |  |  | $ | 8,381,891 |   |
|                                                                                                                                                                      |

Theaccompanying notes are an integral part of the consolidated financialstatements.

4

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) (Dollars and shares in thousands, except per sharedata)

|                                                          |  |  |                                |   |          |                              |  |  |      |   |         |      |  |  |  |   |          |   |  |  |  |   |          |   |
|----------------------------------------------------------|--|--|--------------------------------|---|----------|------------------------------|--|--|------|---|---------|------|--|--|--|---|----------|---|--|--|--|---|----------|---|
|                                                     |  |  | Threemonths endedSeptember 30, |   |          | Nine monthsendedSeptember30, |
|                                                     |  |  | 2006                           |   |          | 2005                         |  |  | 2006 |   |         | 2005 |
| Revenues:                                                |  |  |                                |   |     |                              |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |     |   |
| Gainon sale of mortgageloans                             |  |  |                                | $ | 71,119   |                              |  |  |      | $ | 61,612  |      |  |  |  | $ | 185,744  |   |  |  |  | $ | 140,704  |   |
| Brokeragerevenues                                        |  |  |                                |   | 4,301    |                              |  |  |      |   | 7,506   |      |  |  |  |   | 16,549   |   |  |  |  |   | 20,179   |   |
| Interestincome                                           |  |  |                                |   | 114,341  |                              |  |  |      |   | 90,384  |      |  |  |  |   | 344,884  |   |  |  |  |   | 212,036  |   |
| Interestexpense                                          |  |  |                                |   | (115,530 | )                            |  |  |      |   | (75,741 | )    |  |  |  |   | (336,853 | ) |  |  |  |   | (156,482 | ) |
| Netinterest (expense)income                              |  |  |                                |   | (1,189   | )                            |  |  |      |   | 14,643  |      |  |  |  |   | 8,031    |   |  |  |  |   | 55,554   |   |
| Realizedand unrealized (loss) gain on hedginginstruments |  |  |                                |   | (1,727   | )                            |  |  |      |   | — |      |  |  |  |   | 1,706    |   |  |  |  |   | 9,742    |   |
| Other                                                    |  |  |                                |   | 797      |                              |  |  |      |   | 209     |      |  |  |  |   | 1,654    |   |  |  |  |   | 715      |   |
| Totalrevenues                                            |  |  |                                |   | 73,301   |                              |  |  |      |   | 83,970  |      |  |  |  |   | 213,684  |   |  |  |  |   | 226,894  |   |
| Operatingexpenses:                                       |  |  |                                |   |     |                              |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |     |   |
| Compensationand employeebenefits                         |  |  |                                |   | 38,742   |                              |  |  |      |   | 39,037  |      |  |  |  |   | 111,388  |   |  |  |  |   | 99,051   |   |
| Processingexpenses                                       |  |  |                                |   | 16,515   |                              |  |  |      |   | 16,014  |      |  |  |  |   | 63,301   |   |  |  |  |   | 40,064   |   |
| Generaland administrativeexpenses                        |  |  |                                |   | 7,130    |                              |  |  |      |   | 6,112   |      |  |  |  |   | 22,854   |   |  |  |  |   | 19,117   |   |
| Rent                                                     |  |  |                                |   | 2,748    |                              |  |  |      |   | 2,700   |      |  |  |  |   | 9,942    |   |  |  |  |   | 7,257    |   |
| Marketing,loan acquisition and businessdevelopment       |  |  |                                |   | 1,320    |                              |  |  |      |   | 1,206   |      |  |  |  |   | 3,864    |   |  |  |  |   | 3,126    |   |
| Professionalfees                                         |  |  |                                |   | 4,437    |                              |  |  |      |   | 2,411   |      |  |  |  |   | 10,879   |   |  |  |  |   | 7,238    |   |
| Depreciationandamortization                              |  |  |                                |   | 1,699    |                              |  |  |      |   | 984     |      |  |  |  |   | 4,888    |   |  |  |  |   | 2,621    |   |
| Totaloperatingexpenses                                   |  |  |                                |   | 72,591   |                              |  |  |      |   | 68,464  |      |  |  |  |   | 227,116  |   |  |  |  |   | 178,474  |   |
| Income(loss) before incometaxes                          |  |  |                                |   | 710      |                              |  |  |      |   | 15,506  |      |  |  |  |   | (13,432  | ) |  |  |  |   | 48,420   |   |
| Incometax (benefit) expense                              |  |  |                                |   | (731     | )                            |  |  |      |   | 6,841   |      |  |  |  |   | (15,989  | ) |  |  |  |   | 15,607   |   |
| Netincome                                                |  |  |                                | $ | 1,441    |                              |  |  |      | $ | 8,665   |      |  |  |  | $ | 2,557    |   |  |  |  | $ | 32,813   |   |
| Persharedata:                                            |  |  |                                |   |     |                              |  |  |      |   |    |      |  |  |  |   |     |   |  |  |  |   |     |   |
| Basic                                                    |  |  |                                | $ | 0.05     |                              |  |  |      | $ | 0.31    |      |  |  |  | $ | 0.09     |   |  |  |  | $ | 1.47     |   |
| Diluted                                                  |  |  |                                | $ | 0.05     |                              |  |  |      | $ | 0.30    |      |  |  |  | $ | 0.09     |   |  |  |  | $ | 1.44     |   |
| Weightedaverage number of shares – basic           |  |  |                                |   | 28,491   |                              |  |  |      |   | 28,077  |      |  |  |  |   | 28,409   |   |  |  |  |   | 22,381   |   |
| Weightedaverage number of shares – diluted         |  |  |                                |   | 28,805   |                              |  |  |      |   | 28,427  |      |  |  |  |   | 28,626   |   |  |  |  |   | 22,788   |   |
|                                                          |

Theaccompanying notes are an integral part of the consolidated financialstatements.

5

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(LOSS) (Unaudited) (Dollars inthousands)

|                                                                                                   |  |  |                                 |   |         |                              |  |  |      |   |         |      |  |  |  |   |        |   |  |  |  |   |         |  |
|---------------------------------------------------------------------------------------------------|--|--|---------------------------------|---|---------|------------------------------|--|--|------|---|---------|------|--|--|--|---|--------|---|--|--|--|---|---------|--|
|                                                                                              |  |  | Threemonths ended September 30, |   |         | Nine monthsendedSeptember30, |
|                                                                                              |  |  | 2006                            |   |         | 2005                         |  |  | 2006 |   |         | 2005 |
| Netincome                                                                                         |  |  |                                 | $ | 1,441   |                              |  |  |      | $ | 8,665   |      |  |  |  | $ | 2,557  |   |  |  |  | $ | 32,813  |  |
| Othercomprehensiveincome:                                                                         |  |  |                                 |   |    |                              |  |  |      |   |    |      |  |  |  |   |   |   |  |  |  |   |    |  |
| Realizedand unrealized (loss) gain on hedging instruments arising during theperiod                |  |  |                                 |   | (30,071 | )                            |  |  |      |   | 20,254  |      |  |  |  |   | 1,985  |   |  |  |  |   | 9,008   |  |
| Unrealized(loss) gain on mortgage-backed securities – available for sale,net ofamortization |  |  |                                 |   | (367    | )                            |  |  |      |   | — |      |  |  |  |   | 317    |   |  |  |  |   | — |  |
| Reclassificationof (gain) loss included in net income                                             |  |  |                                 |   | (1,615  | )                            |  |  |      |   | 1,062   |      |  |  |  |   | (7,338 | ) |  |  |  |   | 1,935   |  |
| Netrealized and unrealized gain (loss) during theperiod                                           |  |  |                                 |   | (32,053 | )                            |  |  |      |   | 21,316  |      |  |  |  |   | (5,036 | ) |  |  |  |   | 10,943  |  |
| Comprehensive(loss)income                                                                         |  |  |                                 | $ | (30,612 | )                            |  |  |      | $ | 29,981  |      |  |  |  | $ | (2,479 | ) |  |  |  | $ | 43,756  |  |
|                                                                                                   |

Theaccompanying notes are an integral part of the consolidated financialstatements.

6

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS' EQUITY (Unaudited) Nine months endedSeptember  30,  2006 (Dollars and shares inthousands)

|                                                                     |  |  |                                                             |  |         |               |  |  |                          |   |         |                    |  |  |                                  |   |         |                                   |  |  |                                   |   |         |   |  |  |  |   |         |   |  |  |  |   |         |   |  |  |  |   |         |   |  |  |  |   |         |   |
|---------------------------------------------------------------------|--|--|-------------------------------------------------------------|--|---------|---------------|--|--|--------------------------|---|---------|--------------------|--|--|----------------------------------|---|---------|-----------------------------------|--|--|-----------------------------------|---|---------|---|--|--|--|---|---------|---|--|--|--|---|---------|---|--|--|--|---|---------|---|--|--|--|---|---------|---|
|                                                                |  |  |         CommonStock |  |         | TreasuryStock |  |  | AdditionalPaid-InCapital |   |         | AccumulatedDeficit |  |  | UnamortizedCostofRestrictedStock |   |         | AccumulatedOtherComprehensiveLoss |  |  | TotalStockholders'Equity(Deficit) |
|                                                                |  |  | Shares                                                      |  |         | Amount        |
| Balanceat December  31,2005                                         |  |  |                                                             |  | 28,799  |               |  |  |                          | $ | 289     |                    |  |  |                                  | $ | (1,178  | )                                 |  |  |                                   | $ | 393,304 |   |  |  |  | $ | (45,849 | ) |  |  |  | $ | (5,889  | ) |  |  |  | $ | 13,225  |   |  |  |  | $ | 353,902 |   |
| Issuanceof common stock in connection with restricted stockgrants   |  |  |                                                             |  | 317     |               |  |  |                          |   | 3       |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | 559     |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | 562     |   |
| Issuanceof common stock in connection with exercise of stockoptions |  |  |                                                             |  | 104     |               |  |  |                          |   | 1       |                    |  |  |                                  |   |    |                                   |  |  |                                   |   | 1,246   |   |  |  |  |   |    |   |  |  |  |   |    |   |  |  |  |   |    |   |  |  |  |   | 1,247   |   |
| Restrictedstockforfeitures                                          |  |  |                                                             |  | (34     | )             |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | (315    | ) |  |  |  |   | — |   |  |  |  |   | 315     |   |  |  |  |   | — |   |  |  |  |   | — |   |
| Amortizationof the cost of restrictedstock                          |  |  |                                                             |  | — |               |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | — |   |  |  |  |   | — |   |  |  |  |   | 2,400   |   |  |  |  |   | — |   |  |  |  |   | 2,400   |   |
| Stockbasedcompensation                                              |  |  |                                                             |  | — |               |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | 222     |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | 222     |   |
| Othercomprehensive (loss)income                                     |  |  |                                                             |  | — |               |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | — |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | (5,036  | ) |  |  |  |   | (5,036  | ) |
| Dividendsdeclared on common stock – $.85 pershare             |  |  |                                                             |  | — |               |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | — |   |  |  |  |   | (24,187 | ) |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | (24,187 | ) |
| Netincome                                                           |  |  |                                                             |  | — |               |  |  |                          |   | — |                    |  |  |                                  |   | — |                                   |  |  |                                   |   | — |   |  |  |  |   | 2,557   |   |  |  |  |   | — |   |  |  |  |   | — |   |  |  |  |   | 2,557   |   |
| Balanceat September  30,2006                                        |  |  |                                                             |  | 29,186  |               |  |  |                          | $ | 293     |                    |  |  |                                  | $ | (1,178  | )                                 |  |  |                                   | $ | 395,016 |   |  |  |  | $ | (67,479 | ) |  |  |  | $ | (3,174  | ) |  |  |  | $ | 8,189   |   |  |  |  | $ | 331,667 |   |
|                                                                     |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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MortgageIT Holdings, Inc. andSubsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited) (Dollars inthousands)

|                                                                               |  |  |                               |   |          |      |  |  |  |   |            |   |
|-------------------------------------------------------------------------------|--|--|-------------------------------|---|----------|------|--|--|--|---|------------|---|
|                                                                          |  |  | Ninemonths ended September30, |
|                                                                          |  |  | 2006                          |   |          | 2005 |
| Cashflows from operatingactivities:                                           |  |  |                               |   |     |      |  |  |  |   |       |   |
| Netincome                                                                     |  |  |                               | $ | 2,557    |      |  |  |  | $ | 32,813     |   |
| Adjustmentsto reconcile net income to net cash used in operatingactivities:   |  |  |                               |   |     |      |  |  |  |   |       |   |
| Depreciation andamortization                                                  |  |  |                               |   | 7,985    |      |  |  |  |   | 7,957      |   |
| Stock basedcompensation                                                       |  |  |                               |   | 3,184    |      |  |  |  |   | 2,483      |   |
| Unrealizedgain on hedginginstruments                                          |  |  |                               |   | (945     | )    |  |  |  |   | (7,635     | ) |
| Netamortization of mortgage-backedsecurities                                  |  |  |                               |   | 2,710    |      |  |  |  |   | —    |   |
| Impairmentof mortgage-backedsecurities                                        |  |  |                               |   | 95       |      |  |  |  |   | —    |   |
| Impairment ofmortgage servicingrights                                         |  |  |                               |   | 85       |      |  |  |  |   | —    |   |
| Changesin operating assets:                                                   |  |  |                               |   |     |      |  |  |  |   |       |   |
| Increase inrestrictedcash                                                     |  |  |                               |   | (1,929   | )    |  |  |  |   | (12        | ) |
| Increase inmortgage loans held forsale                                        |  |  |                               |   | (121,721 | )    |  |  |  |   | (2,509,137 | ) |
| Decrease(increase) in accountsreceivable                                      |  |  |                               |   | 5,107    |      |  |  |  |   | (85,785    | ) |
| Increasein prepaids and otherassets                                           |  |  |                               |   | (13,859  | )    |  |  |  |   | (6,168     | ) |
| Changesin operatingliabilities:                                               |  |  |                               |   |     |      |  |  |  |   |       |   |
| (Decrease) increasein accounts payable, accrued expenses and otherliabilities |  |  |                               |   | (40,839  | )    |  |  |  |   | 61,012     |   |
| Netcash used in operatingactivities                                           |  |  |                               |   | (157,570 | )    |  |  |  |   | (2,504,472 | ) |
| Cashflows from investingactivities:                                           |  |  |                               |   |     |      |  |  |  |   |       |   |
| Decrease(increase) in ARMloans                                                |  |  |                               |   | 39,554   |      |  |  |  |   | (2,071,726 | ) |
| Purchasesof property andequipment                                             |  |  |                               |   | (7,554   | )    |  |  |  |   | (5,544     | ) |
| Proceedsfrom maturities of marketablesecurities                               |  |  |                               |   | 15,500   |      |  |  |  |   | 19,322     |   |
| Purchasesof marketablesecurities                                              |  |  |                               |   | (11,825  | )    |  |  |  |   | (15,460    | ) |
| Netcash provided by (used in) investingactivities                             |  |  |                               |   | 35,675   |      |  |  |  |   | (2,073,408 | ) |
| Cashflows from financingactivities:                                           |  |  |                               |   |     |      |  |  |  |   |       |   |
| Net proceeds fromissuance of junior subordinateddebentures                    |  |  |                               |   | 48,451   |      |  |  |  |   | 72,618     |   |
| Proceedsfrom collateralized debtobligations                                   |  |  |                               |   | 733,093  |      |  |  |  |   | 3,057,367  |   |
| Paymentsmade on collateralized debtinstruments                                |  |  |                               |   | (775,700 | )    |  |  |  |   | (490,116   | ) |
| Netborrowings from repurchaseagreements                                       |  |  |                               |   | 7,634    |      |  |  |  |   | 8,223      |   |
| Net proceeds(payments) on hedginginstruments                                  |  |  |                               |   | 2,597    |      |  |  |  |   | (10,035    | ) |
| Distributionspaid                                                             |  |  |                               |   | (29,202  | )    |  |  |  |   | (27,166    | ) |
| Proceeds fromnotespayable                                                     |  |  |                               |   | 15,000   |      |  |  |  |   | —    |   |
| Repayment ofnotespayable                                                      |  |  |                               |   | (15,000  | )    |  |  |  |   | —    |   |
| Proceedsfrom issuance of commonstock                                          |  |  |                               |   | —  |      |  |  |  |   | 150,086    |   |
| Proceedsfrom the exercise of stockoptions                                     |  |  |                               |   | 1,247    |      |  |  |  |   | 1,698      |   |
| Net proceeds ofwarehouse linespayable                                         |  |  |                               |   | 140,878  |      |  |  |  |   | 1,803,980  |   |
| Netcash provided by financingactivities                                       |  |  |                               |   | 128,998  |      |  |  |  |   | 4,566,655  |   |
| Netincrease (decrease) in cash and cashequivalents                            |  |  |                               |   | 7,103    |      |  |  |  |   | (11,225    | ) |
| Cashand cash equivalents at beginning ofperiod                                |  |  |                               |   | 36,757   |      |  |  |  |   | 70,224     |   |
| Cashand cash equivalents at end ofperiod                                      |  |  |                               | $ | 43,860   |      |  |  |  | $ | 58,999     |   |
|                                                                               |

Theaccompanying notes are an integral part of the consolidated financialstatements.

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NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Theaccompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principlesfor interim financial information.

In the opinion ofmanagement, all material adjustments, consisting of normal recurringadjustments, considered necessary for a fair presentation have beenincluded. The operating results for the three and nine months endedSeptember  30,  2006 are not necessarily indicative of theresults that may be expected for the year ending December31,  2006. The interim financial information should be read inconjunction with MortgageIT Holdings, Inc.'s 2005 Annual Reporton Form 10-K.

Basis of Presentation

MortgageITHoldings, Inc. (‘‘Holdings’’ or the‘‘Company’’) is a residential mortgagelender that was formed in March  2004 to continue and expand thebusiness of MortgageIT, Inc.(‘‘MortgageIT’’ or the‘‘TRS’’). Holdings is organized andconducts its operations to qualify as a real estate investment trust(‘‘REIT’’) for federal income tax purposesand is focused on earning net interest income from mortgage loansoriginated by MortgageIT, Holdings' taxable REIT subsidiary.MortgageIT was incorporated in New York on February  1,1999 and began marketing mortgage loan services on May  4,1999. MortgageIT originates, sells and brokers residential mortgageloans in 50 states and the District of Columbia, and is an approvedU.S. Department of Housing and Urban Development(‘‘HUD’’) Title II Nonsupervised DelegatedMortgagee.

As discussed further in Note 11, the Companyoperates its business in two primary segments, mortgage investmentoperations and mortgage banking operations. Mortgage investmentoperations are driven by the net interest income generated on itsinvestment loan portfolio. Mortgage banking operations include loanorigination, underwriting, funding, secondary marketing and loanbrokerage, title and insurance activities.

Theconsolidated financial statements included herein contain results forHoldings, Holdings' wholly owned subsidiaries, MHL Funding Corp.,Next at Bat Lending, Inc., MHL Reinsurance Ltd. and MortgageIT, andMortgageIT's wholly owned subsidiary Home Closer LLC(‘‘Home Closer’’). Home Closer providestitle, settlement and other mortgage related services to the Companyand its customers. All material intercompany account balances andtransactions have been eliminated inconsolidation.

Reclassification

Certain amounts inthe consolidated financial statements for prior periods have beenreclassified to conform to the current year presentation.

Use ofEstimates

The preparation of financial statements inconformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and theaccompanying notes. Management bases its estimates on certainassumptions, which it believes are reasonable under the circumstances,and does not believe that any change in those assumptions would have asignificant effect on the financial position or results of operationsof the Company. Actual results could differ materially from thoseestimates.

Adjustable Rate Mortgage(‘‘ARM’’) Loan InvestmentPortfolio

The Company's ARM loan investmentportfolio is comprised of ARM loans collateralizing debt obligationsand ARM loans held for securitization (collectively referred to as‘‘Portfolio ARM Loans’’ or‘‘ARM Loans’’). All of the Company'sPortfolio ARM Loans are traditional ARM Loans, meaning they haveinterest rates that reprice in one year or less(‘‘Traditional ARMs’’ or‘‘Traditional ARM 

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loans’’), hybrid ARM Loans thathave a fixed interest rate for an initial period of not more than fiveyears and then convert to Traditional ARMs for their remaining terms tomaturity (‘‘Hybrid ARMs’’ or‘‘Hybrid ARM loans’’), or pay option ARMLoans (‘‘POAs’’) that have a lowintroductory rate for the first 30-90 days and, thereafter, repricemonthly on the basis of an index, such as the 12-month Treasuryaverage.

Portfolio ARM Loans are designated as held tomaturity because the Company has the intent and ability to hold themuntil maturity or payoff. Portfolio ARM Loans are carried at cost,which includes unpaid principal balances, unamortized loan originationcosts and fees, and the allowance for loan losses.

ARMloans collateralizing debt obligations are mortgage loans the Companyhas securitized into rated classes with the lower rated classesproviding credit support for higher rated certificates issued to thirdparty investors or retained by the Company in structured financingarrangements.

ARM loans held for securitization aremortgage loans the Company has originated and intends to securitize andretain.

Mortgage Loans Held for Sale

UnallocatedMortgage Loans Held For Sale

Unallocated mortgage loansheld for sale represent loans that have not yet been allocated to aforward sales commitment. At September  30,  2006 andDecember  31,  2005, unallocated mortgage loans held forsale are carried at the lower of adjusted cost or market value.Determining market value requires judgment by management in determininghow the market would value a particular mortgage loan based oncharacteristics of the loan and available marketinformation.

Allocated Mortgage Loans Held ForSale

Allocated mortgage loans held for sale representloans that have been allocated to a forward sales commitment. For thenine months ended September  30,  2006 and the year endedDecember  31,  2005, the Company qualified and elected toapply Statement of Financial Accounting Standards(‘‘SFAS’’) No. 133‘‘Accounting for Derivative Instruments and HedgingActivities’’ (‘‘SFAS No.133’’) fair value hedge accounting for allocated loansheld for sale. Allocated mortgage loans held for sale are carried atthe lower of adjusted cost or market value. Determining market valuerequires judgment by management in determining how the market wouldvalue a particular mortgage loan based on characteristics of the loanand available market information. Adjusted cost includes the loanprincipal amount outstanding, deferred direct origination costs andfees, and any adjustment to the carrying amount of loans resulting fromthe application of hedge accounting.

Mortgage-Backed Securities– Available for Sale

Mortgage-backed securities– available for sale represent beneficial interests the Companypurchased in the MortgageIT real estate mortgage investment conduit(‘‘REMIC’’)securitization.

Mortgage-backed securities classified asavailable for sale are reported at their estimated fair value withunrealized gains and losses reported in accumulated other comprehensiveincome (loss)(‘‘OCI’’). 

Mortgage-backedsecurities represent the retained interests in certain components ofthe cash flows of the underlying mortgage loans or mortgage securitiestransferred to securitization trusts. As payments are received, thepayments are applied to the cost basis of the mortgage relatedsecurity. Each period, the accretable yield for each mortgage securityis evaluated and, to the extent there has been a change in theestimated cash flows, it is adjusted and applied prospectively. Theestimated cash flows change as assumptions for credit losses, borrowerprepayments and interest rates are updated. The accretable yield isrecorded as interest income with a corresponding increase to the costbasis of the mortgage security.

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At each reporting period subsequentto the initial valuation of the purchased securities, the fair value ofmortgage securities is estimated based on different methods, includingindependent valuations from broker dealers. Management’s bestestimate of key assumptions, including credit losses, prepaymentspeeds, the market discount rates and forward yield curves commensuratewith the risks involved, are used in estimating future cash flows. Tothe extent that the cost basis of mortgage securities exceeds the fairvalue and the unrealized loss is considered to be other than temporary,an impairment charge is recognized and the amount recorded in OCI isreclassified to earnings as a realized loss.

LoanSecuritizations

The Company securitizes mortgage loans bytransferring them to independent trusts that issue securitiescollateralized by the transferred mortgage loans. The Company generallyretains interests in all or some of the securities issued by thetrusts. Certain of the securitization agreements may require theCompany to repurchase loans that are found to have legal deficienciesafter the date of transfer. The accounting treatment for transfers ofassets upon securitization depends on whether or not the Company hasretained control over the transferred assets. The Company'saccounting policy for ARM loan securitizations complies with theprovisions of SFAS No. 140 ‘‘Accounting for Transfers andServicing of Financial Assets and Extinguishments ofLiabilities’’ (‘‘SFAS No.140’’). Depending on the structure of the securitization,the accounting for securitizations is treated as either a sale orsecured financing for financial statement purposes. The securitizationtransactions in the Company's mortgage investment operationssegment are treated as secured financings under SFAS No. 140 as theCompany has retained control over the transferred assets. TheMortgageIT REMIC securitization completed in February  2006 wastreated as a financing under SFAS No. 140. The MortgageIT REMICsecuritization completed in November  2005 was treated as a saleunder SFAS No. 140.

Mortgage ServicingRights

Mortgage servicing rights retained in the REMICsecuritization are recorded at allocated cost based upon the relativefair values of the transferred loans and the servicing rights. Mortgageservicing rights are amortized in proportion to and over the projectednet servicing revenues. Periodically, the Company evaluates thecarrying value of mortgage servicing rights based on their estimatedfair value. If the estimated fair value is less than the carryingamount of the mortgage servicing rights, the mortgage servicing rightsare written down to the amount of the estimated fair value. Forpurposes of evaluating and measuring impairment of mortgage servicingrights the Company stratifies the mortgage servicing rights based ontheir predominant risk characteristics.

Mortgage servicingrights are recorded in other assets in the consolidated balance sheets.The servicing fee income associated with the mortgage servicing rightsis reported in other income in the consolidated statements ofoperations.

Derivative Instruments and HedgingActivities

The Company manages its interest rate riskexposure through the use of derivatives, including interest rate swaps,Eurodollar futures, forward delivery contracts on mortgage-backedsecurities (‘‘TBA Securities’’), options onTBA Securities, forward sale commitments and interest rate caps. Inaccordance with SFAS No. 133, all derivative instruments are recordedon the balance sheets at fair value.

If certain conditionsare met, the Company may designate a derivative as a fair value hedge(the hedge of the exposure to changes in the fair value of a recognizedasset, liability or commitment), or a cash flow hedge (a hedge of theexposure to variability in the cash flows related to a forecasted orrecognized liability).

Certain derivatives used inconjunction with interest rate risk management activities qualify forhedge accounting under SFAS No. 133. For derivative hedging activitiesto qualify for hedge accounting, the Company formally documents, at theinception of each hedge, the hedging relationship and its riskmanagement objective and strategy for undertaking the hedge, thehedging instrument, the item or, 

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the nature of the risk being hedged, how thehedging instrument's effectiveness in offsetting the hedged riskwill be assessed, and a description of the method of measuringineffectiveness. The Company also formally assesses, both at thehedge's inception and on an ongoing basis, whether thederivatives that are used in hedging transactions are highly effectivein offsetting changes in fair values or cash flows of hedgeditems.

The Company's fair value hedges are primarilyfor mortgage loans held for sale. Changes in the fair value of aderivative that is highly effective and that is designated andqualifies as a fair value hedge, along with the change in fair valueattributable to the hedged risk, are recorded in earnings. Derivativesthat are utilized as fair value hedges and that qualify for hedgeaccounting are carried at fair value with changes in value included ingain on sale of mortgage loans in the accompanying consolidatedstatements of operations.

The Company's cash flowhedges, which are used for LIBOR based borrowings, have the effect offixing the interest rate on LIBOR based liabilities in the event thatLIBOR based funding costs change. Gains and losses on a derivative thatis highly effective and that is designated and qualifies as a cash flowhedge are recorded in OCI to the extent that the derivative iseffective as a hedge, until earnings are affected by the variability incash flows of the designated hedged item.

The ineffectiveportion of the change in fair value of a derivative instrument thatqualifies as either a fair value hedge or a cash flow hedge wasapproximately $2.5  million for the nine months endedSeptember  30,  2006. The change in value of a derivativeinstrument that does not qualify for hedge accounting, is reported inearnings under the caption realized and unrealized gain (loss) onhedging instruments.

The Company employs a number of riskmanagement monitoring procedures that are designed to ensure that itshedging arrangements are demonstrating, and are expected to continue todemonstrate, a high level of effectiveness. Hedge accounting isdiscontinued on a prospective basis if it is determined that thehedging relationship is no longer highly effective or expected to behighly effective in offsetting changes in fair value or cash flows ofthe hedged item. Additionally, the Company may elect, pursuant to SFASNo. 133, to re-designate a hedge relationship during an interim periodand re-designate upon the rebalancing of a hedgerelationship.

The Company's committed mortgagepipeline includes interest rate lock commitments(‘‘IRLCs’’) that have been extended toborrowers who have applied for loan funding and meet certain definedcredit and underwriting criteria. The Company classifies and accountsfor the IRLCs associated with loans expected to be sold asfree-standing derivatives. The Company does not assign fair value toIRLCs at inception of the loan commitment, but does record subsequentchanges in fair value in gain on sale of mortgage loans on theconsolidated statements of operations.

RepurchaseAgreements

Repurchase agreements represent legal sales ofthe Company's mortgage assets and an agreement to repurchase theassets at a future date. Repurchase agreements are accounted for ascollateralized financing transactions since the Company still hascontrol of the transferred assets and is both entitled and obligated torepurchase the transferred assets. They are carried at the amount atwhich the assets will be repurchased, including accruedinterest.

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Other ComprehensiveIncome

SFAS No. 130, ‘‘ReportingComprehensive Income,’’ divides comprehensive income intonet income and other comprehensive income (loss), which consists ofunrealized gains and losses on derivative financial instruments thatqualify for cash flow hedge accounting under SFAS No. 133, andmortgage-backed securities — available for sale. Accumulated OCIis comprised of thefollowing:

|                                                                   |  |  |                                                                            |   |      |                                                                         |  |      |                                           |   |        |         |  |      |         |   |        |         |
|-------------------------------------------------------------------|--|--|----------------------------------------------------------------------------|---|------|-------------------------------------------------------------------------|--|------|-------------------------------------------|---|--------|---------|--|------|---------|---|--------|---------|
|                                                              |  |  | NetUnrealized Loss on Mortgage-Backed Securities –Available for Sale |   |      | Net Realized andUnrealized Gain(Loss) on DerivativeFinancialInstruments |  |      | AccumulatedOtherComprehensiveIncome(Loss) |
| Balance at December  31,2004                                      |  |  | $    —                                           |   |      |                                                                         |  | (387 | )                                    |   |        |         |  | (387 | )  |
| Netchange                                                         |  |  |                                                                            |   | (948 | )                                                                  |  |      |                                           |   | 14,560 |    |  |      |         |   | 13,612 |    |
| Balanceat December  31,2005                                       |  |  |                                                                            | $ | (948 | )                                                                  |  |      |                                           | $ | 14,173 |    |  |      |         | $ | 13,225 |    |
| Balanceat January  1,2006                                         |  |  |                                                                            |   | (948 | )                                                                  |  |      |                                           |   | 14,173 |    |  |      |         |   | 13,225 |    |
| Netchange                                                         |  |  |                                                                            |   | 316  |                                                                    |  |      |                                           |   | (5,352 | )  |  |      |         |   | (5,036 | )  |
| Balanceat September  30,  2006(unaudited)     |  |  |                                                                            | $ | (632 | )                                                                  |  |      |                                           | $ | 8,821  |    |  |      |         | $ | 8,189  |    |
|                                                                   |

RevenueRecognition

Mortgage InvestmentOperations

Interest income is accrued based on theoutstanding principal amount and contractual terms of the loans. Directloan origination costs and fees associated with the loans are amortizedinto interest income over the lives of the loans using the effectiveyield method, adjusted for the effects of estimated prepayments.Estimating prepayments and estimating the remaining lives of the loansrequires judgment by management, which involves consideration ofpossible future interest rate environments. The actual lives could bemore or less than the amount estimated by management.

MortgageBanking Operations

Gain on sale of loans represents thedifference between the net sales proceeds and the carrying values ofthe mortgage loans sold, and is recognized at the time of sale. Directloan origination costs and fees associated with the loans are initiallyrecorded as an adjustment of the cost of the loans held for sale andare recognized in earnings when the loans aresold.

Brokerage fees represent revenues earned for thebrokering of mortgage loans to third party lenders and are earned andrecognized at the time the loan is closed by the third party lender.Revenues are primarily comprised of borrower application and/oradministrative fees and brokerage fees paid to the Company by thirdparty lenders.

Interest income is accrued as earned.Interest on mortgage loans held for sale accrues on loans from the dateof funding through the date of sale. Interest on loans is computedbased on the contractual loan note rate. Once a loan is 90 days or moredelinquent or a borrower declares bankruptcy, the Company adjusts thevalue of its accrued interest receivable to what it believes to becollectible and stops accruing interest on thatloan.

Generally, the Company is not exposed to significantcredit risk on its loans sold to investors. In the normal course ofbusiness, the Company is obligated to repurchase loans from investorsconsistent with the terms of its investor contracts. In connection withthe sale of loans, the Company records a repurchase reserve forpotential future losses applicable to loans sold. The repurchasereserve is included in accrued expenses on the Company's balancesheets.

Loan Loss Reserves

The Company maintainsan allowance for loan losses based on management's estimate ofcredit losses inherent in the Company's Portfolio ARM Loans. Theestimation of the allowance is based on a variety of factors including,but not limited to, industry statistics, current economic conditions,loan 

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portfolio composition, delinquency trends,credit losses to date on underlying loans and remaining creditprotection. If the credit performance of the Company's PortfolioARM Loans is different than expected, the Company adjusts the allowancefor loan losses to a level deemed appropriate by management to providefor estimated losses inherent in the Company's ARM loanportfolio. Two critical assumptions used in estimating the loan lossreserves are an assumed rate of default, which is the expected rate atwhich loans go into foreclosure over the life of the loans, and anassumed rate of loss severity, which represents the expected rate ofrealized loss upon disposition of the properties that have gone intoforeclosure. The Company’s estimated loan loss reserves arecomprised of baseline expected credit losses for the next four to sixquarters and a stress component which considers the effects ofalternative economic scenarios. The Company will charge off lossesagainst the credit loss reserve at the time of loan disposition. Thefollowing table summarizes changes in thereserve:

|                                      |  |  |                                    |   |        |                          |  |  |  |   |         |        |
|--------------------------------------|--|--|------------------------------------|---|--------|--------------------------|--|--|--|---|---------|--------|
|                                 |  |  | Ninemonthsended September 30, 2006 |   |        | YearendedDecember31,2005 |
|                                 |  |  | (unaudited)                        |   |        |                     |
| Loanloss reserve, beginning ofperiod |  |  |                                    | $ | 4,123  |                     |  |  |  | $ | 674     |   |
| Loan lossprovision                   |  |  |                                    |   | 964    |                     |  |  |  |   | 3,449   |   |
| Writeoffs                            |  |  |                                    |   | (1,087 | )                   |  |  |  |   | — |   |
| Loanloss reserve, end ofperiod       |  |  |                                    | $ | 4,000  |                     |  |  |  | $ | 4,123   |   |
|                                      |

StockCompensation

As of September  30,  2006, theCompany had in effect the 2004 Long-Term Incentive Plan (the‘‘2004 Plan’’) and the Amended Long-TermIncentive Plan (the ‘‘Amended Plan’’),which are described more fully in Note 8.

EffectiveJanuary  1,  2006, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004),‘‘Share-Based Payment’’ (SFAS No. 123R),requiring that compensation cost relating to share-based paymenttransactions be recognized in the financial statements. The cost ismeasured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equityaward). We adopted SFAS No. 123R using the modified prospective methodand, accordingly, financial statement amounts for prior periodspresented in this Form 10-Q have not been restated to reflect the fairvalue method of recognizing compensation cost relating to stockoptions.          

Therewas approximately $74,000 and $222,000 of before tax compensation costrelated to stock options recognized in operating results during thethree and nine months ended September  30,  2006,respectively. The associated future income tax benefit recognized wasapproximately $30,000 and $90,000 during the three and nine monthsended September  30,  2006, respectively.

AtSeptember  30,  2006, there was approximately $250,000 oftotal unrecognized compensation cost related to non-vested stock optionawards which is expected to be recognized over a weighted-averageperiod of 0.8 years.

Through December  31,2005, the Company accounted for all transactions under which employeesreceived shares of stock or other equity instruments in the Companybased on the price of its stock in accordance with the provisions ofAccounting Principles Board Opinion No. 25, ‘‘Accountingfor Stock Issued to Employees.’’ Pursuant to theseaccounting standards, the Company recorded deferred compensation forstock awards at the date of grant based on the estimated values of theshares on that date. There was no stock option-based employeecompensation cost reflected in net income because all options grantedhad an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates theeffect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123, ‘‘Accounting forStock-Based Compensation – Transition andDisclosure’’ (‘‘SFAS No.123’’) for the three and nine months endedSeptember  30,  2005. (Dollars in thousands, except pershare data):

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|                                                                                                           |  |  |                                     |   |        |                                  |  |  |  |   |        |         |
|-----------------------------------------------------------------------------------------------------------|--|--|-------------------------------------|---|--------|----------------------------------|--|--|--|---|--------|---------|
|                                                                                                      |  |  | Threemonthsended September 30, 2005 |   |        | NinemonthsendedSeptember 30,2005 |
|                                                                                                      |  |  | (unaudited)                         |   |        | (unaudited)                      |
| Netincome attributable to commonstockholders                                                              |  |  |                                     | $ | 8,665  |                             |  |  |  | $ | 32,813 |    |
| Amortizationof restricted stock, including forfeitures, net of taxeffects                                 |  |  |                                     |   | 559    |                             |  |  |  |   | 1,708  |    |
| Stock-basedemployee compensation expense determined under the fair value method,net of related taxeffects |  |  |                                     |   | (622   | )                           |  |  |  |   | (1,881 | )  |
| Proforma netincome                                                                                        |  |  |                                     | $ | 8,602  |                             |  |  |  | $ | 32,640 |    |
| Netincome per share attributable to commonstock:                                                          |  |  |                                     |   |   |                             |  |  |  |   |   |    |
| Basic – Asreported                                                                                  |  |  |                                     | $ | 0.31   |                             |  |  |  | $ | 1.47   |    |
| Basic –Proforma                                                                                     |  |  |                                     | $ | 0.31   |                             |  |  |  | $ | 1.46   |    |
| Netincome per share for diluted earnings pershare:                                                        |  |  |                                     |   |   |                             |  |  |  |   |   |    |
| Diluted – Asreported                                                                                |  |  |                                     | $ | 0.30   |                             |  |  |  | $ | 1.44   |    |
| Diluted –Proforma                                                                                   |  |  |                                     | $ | 0.30   |                             |  |  |  | $ | 1.43   |    |
|                                                                                                           |

Underthe 2004 Plan, the fair value for each option granted was estimated atthe date of grant using the Black-Scholes option-pricing model, withthe following assumptions: risk-free interest rate of 3.75%,expected option lives of five years, 26% volatility and9% dividend rate.

The weighted average fair valueof options issued under the 2004 Plan, for the nine months endedSeptember  30,  2005, under the Black-Scholesoption-pricing model, was $1.01 per option.

No stockoptions have been granted under the AmendedPlan.

Restricted stock awards granted to employees underthe 2004 Plan and the Amended Plan are subject to certain sale andtransfer restrictions. Unvested awards are also subject to forfeitureif employment terminates prior to the end of the prescribed restrictionperiod. The value of restricted stock awards is expensed over thevesting period, generally three years.

IncomeTaxes

Income taxes are determined using the liabilitymethod under SFAS No. 109, ‘‘Accounting for IncomeTaxes.’’ Under this method, deferred income taxes reflectthe net tax effect of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes andthe amounts reported for federal and state income taxpurposes.

The Company has elected to be taxed as a REITand believes it complies with the provisions of the Internal RevenueCode of 1986, as amended (the ‘‘Code’’),with respect thereto. Accordingly, the Company is not subject tofederal income tax on that portion of its income that is distributed tostockholders, as long as certain asset, income and stock ownershiptests are met. To maintain its REIT status, the Company is required todistribute a minimum of 90% of its annual taxable income to itsstockholders.

MortgageIT made the election to be treatedas a taxable REIT subsidiary and, therefore, is subject to both federaland state corporate income taxes. Accordingly, the Company records atax provision based primarily on the taxable income of theTRS.

Fair Value of Financial Instruments

Cash andcash equivalents, marketable securities and accounts receivable arecarried at amounts approximating fair value. Unallocated and allocatedmortgage loans held for sale are carried at the lower of adjusted costor market value, or at market value.

Mortgage-backedsecurities – available for sale are carried at fairvalue.

Derivative instruments related to the hedging ofthe Company's financing costs, including interest rate swapagreements, Eurodollar futures contracts and interest rate capagreements (collectively ‘‘Portfolio HedgingInstruments’’) are carried at fair value and areclassified as hedging instruments on the balancesheets.

15

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Derivative instruments, includingIRLCs and those related to the hedging of the Company's lockedpipeline loans and mortgage loans held for sale, including TBASecurities, options on TBA Securities, forward sale commitments andEurodollar futures contracts, are carried at fair value and areclassified as hedging instruments on the balancesheets.

Liabilities, including warehouse lines payable,collateralized debt obligations, notes payable and other debt, arecarried at their contractual notional amounts which approximate fairvalue. Portfolio ARM Loans are carried at cost, as more fully describedin Note 2.

The following table presents information as tothe carrying amount and estimated fair value of certain of theCompany's market risk sensitive assets, liabilities and hedginginstruments at September  30,  2006 and December31,2005:

|                                                     |  |  |                                             |   |           |                    |  |  |  |   |           |        |
|-----------------------------------------------------|--|--|---------------------------------------------|---|-----------|--------------------|--|--|--|---|-----------|--------|
|                                                |  |  | September30,2006                            |
|                                                |  |  | CarryingAmount                              |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars in thousands)(unaudited) |
| Assets:                                             |  |  |                                             |   |      |               |  |  |  |   |      |   |
| Mortgageloans held forsale                          |  |  |                                             | $ | 3,499,918 |               |  |  |  | $ | 3,521,076 |   |
| ARM loanscollateralizing debt obligations,net       |  |  |                                             |   | 4,642,282 |               |  |  |  |   | 4,598,891 |   |
| Mortgage-backedsecurities – available forsale |  |  |                                             |   | 20,982    |               |  |  |  |   | 20,982    |   |
| Hedginginstruments                                  |  |  |                                             |   | 46,639    |               |  |  |  |   | 46,639    |   |
| Liabilities:                                        |  |  |                                             |   |      |               |  |  |  |   |      |   |
| Warehouselinespayable                               |  |  |                                             | $ | 3,318,868 |               |  |  |  | $ | 3,318,868 |   |
| Collateralizeddebtobligations                       |  |  |                                             |   | 4,442,590 |               |  |  |  |   | 4,452,057 |   |
| Repurchaseagreements                                |  |  |                                             |   | 94,692    |               |  |  |  |   | 94,692    |   |
| Juniorsubordinateddebentures                        |  |  |                                             |   | 128,871   |               |  |  |  |   | 128,871   |   |
| Hedginginstruments                                  |  |  |                                             |   | 7,422     |               |  |  |  |   | 7,422     |   |
|                                                     |

|                                                     |  |  |                       |   |           |                    |  |  |  |   |           |        |
|-----------------------------------------------------|--|--|-----------------------|---|-----------|--------------------|--|--|--|---|-----------|--------|
|                                                |  |  | December31,2005       |
|                                                |  |  | CarryingAmount        |   |           | EstimatedFairValue |
|                                                |  |  | (Dollars inthousands) |
| Assets:                                             |  |  |                       |   |      |               |  |  |  |   |      |   |
| Mortgageloans held forsale                          |  |  |                       | $ | 3,378,197 |               |  |  |  | $ | 3,383,752 |   |
| ARM loansheld for securitization,net                |  |  |                       |   | 282       |               |  |  |  |   | 277       |   |
| ARM loanscollateralizing debt obligations,net       |  |  |                       |   | 4,681,554 |               |  |  |  |   | 4,624,237 |   |
| Mortgage-backedsecurities – available forsale |  |  |                       |   | 23,357    |               |  |  |  |   | 23,357    |   |
| Hedginginstruments                                  |  |  |                       |   | 54,472    |               |  |  |  |   | 54,472    |   |
| Liabilities:                                        |  |  |                       |   |      |               |  |  |  |   |      |   |
| Warehouselinespayable                               |  |  |                       | $ | 3,177,990 |               |  |  |  | $ | 3,177,990 |   |
| Collateralizeddebtobligations                       |  |  |                       |   | 4,485,197 |               |  |  |  |   | 4,485,197 |   |
| Repurchaseagreements                                |  |  |                       |   | 87,058    |               |  |  |  |   | 87,058    |   |
| Juniorsubordinateddebentures                        |  |  |                       |   | 77,324    |               |  |  |  |   | 77,324    |   |
| Hedginginstruments                                  |  |  |                       |   | 8,801     |               |  |  |  |   | 8,801     |   |
|                                                     |

RECENTLYISSUED ACCOUNTING STANDARDS

In February  2006, FASBissued SFAS No. 155, ‘‘Accounting for Certain HybridFinancial Instruments’’, which addresses issues on theevaluation of beneficial interests issued in securitizationtransactions under SFAS No. 133. The statement also amends SFAS No. 140to eliminate the prohibition on a qualifying special purpose entityfrom holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.This statement shall be effective for all financial instrumentsacquired, issued, or subject to a remeasurement event occurring afterDecember  31,  2006. The Company will adopt this statementwhen effective and is currently evaluating its impact.

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In March  2006, the FASBissued SFAS No. 156, ‘‘Accounting for Servicing ofFinancial Assets’’, an amendment of SFAS No. 140(‘‘SFAS 156’’). This statement requiresthat an entity separately recognize a servicing asset or a servicingliability when it undertakes an obligation to service a financial assetunder a servicing contract in certain situations. Such servicing assetsor servicing liabilities are required to be initially measured at fairvalue, if practicable. SFAS 156 also allows an entity to choose one oftwo methods when subsequently measuring its servicing assets andservicing liabilities: (1) the amortization method or (2) thefair value measurement method. The amortization method existedunder SFAS 140 and remains unchanged in (1) allowing entities toamortize their servicing assets or servicing liabilities in proportionto and over the period of estimated net servicing income or netservicing loss and (2) requiring the assessment of those servicingassets or servicing liabilities for impairment or increased obligationbased on fair value at each reporting date. The fair value measurementmethod allows entities to measure their servicing assets or servicingliabilities at fair value each reporting date and report changes infair value in earnings in the period the change occurs. SFAS 156introduces the notion of classes and allows companies to make aseparate subsequent measurement election for each class of itsservicing rights. In addition, SFAS 156 requires certain comprehensiveroll−forward disclosures that must be presented for each class.The Statement is effective as of the beginning of an entity’sfirst fiscal year that begins after September  15,  2006.Earlier adoption is permitted as of the beginning of an entity’sfiscal year, so long as the entity has not yet issued financialstatements, including financial statements for any interim period, forthat fiscal year. The Company will adopt this statement when effectiveand is currently evaluating its impact.

In July2006, the FASB issued Interpretation No. 48, ‘‘Accountingfor Uncertainty in Income Taxes’’ (‘‘FIN48’’). FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken on a taxreturn. The provisions of this interpretation apply to fiscal yearsbeginning after December  15,  2006. Management iscurrently evaluating FIN 48, but does not currently expect it to have amaterial impact on the Company’s financialstatements.

In September  2006, the SEC staff issuedStaff Accounting Bulletin (‘‘SAB’’) 108‘‘Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year FinancialStatements’’ (SAB 108). SAB 108 requires that publiccompanies utilize a‘‘dual−approach’’ to assessing thequantitative effects of financial misstatements. This dual approachincludes both an income statement focused assessment and a balancesheet focused assessment. The guidance in SAB 108 must be applied toannual financial statements for fiscal years ending afterNovember  15,  2006. The Company is currently evaluatingthe impact of adopting SAB 108 but does not expect that it will have amaterial effect on our consolidated financial position or results ofoperations.

In September  2006, the FASB issued SFASNo. 157, ‘‘Fair Value Measurements’’(‘‘SFAS No. 157’’). This Statement definesfair value, establishes a framework for measuring fair value andexpands disclosure of fair value measurements. SFAS No. 157 appliesunder other accounting pronouncements that require or permit fair valuemeasurements and accordingly, does not require any new fair valuemeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November  15,  2007. TheCompany is currently evaluating the impact of adopting SFAS No. 157 butdoes not expect that it will have a material effect on our consolidatedfinancial position or results of operations.

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NOTE 2 — PORTFOLIO ARMLOANS

The following table presents the Company'sPortfolio ARM Loans as of September  30,  2006 andDecember  31,  2005 (Dollars inthousands):

|                                           |  |  |                                         |   |           |                                 |  |  |       |   |         |        |  |  |  |   |           |         |
|-------------------------------------------|--|--|-----------------------------------------|---|-----------|---------------------------------|--|--|-------|---|---------|--------|--|--|--|---|-----------|---------|
| September30, 2006 (unaudited)             |  |  | ARMloanscollateralizingdebt obligations |   |           | ARM loansheld forsecuritization |  |  | Total |
| Principalbalanceoutstanding               |  |  |                                         | $ | 4,597,856 |                            |  |  |       | $ | — |   |  |  |  | $ | 4,597,856 |    |
| Unamortizedloan origination costs andfees |  |  |                                         |   | 48,426    |                            |  |  |       |   | — |   |  |  |  |   | 48,426    |    |
| Loanlossreserves                          |  |  |                                         |   | (4,000    | )                          |  |  |       |   | — |   |  |  |  |   | (4,000    | )  |
| Amortizedcost,net                         |  |  |                                         |   | 4,642,282 |                            |  |  |       |   | — |   |  |  |  |   | 4,642,282 |    |
| Grossunrealizedloss                       |  |  |                                         |   | (43,391   | )                          |  |  |       |   | — |   |  |  |  |   | (43,391   | )  |
| Estimatedfairvalue                        |  |  |                                         | $ | 4,598,891 |                            |  |  |       | $ | — |   |  |  |  | $ | 4,598,891 |    |
| Carryingvalue                             |  |  |                                         | $ | 4,642,282 |                            |  |  |       | $ | — |   |  |  |  | $ | 4,642,282 |    |
|                                           |

|                                           |  |  |                                         |   |           |                                 |  |  |       |   |         |         |  |  |  |   |           |         |
|-------------------------------------------|--|--|-----------------------------------------|---|-----------|---------------------------------|--|--|-------|---|---------|---------|--|--|--|---|-----------|---------|
| December31, 2005                          |  |  | ARMloanscollateralizingdebt obligations |   |           | ARM loansheld forsecuritization |  |  | Total |
| Principalbalanceoutstanding               |  |  |                                         | $ | 4,641,588 |                            |  |  |       | $ | 278     |    |  |  |  | $ | 4,641,866 |    |
| Unamortizedloan origination costs andfees |  |  |                                         |   | 44,089    |                            |  |  |       |   | 4       |    |  |  |  |   | 44,093    |    |
| Loanlossreserves                          |  |  |                                         |   | (4,123    | )                          |  |  |       |   | — |    |  |  |  |   | (4,123    | )  |
| Amortizedcost,net                         |  |  |                                         |   | 4,681,554 |                            |  |  |       |   | 282     |    |  |  |  |   | 4,681,836 |    |
| Grossunrealizedloss                       |  |  |                                         |   | (57,317   | )                          |  |  |       |   | (5      | )  |  |  |  |   | (57,322   | )  |
| Estimatedfairvalue                        |  |  |                                         | $ | 4,624,237 |                            |  |  |       | $ | 277     |    |  |  |  | $ | 4,624,514 |    |
| Carryingvalue                             |  |  |                                         | $ | 4,681,554 |                            |  |  |       | $ | 282     |    |  |  |  | $ | 4,681,836 |    |
|                                           |

Theloans that the Company retains in its portfolio are serviced through asubservicing arrangement. The TRS sells all of its fixed rate loanproduction to third parties, as well as any ARM loans that the Companydoes not retain in its portfolio.

The Company does notaccount for mortgage-backed securities created in connection with thesecuritization of Portfolio ARM Loans and placed with third partyinvestors as sales and, therefore, does not record any gain or loss inconnection with these securitization transactions. Instead, the Companyaccounts for the securities it issues as a long-term collateralizedfinancing. As of September  30,  2006, the Company heldapproximately $4.6  billion of ARM loans that collateralize thesecurities resulting from its securitization activities, and areclassified on its balance sheet as ARM loans collateralizing debtobligations, net.

The Company has credit exposure on itsARM Loan investment portfolio. During the nine months endedSeptember  30,  2006, the Company recorded loan lossprovisions totaling $964,000 to reserve for estimated future creditlosses on Portfolio ARM Loans, and charged $1,087,000 against theallowance for losses during the period.

The followingtable summarizes Portfolio ARM Loan delinquency information as ofSeptember  30, 2006 and December  31,  2005 (Dollarsin thousands):

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September  30,  2006(unaudited)

|                             |  |  |            |  |     |             |  |  |                              |   |        |                       |  |  |  |  |      |         |  |  |  |  |      |         |
|-----------------------------|--|--|------------|--|-----|-------------|--|--|------------------------------|---|--------|-----------------------|--|--|--|--|------|---------|--|--|--|--|------|---------|
| DelinquencyStatus           |  |  | Loan Count |  |     | LoanBalance |  |  | Percent ofPortfolio ARMLoans |   |        | PercentofTotal Assets |
| 60 to 89days                |  |  |            |  | 35  |        |  |  |                              | $ | 9,620  |                  |  |  |  |  | 0.21 | %  |  |  |  |  | 0.11 | %  |
| 90days ormore               |  |  |            |  | 36  |        |  |  |                              |   | 9,935  |                  |  |  |  |  | 0.21 |    |  |  |  |  | 0.12 |    |
| Inbankruptcy andforeclosure |  |  |            |  | 72  |        |  |  |                              |   | 19,610 |                  |  |  |  |  | 0.42 |    |  |  |  |  | 0.23 |    |
|                        |  |  |            |  | 143 |        |  |  |                              | $ | 39,165 |                  |  |  |  |  | 0.84 | %  |  |  |  |  | 0.46 | %  |
|                             |

December31,2005

|                             |  |  |            |  |    |             |  |  |                              |   |        |                       |  |  |  |  |      |         |  |  |  |  |      |         |
|-----------------------------|--|--|------------|--|----|-------------|--|--|------------------------------|---|--------|-----------------------|--|--|--|--|------|---------|--|--|--|--|------|---------|
| DelinquencyStatus           |  |  | Loan Count |  |    | LoanBalance |  |  | Percent ofPortfolio ARMLoans |   |        | PercentofTotal Assets |
| 60 to 89days                |  |  |            |  | 48 |        |  |  |                              | $ | 12,189 |                  |  |  |  |  | 0.26 | %  |  |  |  |  | 0.15 | %  |
| 90days ormore               |  |  |            |  | 19 |        |  |  |                              |   | 5,627  |                  |  |  |  |  | 0.12 |    |  |  |  |  | 0.07 |    |
| Inbankruptcy andforeclosure |  |  |            |  | 18 |        |  |  |                              |   | 4,461  |                  |  |  |  |  | 0.10 |    |  |  |  |  | 0.05 |    |
|                        |  |  |            |  | 85 |        |  |  |                              | $ | 22,277 |                  |  |  |  |  | 0.48 | %  |  |  |  |  | 0.27 | %  |
|                             |

NOTE3 — MORTGAGE LOANS HELD FOR SALE

Mortgage loansheld for sale consist of the following components (Dollars inthousands):

|                                               |  |  |                  |   |           |                 |  |  |  |   |           |        |
|-----------------------------------------------|--|--|------------------|---|-----------|-----------------|--|--|--|---|-----------|--------|
|                                          |  |  | September30,2006 |   |           | December31,2005 |
|                                          |  |  | (unaudited)      |   |           |            |
| Mortgageloans held forsale                    |  |  |                  | $ | 3,451,582 |            |  |  |  | $ | 3,331,966 |   |
| Deferredorigination costs andfees             |  |  |                  |   | 48,336    |            |  |  |  |   | 46,231    |   |
| Carryingamount of mortgage loans held forsale |  |  |                  | $ | 3,499,918 |            |  |  |  | $ | 3,378,197 |   |
|                                               |

Mortgageloans are residential mortgages on properties located throughout theUnited States having maturities of up to 40 years, and include ARMloans that are not Portfolio ARM Loans. Pursuant to the terms of themortgage loans, the borrowers have pledged the underlying real estateas collateral for the loans. It is the Company's practice to sellto third party investors any loans that do not constitute Portfolio ARMLoans shortly after they are funded, generally within 30 to 60days.

The Company had loan purchase commitments from thirdparty investors for approximately $2.1  billion and $2.3billion, as of September  30,  2006 and December31,  2005, respectively. Substantially all loans held for sale atSeptember  30,  2006 and December  31,  2005were subsequently sold to third party investors. Substantially allmortgage loans held for sale are pledged as collateral for warehouselines payable (See Note 6).

As of September30,  2006 and December  31,  2005, the Company hadaggregate locked pipeline commitments to fund mortgage loans held forsale of $2.6  billion and $2.3  billion,respectively.

NOTE 4 — DERIVATIVES AND HEDGINGACTIVITIES

The Company is exposed to interest rate riskin conjunction with the origination, funding, sale and investment inmortgage loan assets. The Company manages the risk of interest ratechanges primarily through the use of derivative instruments asfollows:

|              |                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------|
| •  | Fair value hedges, which areintended to manage the risks associated with potential changes in thefair value of loans held for sale;and |

|              |                                                                                                                            |
|--------------|----------------------------------------------------------------------------------------------------------------------------|
| •  | Cash flow hedges, which are intendedto manage the risks associated with potential changes in theCompany's financing costs. |

In connection with itsmortgage loan origination activities, MortgageIT issues IRLCs to loanapplicants and financial intermediaries. The IRLCs guarantee the loanterms, subject to credit 

19

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approval, for a specified period while theapplication is in process, typically between 15 and 60 days.MortgageIT's risk management objective is to protect earningsfrom an unexpected change in the fair value of IRLCs by economicallyhedging the estimated closed loan volume from the IRLC pipeline.MortgageIT's pipeline hedging strategy primarily utilizes TBASecurities to protect the value of its IRLCs. The TBA Securities,options on TBA Securities, forward sales commitments and IRLCs relatingto mortgage loans held for sale, are derivative instruments and havebeen classified as such by the Company. Accordingly, these derivativeshave been recorded at fair value with changes in fair value reflectedin gain on sale of loans.

At September  30,2006 and December  31,  2005, the notional amount of theCompany's IRLCs relating to mortgage loans held for sale, wasapproximately $1.65  billion and $1.59  billion,respectively. The fair value of the IRLCs at September30,  2006 and December  31,  2005 reflected a gain ofapproximately $8.4  million and $5.8  million,respectively.

At September  30,  2006 andDecember  31,  2005, the notional amount of TBA Securitiesand options on TBA Securities outstanding was approximately$1.30  billion and $1.03  billion, respectively, with afair value loss of approximately $1.6  million and approximately$2.9  million, respectively.

At September30,  2006 and December  31,  2005, the notionalamount of the Company's forward sales commitments with thirdparty investors was approximately $2.4  billion and $1.8billion, respectively, with a fair value loss of approximately$3.1  million and approximately $4.6  million,respectively.

Fair Value Hedges

The Company isexposed to interest rate risk in conjunction with the sale of mortgageloans. The Company manages the risk of interest rate changes associatedwith its loans held for sale through use of TBA Securities, options onTBA Securities, forward sale commitments and Eurodollar futurescontracts. These derivative instruments are designed to hedge potentialchanges in the fair value of loans held for sale.

The fairvalue adjustments for IRLCs, TBA Securities, options, forward salescommitments and Eurodollar futures contracts are included in gain onsale of mortgage loans.

Cash Flow Hedges

TheCompany primarily utilizes Eurodollar futures contracts, interest ratecap agreements (‘‘Cap Agreements’’) andinterest rate swap agreements (‘‘SwapAgreements’’) in order to manage potential changes infuture LIBOR-based financing costs. The Company generally borrows fundsbased on short-term LIBOR-based interest rates to finance its PortfolioARM Loans. However, its Portfolio ARM Loans have an initial fixedinterest rate period up to five years. As a result, the Company'sexisting and forecasted borrowings reprice to a new rate morefrequently than its Portfolio ARM Loans. Therefore, the purpose ofthese hedges is to better match the average repricing of the variablerate debt with the average repricing of the Portfolio ARMLoans.

All changes in the fair value of derivativesdesignated as cash flow hedges, (Cap Agreements, Swap Agreements andthe effective portion of the Eurodollar futures contracts), arerecorded in OCI on the consolidated balance sheets and will berecognized as net interest income when the forecasted financingtransactions occur. If it becomes probable that the forecastedtransaction, which is the future interest payments on theCompany's collateralized debt obligations, will not occur asspecified at the inception of the hedging relationship, then therelated gain or loss in OCI would be reclassified out of OCI andrecognized in interest expense. The carrying value of these derivativeinstruments is included in hedging instruments on the accompanyingconsolidated balance sheets.

The Company purchases CapAgreements by incurring a one-time fee or premium. Pursuant to theterms of the Cap Agreements, the Company will receive cash payments ifthe interest rate index specified in the Cap Agreements increases abovecontractually specified levels. Therefore, such Cap Agreements have theeffect of capping the interest rate on a portion of the Company'sborrowings at a level specified by the Cap Agreement. The notionalbalances of the caps generally decline over the life of theseinstruments approximating the declining balance of the Company'scollateralized debt obligations.

20

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Under the Company's existingCap Agreements, the Company will receive cash payments should one-monthLIBOR increase above the contract rates of the caps, which range from3.00% to 6.02%. The Cap Agreements had an averagematurity of 4.87 years as of September  30,  2006 and willexpire between August  2007 and June2014.

The Company enters into Swap Agreements to fix theinterest rate on a portion of the Company's borrowings asspecified in the Swap Agreement. When the Company enters into a SwapAgreement, it agrees to pay a fixed interest rate as specified in theagreement, typically based on LIBOR. Swap Agreements have the effect ofconverting the Company's variable-rate debt into fixed-rate debtover the life of the Swap Agreements.

Both Cap and SwapAgreements represent a means to lengthen the average repricing periodof the Company's variable-rate collateralized debt obligationssuch that the average repricing duration of the borrowings more closelymatches the average repricing duration of the Company's PortfolioARM Loans.

The Company uses Eurodollar futures contractsto hedge both forecasted and recognized LIBOR-based borrowings. WhenLIBOR-based interest rates change, the change in the value ofEurodollar futures contracts can be expected to approximately offsetthe change in LIBOR-based funding costs.

The followingtable presents notional amount, carrying amount and realized andunrealized gains and (losses) recorded in OCI for the Company'scash flow hedges at September  30,  2006 andDecember  31,  2005. The carrying amount of the cash flowderivative instruments is included in hedging instruments in theaccompanying balancesheets.

|                             |  |  |                              |   |           |                |  |  |                |   |        |         |  |  |  |   |       |         |
|-----------------------------|--|--|------------------------------|---|-----------|----------------|--|--|----------------|---|--------|---------|--|--|--|---|-------|---------|
|                        |  |  | September30, 2006(unaudited) |
|                        |  |  | NotionalAmount               |   |           | CarryingAmount |  |  | Net Gain(Loss) |
|                        |  |  | (Dollars inthousands)        |
| Eurodollar futurescontracts |  |  |                              | $ | 1,200,000 |           |  |  |                | $ | (602   | )  |  |  |  | $ | 522   |    |
| Capagreements               |  |  |                              |   | 4,203,632 |           |  |  |                |   | 29,366 |    |  |  |  |   | (402  | )  |
| Swapagreements              |  |  |                              |   | 503,747   |           |  |  |                |   | 8,836  |    |  |  |  |   | 8,701 |    |
| Totalcash flowhedges        |  |  |                              | $ | 5,907,379 |           |  |  |                | $ | 37,600 |    |  |  |  | $ | 8,821 |    |
|                             |

|                             |  |  |                       |   |           |                |  |  |                |   |        |        |  |  |  |   |        |         |
|-----------------------------|--|--|-----------------------|---|-----------|----------------|--|--|----------------|---|--------|--------|--|--|--|---|--------|---------|
|                        |  |  | December31, 2005      |
|                        |  |  | NotionalAmount        |   |           | CarryingAmount |  |  | Net Gain(Loss) |
|                        |  |  | (Dollars inthousands) |
| Eurodollar futurescontracts |  |  |                       | $ | 4,141,000 |           |  |  |                | $ | 469    |   |  |  |  | $ | (3,627 | )  |
| Capagreements               |  |  |                       |   | 3,971,027 |           |  |  |                |   | 31,524 |   |  |  |  |   | 6,801  |    |
| Swapagreements              |  |  |                       |   | 596,463   |           |  |  |                |   | 11,264 |   |  |  |  |   | 10,999 |    |
| Totalcash flowhedges        |  |  |                       | $ | 8,708,490 |           |  |  |                | $ | 43,257 |   |  |  |  | $ | 14,173 |    |
|                             |

Asof September  30,  2006, the net gain in OCI wasapproximately $8.8  million. The Company estimates that, over thenext twelve months, approximately $2.2  million of this net gainwill be reclassified from OCI to net interest income.

NOTE 5— REMIC SECURITIZATION

In November  2005,MortgageIT completed its first REMIC securitization, whereby a pool ofARM loans totaling approximately $388  million was securitizedand sold to the public. The Company retained the mortgage servicingrights and retained approximately $24.3  million inmortgage-backed securities created in the transaction.

Theavailable for sale mortgage-backed securities consist of theCompany’s investment in the interest-only, prepayment penaltyand other subordinated securities that the trust issued. The unrealizedlosses and estimated fair value of the available for salemortgage-backed securities as of 

21

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September  30,  2006 andDecember  31,  2005, are approximately $632,000 and$21.0  million, and $948,000 and $23.4  million,respectively.

MortgageIT records mortgage servicing rightsarising from the sale of loans in the REMIC securitization. Thecarrying value of mortgage servicing rights and the estimated fairvalue of the servicing rights as of September  30,  2006and December  31,  2005, are approximately $2.5million and $2.9  million, and $2.5  million and$2.6  million, respectively.

In February2006, MortgageIT completed its second REMIC transaction, which wasstructured to qualify as a financing and, as such, is included incollateralized debt obligations, discussed below.

NOTE 6— BORROWINGS

Collateralized DebtObligations

In the February  2006 REMICsecuritization, the Company issued, through a trust, AAA and AA-ratedfloating-rate pass-through certificates totaling $723.0  millionand A-rated subordinated floating-rate securities totaling $10.1million to third party investors, and retained $33.3  million ofsubordinated certificates, which provide credit support to thehigher-rated certificates.

In addition, throughDecember  31,  2005, the Company had issued AAA/AA-ratedfloating-rate pass-through certificates totaling $5.25  billionand A+/BBB+ subordinated floating-rate securities totaling $55.1million to third party investors and retained $112.2  million ofsubordinated certificates, which provide credit support to thehigher-rated certificates that were placed with third party investors.The interest rates on the floating-rate pass-through certificates resetmonthly and are indexed to one-month LIBOR.

In connectionwith the issuance of these mortgage-backed securities, which are alsoreferred to as collateralized debt obligations, the Company incurredcosts of $17.7  million through September  30, 2006. Thesecosts are being amortized over the expected life of the securitiesusing the level yield method. These transactions were accounted for asfinancings of loans and represent permanent financing that is notsubject to margin calls. The Company's collateralized debtobligations are issued by trusts and are secured by ARM loans depositedinto the trust. For financial reporting and tax purposes, thetrusts' ARM loans held as collateral are recorded as assets ofthe Company and the issued mortgage-backed securities are recorded ascollateralized debt obligations.

The mortgage-backedsecurities were collateralized by ARM loans with a principal balance of$4.6  billion, as of both September  30,  2006 andDecember  31,  2005. The debt matures between 2033 and 2036and is callable by the Company at par anytime after the total balanceof the loans collateralizing the debt is amortized down to 20%,or 10% for the February  2006 REMIC securitization, of theoriginal unpaid balance. The balance of this debt is reduced as theunderlying loan collateral is paid down by borrowers and is expected tohave an average life of approximately 2.5 years.

RepurchaseAgreements

The Company had $94.7  million and$87.1  million outstanding under repurchase agreements with aweighted average borrowing rate of approximately 5.5% and3.5% and a weighted average remaining maturity of 25 days and 26days as of September  30,  2006 and December31,  2005, respectively.

Junior SubordinatedDebentures

During March  2006, MortgageIT issuedapproximately $51.5  million of junior subordinated debentures(the ‘‘2006 Debentures’’). The 2006Debentures were issued to a trust subsidiary of MortgageIT in order tofund such trust's obligations with respect to an aggregate of$50  million of trust preferred securities which were issued bysuch trust subsidiary. The 2006 Debentures are floating-rate and bear avariable interest rate of 360 basis points above 3-month LIBOR, paidquarterly, and mature in 2036. They are redeemable, by MortgageIT, atpar, after five years and at a premium to par in certain 

22

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limited circumstances over the first fiveyears. In connection with the issuance of the 2006 Debentures, theCompany incurred costs of $1.5  million. These costs are beingamortized over the expected life of the 2006 Debentures using theinterest method.

During April and May  2005,MortgageIT issued an aggregate of approximately $77.3  million ofjunior subordinated debentures (the ‘‘2005Debentures’’). The 2005 Debentures were issued to trustsubsidiaries of MortgageIT in order to fund such trust'sobligations with respect to an aggregate of $75  million of trustpreferred securities which were issued by such trust subsidiary. The2005 Debentures are floating-rate and bear a variable interest rate of375 basis points above 3-month LIBOR, paid quarterly, and mature in2035. They are redeemable, by MortgageIT, at par, after five years andat a premium to par in certain limited circumstances over the firstfive years. In connection with the issuance of the 2005 Debentures, theCompany incurred costs of $2.5  million. These costs are beingamortized over the expected life of the 2005 Debentures using theinterest method.

As of September  30,  2006,the Company did not include in its consolidated financial statementsthe assets, liabilities and operations of the trust subsidiariespursuant to FASB Interpretation No. 46 (revised December  2003),‘‘Consolidation of Variable InterestEntities’’ (‘‘FIN 46R’’). Asof September  30,  2006 and December  31,2005, the Company recorded its investment in the trust subsidiaries, ofapproximately $3.8 and $2.3  million, respectively, in prepaidsand other assets in the accompanying consolidated balancesheets.

Warehouse Lines Payable

As ofSeptember  30,  2006, the Company had eight warehousecredit facilities with major lenders that it used to fund mortgageloans. During October  2006, the Company’s warehousecredit facilities with JPMorgan Chase Bank, National Association,Greenwich Capital Financial Products Inc. and Residential FundingCorporation expired according to their terms.

InMay  2006, the Company entered into a warehouse credit facilitywith Bank of America, N.A., for a noncommitted credit limit of$1.0  billion. Under the line, outstanding advances are securedby the specific mortgage loans funded, and bear interest at LIBOR plusa spread based on the types of loans being funded. As ofSeptember  30,  2006, there were no outstanding borrowingson the line. This credit facility expires in May2007.

In July  2006, the Company entered into awarehouse credit facility with DB Structured Products, Inc., anindirect subsidiary of Deutsche Bank AG, (‘‘DB StructuredProducts’’) for a committed credit limit of $5.0billion. Under the line, outstanding advances are secured by thespecific mortgage loans funded, and bear interest at LIBOR plus aspread based on the types of loans being funded. As of September30,  2006, the Company had approximately $3.0  billionoutstanding on this facility. This credit facility expires inJuly  2007. On July  11,  2006, the Company enteredinto a definitive agreement to be acquired by DB Structured Products,which is described more fully in Note 13.

The Companymaintains a warehouse credit facility with Credit Suisse First BostonMortgage Capital LLC for an uncommitted credit limit of $750million. Under the line, outstanding advances are secured by thespecific mortgage loans funded, and bear interest at LIBOR plus aspread based on the types of loans being funded. As of September30,  2006 and December  31,  2005, the Company hadoutstanding approximately $147.9  million and $384.1million, respectively, on this facility. This credit facility expiresin December  2006.

The Company maintains a warehousecredit facility with Merrill Lynch Bank USA, which has a partiallycommitted credit limit of $1.25  billion. Under the line,outstanding advances are secured by the specific mortgage loans funded,and bear interest at LIBOR plus a spread based on the types of loansbeing funded. As of September  30,  2006 andDecember  31,  2005, the Company had outstandingapproximately $107.0  million and $1.1  billion,respectively, on this facility. This credit facility expires inDecember  2006.

The Company maintains a creditfacility (the ‘‘UBS Warehouse Facility’’)with UBS Real Estate Securities, Inc.(‘‘UBS’’), for an uncommitted credit limitof $2.0  billion, which includes a mortgage loan sale conduitfacility. The Company has no outstanding borrowing on this line anddoes not expect 

23

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to have any additional borrowings on thisline, and expects to terminate it in November 2006. The facilityprovides for temporary increases in the line amount on an as-requestedbasis. Under the UBS Warehouse Facility, outstanding advances aresecured by the specific mortgage loans funded and bear interest atLIBOR plus a spread based on the types of loans being funded. Interestis payable at the time the outstanding principal amount of the advanceis due, generally within 30 to 60 days. As of September30,  2006, there were no outstanding borrowings on the line. Asof December  31,  2005, the Company had outstandingapproximately $589.0  million on this facility. Under the conduitfacility, the Company sells mortgage loans to UBS at a price equal tothe committed purchase price from a third party investor, and recordsthe transaction as a sale in accordance with SFAS No. 140. UBS, inturn, sells the loan to a third party investor. The Company facilitatesthe sale to the third party investor on behalf of UBS and receives aperformance fee that varies depending on the time required by UBS tocomplete the transfer of the loans to the third party investor. Theperformance fee of $43,000, $2.3  million, $1.6  millionand $3.7  million for the three and nine months endedSeptember  30,  2006 and 2005, respectively, is included inbrokerage revenue on the statement of operations. As ofSeptember  30, 2006, there were no loans on the conduit line.Loans on the conduit line, which totaled approximately $1.1billion at December  31,  2005, reduced availability underthe facility until they were transferred to the third party investor byUBS. The mortgage loans sold to UBS are subject to repurchase undercertain limited conditions, primarily if UBS determines that a mortgageloan was not properly underwritten.

The Companymaintained a warehouse credit facility with JPMorgan Chase Bank,National Association, which expired in October  2006, for anoncommitted credit limit of $500  million. Under the line,outstanding advances were secured by the specific mortgage loansfunded, and bore interest at LIBOR plus a spread based on the types ofloans being funded. As of September  30,  2006, there wereno outstanding borrowings on the line. As of December  31,2005, the Company had outstanding approximately $153.4  millionon this facility.

The Company maintained a warehousecredit facility with Greenwich Capital Financial Products Inc., whichexpired in October  2006, for an uncommitted credit limit of$750  million. Under the line, outstanding advances were securedby the specific mortgage loans funded, and bore interest at LIBOR plusa spread based on the types of loans being funded. As ofSeptember  30,  2006, there were no outstanding borrowingson the line. As of December  31,  2005, the Company hadoutstanding approximately $485.6  million on this facility.

The Company maintained a credit facility with ResidentialFunding Corporation, which expired in October  2006, for acommitted credit limit of $54  million, collateralized by thespecific mortgage loans funded, and bore interest at LIBOR plus aspread based on the types of loans being funded. As of September30,  2006 and December  31,  2005, the Company hadoutstanding approximately $21.3  million and $510.1million, respectively, on this facility.

The weightedaverage effective rate of interest for borrowings under all warehouselines of credit was approximately 5.9% and 4.3% for thenine months ended September  30,  2006 and the year endedDecember  31,  2005,respectively.

Substantially all mortgage loans held forsale have been pledged as collateral under the warehouse creditfacilities described above. In addition, the facilities contain variousfinancial covenants and restrictions, including a requirement that theCompany maintain specified leverage ratios and net worth amounts. TheCompany was not in compliance with a covenant contained in one of itswarehouse credit facilities as of July  31,  2006 andAugust  31,  2006, for which waivers have been obtained. Noassurance can be made that the Company's lenders will waivefuture covenant violations, if violations occur.

24

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Maturities of borrowings are asfollows at September  30,  2006 (Dollars inthousands):

|                                   |  |  |                      |   |           |                 |  |  |           |   |           |           |  |  |                  |   |           |        |  |  |  |   |           |        |  |  |  |   |         |        |
|-----------------------------------|--|--|----------------------|---|-----------|-----------------|--|--|-----------|---|-----------|-----------|--|--|------------------|---|-----------|--------|--|--|--|---|-----------|--------|--|--|--|---|---------|--------|
|                              |  |  | Paymentsdue byPeriod |
|                              |  |  | (unaudited)          |
|                              |  |  | Total                |   |           | Lessthan 1 year |  |  | 1-3 years |   |           | 3-5 years |  |  | Morethan 5 years |
| Collateralized debtobligations(1) |  |  |                      | $ | 4,442,590 |            |  |  |           | $ | 953,440   |      |  |  |                  | $ | 1,854,135 |   |  |  |  | $ | 1,555,977 |   |  |  |  | $ | 79,038  |   |
| Warehouselinespayable             |  |  |                      |   | 3,318,868 |            |  |  |           |   | 3,318,868 |      |  |  |                  |   | —   |   |  |  |  |   | —   |   |  |  |  |   | — |   |
| Repurchaseagreements              |  |  |                      |   | 94,692    |            |  |  |           |   | 94,692    |      |  |  |                  |   | —   |   |  |  |  |   | —   |   |  |  |  |   | — |   |
| Juniorsubordinateddebentures      |  |  |                      |   | 128,871   |            |  |  |           |   | —   |      |  |  |                  |   | —   |   |  |  |  |   | —   |   |  |  |  |   | 128,871 |   |
|                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Paymentson the Company's collateralized debt obligations are dependentupon cash flows received from underlying loans receivable. TheCompany's estimate of its repayment is based on scheduledprincipal payments on the underlying loans receivable, adjusted forestimated pre-payments. This estimate will differ from actualpre-payment amounts. |

NOTE 7 — NOTESPAYABLE

MortgageIT issued senior secured notes maturingin 2007, with an aggregate principal amount of $15  million, inMarch  2004. The notes are secured by a first priority securityinterest in all of MortgageIT's assets, with the exception of itsmortgage loans held for sale and ARM loans held for securitization. Thenote purchase agreement governing the notes contains variousrestrictions and covenants. As of September  30,  2006,MortgageIT was in compliance with all of the restrictions and covenantscontained in the related note purchase agreement. If covenantviolations occur in the future, there can be no assurance that theinvestor will waive them.

In November  2004,MortgageIT entered into an amendment of the note purchase agreement,which reduced the interest rate on the outstanding principal balancethereunder from 10% per annum to 7.5% per annum for theperiod beginning October  1,  2004 and ending March31,  2005. In addition, the amendment prohibited MortgageIT fromprepaying the notes prior to April  14,  2005. InAugust  2005, MortgageIT entered into an amendment andrestatement of the note purchase agreement, which reduced the interestrate on the outstanding principal balance thereunder from 10%per annum to 5.5% for the period as of August  23,2005 and ending at maturity. In addition, this amendment requiredMortgageIT to pay a premium on any optional prepayment of the notes onor prior to July  31,  2006.

InFebruary  2006, MortgageIT sold an additional aggregate principalamount of $15  million of senior secured notes to the investor,and amended the interest rate to 6.5% for all notes outstandingas of February  21,  2006 and ending at maturity. InAugust  2006, MortgageIT repaid an aggregate principal amount of$15  million of senior secured notes to the investor. InSeptember  2006, the investor notified MortgageIT that it intendsto exercise its purchaser put right for all amounts owed under the notepurchase agreement on December  19,  2006.

NOTE 8— STOCKHOLDERS EQUITY

Stock RepurchasePlan

In October  2005, the Company announced thatits board of directors authorized a program to repurchase up to$30  million of the Company's outstanding common stock. Therepurchase program allows for shares to be purchased from time to timeat management's discretion based upon ongoing assessments of thecapital needs of the Company and the market valuation of its stock.Through December  31,  2005, the Company repurchased 90,400shares of common stock at an average price of $13.03 per share. Therewere no repurchases during the nine months ended September30,  2006.

2004 and Amended Long-Term IncentivePlans

In August  2004, the Company adopted theMortgageIT Holdings, Inc. 2004 Long-Term Incentive Plan (the‘‘2004 Plan’’). A total of 1,725,000 sharesof common stock have been reserved for issuance under the 2004 Plan,which terminates in 2014.

25

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In April  2005, the board ofdirectors adopted the MortgageIT Holdings, Inc. Amended Long-TermIncentive Plan (the ‘‘Amended Plan’’),which was subsequently approved by the Company's stockholders.Under the Amended Plan, an additional 1,000,000 shares of theCompany's common stock were reserved for issuance; this additionof shares is the only material difference between the 2004 Plan and theAmended Plan. The Amended Plan will terminate in2015.

Both the 2004 Plan and the Amended Plan provide forthe grant of incentive stock options, non-qualified stock options,stock appreciation rights and restricted stock. During the nine monthsended September  30,  2006, options to purchase 47,648shares of common stock, at an average exercise price of $12.05 pershare, and 34,321 shares of restricted stock were forfeited, and theCompany granted 317,345 shares of restricted stock. The stock optionsand restricted stock will vest over a three-year period. There havebeen no stock option grants made under the AmendedPlan.

During the nine months ended September30,  2006, 181,938 shares of restricted stockvested.

There were approximately 859,000 shares availablefor future grant at September  30,  2006, under both the2004 Plan and the Amended Plan.

NOTE 9 — EARNINGS PERSHARE

Basic and diluted income per share are calculatedin accordance with SFAS No. 128, ‘‘Earnings PerShare.’’ The basic and diluted income per common sharefor all periods presented were computed based on the weighted-averagenumber of common shares outstanding, as follows (Dollars and shares inthousands, except per share data)(Unaudited):

|                                                                        |  |  |                                |   |        |                               |  |  |      |   |        |        |  |  |  |   |        |        |  |  |  |   |        |        |
|------------------------------------------------------------------------|--|--|--------------------------------|---|--------|-------------------------------|--|--|------|---|--------|--------|--|--|--|---|--------|--------|--|--|--|---|--------|--------|
|                                                                   |  |  | Threemonths endedSeptember 30, |   |        | Nine months endedSeptember30, |
|                                                                   |  |  | 2006                           |   |        | 2005                          |  |  | 2006 |   |        | 2005   |
| Netincome                                                              |  |  |                                | $ | 1,441  |                          |  |  |      | $ | 8,665  |   |  |  |  | $ | 2,557  |   |  |  |  | $ | 32,813 |   |
| Basicearnings pershare:                                                |  |  |                                |   |   |                          |  |  |      |   |   |   |  |  |  |   |   |   |  |  |  |   |   |   |
| Weightedaverage common stock outstanding for basic earnings pershare   |  |  |                                |   | 28,491 |                          |  |  |      |   | 28,077 |   |  |  |  |   | 28,409 |   |  |  |  |   | 22,381 |   |
| Basicearnings pershare                                                 |  |  |                                | $ | 0.05   |                          |  |  |      | $ | 0.31   |   |  |  |  | $ | 0.09   |   |  |  |  | $ | 1.47   |   |
| Dilutedearnings pershare:                                              |  |  |                                |   |   |                          |  |  |      |   |   |   |  |  |  |   |   |   |  |  |  |   |   |   |
| Netincome for diluted earnings pershare                                |  |  |                                | $ | 1,441  |                          |  |  |      | $ | 8,665  |   |  |  |  | $ | 2,557  |   |  |  |  | $ | 32,813 |   |
| Commonstock outstanding for basic earnings per sharecomputation        |  |  |                                |   | 28,491 |                          |  |  |      |   | 28,077 |   |  |  |  |   | 28,409 |   |  |  |  |   | 22,381 |   |
| Assumedconversion ofdilutive:                                          |  |  |                                |   |   |                          |  |  |      |   |   |   |  |  |  |   |   |   |  |  |  |   |   |   |
| Stockoptions and unvested restrictedstock                              |  |  |                                |   | 314    |                          |  |  |      |   | 350    |   |  |  |  |   | 217    |   |  |  |  |   | 407    |   |
| Weightedaverage common stock outstanding for diluted earnings pershare |  |  |                                |   | 28,805 |                          |  |  |      |   | 28,427 |   |  |  |  |   | 28,626 |   |  |  |  |   | 22,788 |   |
| Dilutedearnings pershare                                               |  |  |                                | $ | 0.05   |                          |  |  |      | $ | 0.30   |   |  |  |  | $ | 0.09   |   |  |  |  | $ | 1.44   |   |
|                                                                        |

NOTE10 — STATEMENT OF CASH FLOWS

Supplementaldisclosure of cash flow information (Dollars inthousands)

|                              |  |  |                                          |   |         |        |  |  |  |   |         |        |
|------------------------------|--|--|------------------------------------------|---|---------|--------|--|--|--|---|---------|--------|
|                         |  |  | (Unaudited)Nine months endedSeptember30, |
|                         |  |  | 2006                                     |   |         | 2005   |
| Cashpaid during the yearfor: |  |  |                                          |   |    |   |  |  |  |   |    |   |
| Interest                     |  |  |                                          | $ | 348,595 |   |  |  |  | $ | 148,441 |   |
| Incometaxes                  |  |  |                                          |   | 5,525   |   |  |  |  |   | 14,561  |   |
|                              |

26

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NOTE 11 — SEGMENTREPORTING

The Company operates its business in twoprimary segments, mortgage investment operations conducted in the REITand mortgage banking operations conducted in the TRS. Mortgageinvestment operations are driven by the balance of Portfolio ARM Loansand the net interest income generated on those balances. Mortgagebanking operations includes loan origination, underwriting, funding,secondary marketing and loan brokerage, title and insurance activities.Following is a summary of the Company's segment operating resultsfor the three and nine months ended September  30,  2006and 2005 (Dollars in thousands).

Three months endedSeptember  30,  2006(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |         |  |  |  |   |          |         |  |  |  |   |           |         |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|---------|--|--|--|---|----------|---------|--|--|--|---|-----------|---------|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total   |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                      |  |  |              | $ | 71,083    |    |  |  |  | $ | 36       |    |  |  |  | $ | 71,119    |    |
| Brokeragerevenues                                 |  |  |                              |   | —   |                      |  |  |              |   | 4,301     |    |  |  |  |   | —  |    |  |  |  |   | 4,301     |    |
| Interestincome                                    |  |  |                              |   | 67,507    |                      |  |  |              |   | 59,250    |    |  |  |  |   | (12,416  | )  |  |  |  |   | 114,341   |    |
| Interestexpense                                   |  |  |                              |   | (60,378   | )                    |  |  |              |   | (68,715   | )  |  |  |  |   | 13,563   |    |  |  |  |   | (115,530  | )  |
| Netinterest income(expense)                       |  |  |                              |   | 7,129     |                      |  |  |              |   | (9,465    | )  |  |  |  |   | 1,147    |    |  |  |  |   | (1,189    | )  |
| Realizedand unrealized loss on hedginginstruments |  |  |                              |   | (1,727    | )                    |  |  |              |   | —   |    |  |  |  |   | —  |    |  |  |  |   | (1,727    | )  |
| Other                                             |  |  |                              |   | 20        |                      |  |  |              |   | 777       |    |  |  |  |   | —  |    |  |  |  |   | 797       |    |
| Totalrevenues                                     |  |  |                              |   | 5,422     |                      |  |  |              |   | 66,696    |    |  |  |  |   | 1,183    |    |  |  |  |   | 73,301    |    |
| Operatingexpenses                                 |  |  |                              |   | 2,718     |                      |  |  |              |   | 69,853    |    |  |  |  |   | 20       |    |  |  |  |   | 72,591    |    |
| Income(loss) before incometax                     |  |  |                              |   | 2,704     |                      |  |  |              |   | (3,157    | )  |  |  |  |   | 1,163    |    |  |  |  |   | 710       |    |
| Incometax (benefit)expense                        |  |  |                              |   | —   |                      |  |  |              |   | (731      | )  |  |  |  |   | —  |    |  |  |  |   | (731      | )  |
| Netincome(loss)                                   |  |  |                              | $ | 2,704     |                      |  |  |              | $ | (2,426    | )  |  |  |  | $ | 1,163    |    |  |  |  |   | 1,441     |    |
| Segmentassets                                     |  |  |                              | $ | 4,870,649 |                      |  |  |              | $ | 4,419,832 |    |  |  |  | $ | (820,604 | )  |  |  |  | $ | 8,469,877 |    |
|                                                   |

Allocationofeliminations:

|                                      |  |  |                              |   |       |                            |  |  |       |   |        |         |  |  |  |   |       |        |
|--------------------------------------|--|--|------------------------------|---|-------|----------------------------|--|--|-------|---|--------|---------|--|--|--|---|-------|--------|
|                                 |  |  | MortgageInvestmentOperations |   |       | Mortgage BankingOperations |  |  | Total |
| Net income (loss) beforeeliminations |  |  |                              | $ | 2,704 |                       |  |  |       | $ | (2,426 | )  |  |  |  | $ | 278   |   |
| Eliminations                         |  |  |                              |   | 1,052 |                       |  |  |       |   | 111    |    |  |  |  |   | 1,163 |   |
| Netincome(loss)                      |  |  |                              | $ | 3,756 |                       |  |  |       | $ | (2,315 | )  |  |  |  | $ | 1,441 |   |
|                                      |

27

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Three months ended September30,  2005(unaudited)

|                              |  |  |                              |   |           |                           |  |  |              |   |           |         |  |  |  |   |          |         |  |  |  |   |           |         |
|------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|---------|--|--|--|---|----------|---------|--|--|--|---|-----------|---------|
|                         |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total   |
| Gainon sale of mortgageloans |  |  |                              | $ | —   |                      |  |  |              | $ | 69,211    |    |  |  |  | $ | (7,599   | )  |  |  |  | $ | 61,612    |    |
| Brokeragerevenues            |  |  |                              |   | —   |                      |  |  |              |   | 7,506     |    |  |  |  |   | —  |    |  |  |  |   | 7,506     |    |
| Interestincome               |  |  |                              |   | 50,640    |                      |  |  |              |   | 37,785    |    |  |  |  |   | 1,959    |    |  |  |  |   | 90,384    |    |
| Interestexpense              |  |  |                              |   | (42,443   | )                    |  |  |              |   | (33,522   | )  |  |  |  |   | 224      |    |  |  |  |   | (75,741   | )  |
| Netinterestincome            |  |  |                              |   | 8,197     |                      |  |  |              |   | 4,263     |    |  |  |  |   | 2,183    |    |  |  |  |   | 14,643    |    |
| Other                        |  |  |                              |   | —   |                      |  |  |              |   | 209       |    |  |  |  |   | —  |    |  |  |  |   | 209       |    |
| Totalrevenues                |  |  |                              |   | 8,197     |                      |  |  |              |   | 81,189    |    |  |  |  |   | (5,416   | )  |  |  |  |   | 83,970    |    |
| Operatingexpenses            |  |  |                              |   | 3,566     |                      |  |  |              |   | 65,270    |    |  |  |  |   | (372     | )  |  |  |  |   | 68,464    |    |
| Incomebefore incometax       |  |  |                              |   | 4,631     |                      |  |  |              |   | 15,919    |    |  |  |  |   | (5,044   | )  |  |  |  |   | 15,506    |    |
| Incometaxes                  |  |  |                              |   | —   |                      |  |  |              |   | 6,841     |    |  |  |  |   | —  |    |  |  |  |   | 6,841     |    |
| Netincome                    |  |  |                              | $ | 4,631     |                      |  |  |              | $ | 9,078     |    |  |  |  | $ | (5,044   | )  |  |  |  | $ | 8,665     |    |
| December31,2005              |  |  |                              |   |      |                      |  |  |              |   |      |    |  |  |  |   |     |    |  |  |  |   |      |    |
| Segmentassets                |  |  |                              | $ | 4,926,820 |                      |  |  |              | $ | 3,584,137 |    |  |  |  | $ | (129,066 | )  |  |  |  | $ | 8,381,891 |    |
|                              |

Allocationofeliminations:

|                               |  |  |                              |   |       |                            |  |  |       |   |        |         |  |  |  |   |        |         |
|-------------------------------|--|--|------------------------------|---|-------|----------------------------|--|--|-------|---|--------|---------|--|--|--|---|--------|---------|
|                          |  |  | MortgageInvestmentOperations |   |       | Mortgage BankingOperations |  |  | Total |
| Net income beforeeliminations |  |  |                              | $ | 4,631 |                       |  |  |       | $ | 9,078  |    |  |  |  | $ | 13,709 |    |
| Eliminations                  |  |  |                              |   | 2,183 |                       |  |  |       |   | (7,227 | )  |  |  |  |   | (5,044 | )  |
| Netincome                     |  |  |                              | $ | 6,814 |                       |  |  |       | $ | 1,851  |    |  |  |  | $ | 8,665  |    |
|                               |

Ninemonths ended September  30,  2006(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |         |  |  |  |   |          |         |  |  |  |   |           |         |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|---------|--|--|--|---|----------|---------|--|--|--|---|-----------|---------|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total   |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                      |  |  |              | $ | 185,618   |    |  |  |  | $ | 126      |    |  |  |  | $ | 185,744   |    |
| Brokeragerevenues                                 |  |  |                              |   | —   |                      |  |  |              |   | 16,549    |    |  |  |  |   | —  |    |  |  |  |   | 16,549    |    |
| Interestincome                                    |  |  |                              |   | 202,011   |                      |  |  |              |   | 172,198   |    |  |  |  |   | (29,325  | )  |  |  |  |   | 344,884   |    |
| Interestexpense                                   |  |  |                              |   | (178,425  | )                    |  |  |              |   | (192,532  | )  |  |  |  |   | 34,104   |    |  |  |  |   | (336,853  | )  |
| Netinterest income(expense)                       |  |  |                              |   | 23,586    |                      |  |  |              |   | (20,334   | )  |  |  |  |   | 4,779    |    |  |  |  |   | 8,031     |    |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 1,706     |                      |  |  |              |   | —   |    |  |  |  |   | —  |    |  |  |  |   | 1,706     |    |
| Other                                             |  |  |                              |   | (75       | )                    |  |  |              |   | 1,729     |    |  |  |  |   | —  |    |  |  |  |   | 1,654     |    |
| Totalrevenues                                     |  |  |                              |   | 25,217    |                      |  |  |              |   | 183,562   |    |  |  |  |   | 4,905    |    |  |  |  |   | 213,684   |    |
| Operatingexpenses                                 |  |  |                              |   | 5,516     |                      |  |  |              |   | 221,331   |    |  |  |  |   | 269      |    |  |  |  |   | 227,116   |    |
| Income(loss) before incometax                     |  |  |                              |   | 19,701    |                      |  |  |              |   | (37,769   | )  |  |  |  |   | 4,636    |    |  |  |  |   | (13,432   | )  |
| Incometax (benefit)expense                        |  |  |                              |   | —   |                      |  |  |              |   | (15,989   | )  |  |  |  |   | —  |    |  |  |  |   | (15,989   | )  |
| Netincome(loss)                                   |  |  |                              | $ | 19,701    |                      |  |  |              | $ | (21,780   | )  |  |  |  | $ | 4,636    |    |  |  |  | $ | 2,557     |    |
| Segmentassets                                     |  |  |                              | $ | 4,870,649 |                      |  |  |              | $ | 4,419,832 |    |  |  |  | $ | (820,604 | )  |  |  |  | $ | 8,469,877 |    |
|                                                   |

28

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Allocation ofeliminations:

|                                      |  |  |                              |   |        |                            |  |  |       |   |         |         |  |  |  |   |        |         |
|--------------------------------------|--|--|------------------------------|---|--------|----------------------------|--|--|-------|---|---------|---------|--|--|--|---|--------|---------|
|                                 |  |  | MortgageInvestmentOperations |   |        | Mortgage BankingOperations |  |  | Total |
| Net income (loss) beforeeliminations |  |  |                              | $ | 19,701 |                       |  |  |       | $ | (21,780 | )  |  |  |  | $ | (2,079 | )  |
| Eliminations                         |  |  |                              |   | 4,338  |                       |  |  |       |   | 298     |    |  |  |  |   | 4,636  |    |
| Netincome(loss)                      |  |  |                              | $ | 24,039 |                       |  |  |       | $ | (21,482 | )  |  |  |  | $ | 2,557  |    |
|                                      |

Ninemonths ended September  30,  2005(unaudited)

|                                                   |  |  |                              |   |           |                           |  |  |              |   |           |         |  |  |  |   |          |         |  |  |  |   |           |         |
|---------------------------------------------------|--|--|------------------------------|---|-----------|---------------------------|--|--|--------------|---|-----------|---------|--|--|--|---|----------|---------|--|--|--|---|-----------|---------|
|                                              |  |  | MortgageInvestmentOperations |   |           | MortgageBankingOperations |  |  | Eliminations |   |           | Total   |
| Gainon sale of mortgageloans                      |  |  |                              | $ | —   |                      |  |  |              | $ | 161,614   |    |  |  |  | $ | (20,910  | )  |  |  |  | $ | 140,704   |    |
| Brokeragerevenues                                 |  |  |                              |   | —   |                      |  |  |              |   | 20,179    |    |  |  |  |   | —  |    |  |  |  |   | 20,179    |    |
| Interestincome                                    |  |  |                              |   | 124,341   |                      |  |  |              |   | 83,458    |    |  |  |  |   | 4,237    |    |  |  |  |   | 212,036   |    |
| Interestexpense                                   |  |  |                              |   | (96,687   | )                    |  |  |              |   | (59,925   | )  |  |  |  |   | 130      |    |  |  |  |   | (156,482  | )  |
| Netinterestincome                                 |  |  |                              |   | 27,654    |                      |  |  |              |   | 23,533    |    |  |  |  |   | 4,367    |    |  |  |  |   | 55,554    |    |
| Realizedand unrealized gain on hedginginstruments |  |  |                              |   | 8,128     |                      |  |  |              |   | —   |    |  |  |  |   | 1,614    |    |  |  |  |   | 9,742     |    |
| Other                                             |  |  |                              |   | —   |                      |  |  |              |   | 715       |    |  |  |  |   | —  |    |  |  |  |   | 715       |    |
| Totalrevenues                                     |  |  |                              |   | 35,782    |                      |  |  |              |   | 206,041   |    |  |  |  |   | (14,929  | )  |  |  |  |   | 226,894   |    |
| Operatingexpenses                                 |  |  |                              |   | 10,308    |                      |  |  |              |   | 169,741   |    |  |  |  |   | (1,575   | )  |  |  |  |   | 178,474   |    |
| Incomebefore incometax                            |  |  |                              |   | 25,474    |                      |  |  |              |   | 36,300    |    |  |  |  |   | (13,354  | )  |  |  |  |   | 48,420    |    |
| Incometaxes                                       |  |  |                              |   | 2         |                      |  |  |              |   | 15,605    |    |  |  |  |   | —  |    |  |  |  |   | 15,607    |    |
| Netincome                                         |  |  |                              | $ | 25,472    |                      |  |  |              | $ | 20,695    |    |  |  |  | $ | (13,354  | )  |  |  |  | $ | 32,813    |    |
| December31,2005                                   |  |  |                              |   |      |                      |  |  |              |   |      |    |  |  |  |   |     |    |  |  |  |   |      |    |
| Segmentassets                                     |  |  |                              | $ | 4,926,820 |                      |  |  |              | $ | 3,584,137 |    |  |  |  | $ | (129,066 | )  |  |  |  | $ | 8,381,891 |    |
|                                                   |

Allocationofeliminations:

|                               |  |  |                              |   |        |                            |  |  |       |   |         |         |  |  |  |   |         |         |
|-------------------------------|--|--|------------------------------|---|--------|----------------------------|--|--|-------|---|---------|---------|--|--|--|---|---------|---------|
|                          |  |  | MortgageInvestmentOperations |   |        | Mortgage BankingOperations |  |  | Total |
| Net income beforeeliminations |  |  |                              | $ | 25,472 |                       |  |  |       | $ | 20,695  |    |  |  |  | $ | 46,167  |    |
| Eliminations                  |  |  |                              |   | 5,981  |                       |  |  |       |   | (19,335 | )  |  |  |  |   | (13,354 | )  |
| Netincome                     |  |  |                              | $ | 31,453 |                       |  |  |       | $ | 1,360   |    |  |  |  | $ | 32,813  |    |
|                               |

NOTE12 — COMMITMENTS AND CONTINGENCIES

On July13,  2006, as amended on September  15,  2006,Mr.  Jerry  Pressner, a purported stockholder of theCompany, filed a complaint styled Pressner v. MortgageIT Holdings,Inc., et al., (Index No. 602472/06) in the Supreme Court of the Stateof New York in New York County against the Company and seven of itseight directors. The complaint alleged, among other things, that theCompany’s directors breached their fiduciary duties by failingto maximize stockholder value with regard to the proposed acquisitionby DB Structured Products. Among other things, the complaint soughtclass action status, a court order enjoining the Company and itsdirectors from proceeding with or consummating the merger, and thepayment of attorneys' fees and expenses.

OnSeptember  25,  2006, the Company entered into a Memorandumof Understanding with the plaintiff in the above referenced action thatled to the execution of a Stipulation and Agreement of Compromise,Settlement and Release on October  6,  2006 (the‘‘Stipulation’’). Pursuant to theStipulation, the Company agreed to include certain additionaldisclosures in its proxy statement relating to the specialstockholders’ meeting to vote on the proposed acquisition by DBStructured 

29

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Products from that which were included inits preliminary proxy statement that was filed on August11,  2006. On October  18,  2006, the Court enteredan Order Regarding Preliminary Approval of Class Action and Notice toClass, which, among other things, approved the Notice of Pendency ofClass Action and Hearing Thereon, and contained additional informationregarding the litigation, the settlement of the litigation according tothe terms of the Stipulation (the‘‘Settlement’’), and procedures forobjecting to the Settlement, among other things.

Theparties have agreed to seek final Court approval of the Settlement,which will provide for certification of a non-opt-out class of theCompany’s stockholders, for entry of a judgment dismissing thepurported class action with prejudice and a complete release andsettlement of all claims that were made or could have been made in thelitigation. The parties entered into the Stipulation to eliminate theburden, risk and expense of further litigation. The Stipulation is notan admission by the Company or its directors of any breach of duty,liability or wrongdoing. Subject to the occurrence of certain events,including the consummation of the merger and final Court approval ofthe Settlement, the entity surviving the merger has agreed to payplaintiff's counsel attorney's fees in an amount not toexceed $250,000 and documented expenses in an amount not to exceed$25,000.

On February  16,  2006, EMC MortgageCorp. (‘‘EMC’’) filed suit againstMortgageIT in the 95th Judicial District Court of Dallas County, Texas.This suit alleges, among other things, that MortgageIT is obligated torepurchase from EMC approximately $70.5  million in sub-primemortgage loans sold to EMC pursuant to a Mortgage Loan Purchase andInterim Servicing Agreement dated January  1,  2003, asamended, due to alleged breaches of representations and warranties aswell as alleged early payment default repurchase obligations withrespect to such loans. The case was subsequently removed to the U.S.District Court for the Northern District of Texas, Dallas Division.MortgageIT moved to dismiss EMC’s third amended complaint, whichmotion was denied, except with respect to EMC’s claim forattorneys’ fees. MortgageIT is in the process of evaluating theclaims and its counterclaims and preparing an answer. MortgageITintends to vigorously defend the suit. At this stage of theproceedings, it is not possible to predict the outcome of thislitigation.

In addition to these cases, in the ordinarycourse of business, the Company is a defendant in or party to a numberof pending and threatened legal actions and proceedings, and is alsoinvolved from time to time in investigations and administrativeproceedings by governmental agencies. Certain of such actions andproceedings involve alleged violations of consumer protection laws,including claims relating to the Company’s loan origination andcollection efforts, and other federal and state banking laws. Certainof such actions and proceedings include claims for breach of contract,restitution, compensatory damages, punitive damages and other forms ofrelief. Due to the difficulty of predicting the outcome of suchmatters, the Company can give no assurance that it will prevail on allclaims made against it; however, management believes, based on currentknowledge and after consultation with counsel, that these legal mattersand administrative proceedings and the losses, if any, resulting fromthe final outcome thereof, will not have a material adverse effect onthe Company’s financial position, results of operations orliquidity, but can give no assurance that they will not have such aneffect.

Although it is difficult to predict the outcome ofany litigation, the Company has established litigation reserves wherenecessary in accordance with generally accepted accountingprinciples.

NOTE 13 — PENDING ACQUISITION BY DEUTSCHEBANK

On July  11,  2006, the Company enteredinto a definitive agreement to be acquired by DB Structured Products,for $14.75 in cash per share of Company common stock, or approximately$429  million in the aggregate. The transaction is expected toclose during the first quarter of 2007, pending regulatory approvals,approval by the Company’s stockholders and the satisfaction ofother customary closing conditions.

On or aboutOctober  20,  2006, the Company’s definitive mergerproxy statement was mailed to stockholders of record as ofOctober  13,  2006 in connection with the Company’sspecial meeting of stockholders scheduled for November30,  2006.

30

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| ITEM2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

Unless thecontext suggests otherwise, the terms‘‘Company,’’‘‘Holdings,’’‘‘we,’’ ‘‘us,’’and ‘‘our’’ refer to MortgageIT Holdings,Inc., a Maryland corporation incorporated in March  2004, and itssubsidiaries. ‘‘MortgageIT’’ or‘‘TRS’’ refers to our wholly ownedsubsidiary, MortgageIT, Inc., a New Yorkcorporation.

GENERAL

Formed inMarch  2004, Holdings is organized and conducts its operations toqualify as REIT for federal income tax purposes, and is focused onearning net interest income from mortgage loans originated byMortgageIT, its taxable REIT subsidiary. MortgageIT was incorporated inNew York in February  1999, and began marketing mortgage loanservices in May  1999. MortgageIT is a full-service residentialmortgage banking company that is licensed to originate mortgage loansthroughout the United States. MortgageIT originates single-familymortgage loans of all types, with a particular focus on prime ARM andfixed-rate, first lien residential mortgage loans. Prior toAugust  4,  2004, MortgageIT sold all of the loans itoriginated through both its retail and wholesale operations to thirdparty investors. Home Closer LLC (‘‘HomeCloser’’), a subsidiary of MortgageIT, Inc., providessettlement, title and related services.

Our businessstrategy has been to self-originate prime ARM loans that are used tocollateralize debt obligations, and generate earnings by holding theseloans or investment securities in our portfolio and receiving thespread between the yield on our assets and the cost of borrowings.However, the Company neither transferred any loans to the portfolio norcompleted any loan securitizations during the third quarter endedSeptember  30,  2006. Rather, the Company’s strategyduring the third quarter of 2006, and the strategy the Company expectsto employ going forward, is to sell to third party investors all (andnot just certain of) the loans it originates. While the Company willcontinue to generate earnings by holding the loans and investmentsecurities currently in our portfolio and receiving the spread betweenthe yield on our assets and the cost of borrowing, the Company willgenerate an increase in earnings from the mortgage loans it sells tothird party investors.

Our investment strategy is designedto mitigate credit risk and interest rate risk. Our mortgage loaninvestment portfolio consists primarily of self-originated prime ARMLoans that collateralize multi-class pass-through securities that weissue in securitization transactions, and prime ARM Loans that weintend to securitize. A small portion of the portfolio consists ofmortgage-backed securities (‘‘MBS’’) issuedby the TRS through a real estate mortgage investment conduit(‘‘REMIC’’). Mortgage-backed securities aredebt obligations that represent claims to the cash flows from pools ofmortgage loans. A REMIC is an entity through which an issuer can sellmultiple-class securities to investors. The entity invests in a pool ofmortgages, and sells interests in those mortgages through securitieswith one or more senior classes as well as subordinated classes thatassume the credit risk of defaults and delinquencies.

AREMIC securitization may be structured to qualify as either a sale or afinancing for accounting purposes. The REMIC securitization executed bythe TRS in November  2005 is structured to qualify as a sale, andas such, the loans are removed from our balance sheet, but the Companyretains excess interest, prepayment penalty and subordinated securitiesfor its investment portfolio. In such transactions the TRS generatesgain on sale revenue through the sale of loans to the REMIC, and mayalso retain mortgage servicing rights(‘‘MSR’’) on the underlying loans, therebygenerating a stream of revenue over the life of the loans. Thesecurities purchased by the Company for its investment portfolio arefunded with a combination of repurchase line financing and equitycapital. The REMIC securitization executed by the TRS inFebruary  2006 is structured to qualify as a financing. The loanstherefore remain on our balance sheet, and the Company generatesearnings by receiving the spread between the yield on these loan assetsand the cost of borrowings. The Company used a combination ofmulti-class pass-through securities, repurchase line financing andequity capital for this REMIC securitization.

31

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The loans that we retain inportfolio are serviced through a subservicing arrangement. Generally,we expect to continue to sell the fixed rate loans originated byMortgageIT to third parties as well as any ARM or hybrid ARM loans thatwe do not retain in portfolio.

On August  4,2004, we closed our initial public offering and sold 14.6million shares of common stock at a price to the public of $12.00 pershare, for net proceeds of approximately $163.4  million, afterdeducting the underwriters' discount and other offering-relatedexpenses. Since the completion of our initial public offering, theprimary focus of our business has been to build a leveraged portfolioof single-family residential mortgage loans comprised largely oftraditional ARM and hybrid ARM loans, the majority of which have aninitial fixed-rate period followed by an adjustable-rate period. Ourportfolio of mortgage loans consists exclusively of loans originated bythe TRS. As of September  30, 2006, we had transferred to ourinvestment portfolio approximately $6.3  billion of residentialtraditional ARM and hybrid ARM loans originated by MortgageIT, as wellas $24.3  million of investment securities collateralized byself-originated ARM loans.

In June  2005, theCompany conducted a secondary public offering of its common stock andsold 7,289,428 shares at a price to the public of $18.25 per share. InJuly  2005, the underwriters of the secondary public offeringexercised, in full, their option to purchase an additional 1,422,646shares of common stock from the Company at the public offering price of$18.25 to cover over-allotments. Net proceeds to the Company, afterdeducting the underwriting discount and estimated offering expenses,were approximately $150  million. In addition, certainstockholders sold 2,194,878 shares in the secondary public offering.The Company did not receive any proceeds from the sale of shares by theselling stockholders.

In April and May  2005, theCompany issued, in two private placements, an aggregate of $75million of trust preferred securities(‘‘TPS’’) through trust subsidiaries andsold them to collateralized debt obligation pool vehicles under Rule144A of the Securities Act of 1933. The floating-rate TPS bear avariable interest rate of 375 basis points above 3-month LIBOR, paidquarterly, and will mature in 2035. They are redeemable at par afterfive years and, in certain limited circumstances, at a premium to parin less than five years. Proceeds from the TPS sale were used to growthe Company’s self-originated loan portfolio as well as tosupport the continued expansion of the Company’s taxable REITsubsidiary.

In March  2006, the Company issued$50  million of TPS through a trust subsidiary and sold them tocollateralized debt obligation pool vehicles under Rule 144A of theSecurities Act of 1933. The floating-rate TPS bear a variable interestrate of 360 basis points above 3-month LIBOR, paid quarterly, and willmature in 2036. They are redeemable at par after five years and, incertain limited circumstances, at a premium to par in less than fiveyears. Proceeds from the TPS sale were used to support the continuedexpansion of the Company’s taxable REITsubsidiary.

In October  2005, the Company announceda program to repurchase up to $30  million of its outstandingcommon stock, depending upon management’s discretion based uponongoing assessments of the capital needs of the Company and the marketvaluation of its stock. During the fourth quarter of 2005, the Companyrepurchased approximately $1.2  million of its stock. There wereno repurchases during the nine months ended September  30,2006.

Also, in October  2005, Holdings established acaptive mortgage reinsurance company, which generates earnings frommortgage insurance premiums paid on a portion of the loans originatedby MortgageIT. Approximately 6.3% of the loans originated byMortgageIT during the first nine months of 2006 required mortgageinsurance.

In December  2005, the TRS declared a$10  million dividend to Holdings, substantially all of which wasincluded in the 2005 dividend payments paid to shareholders of theCompany.

During the fourth quarter of 2005, gain on salemargins for sub-prime loans narrowed significantly industry-wide. Inresponse to these adverse industry conditions, the Company reduced itspresence in the sub-prime origination market by decreasing the numberof its sub-prime branches and implementing related work forcereductions. In the first quarter of 2006, the Company exited thenational wholesale sub-prime market. Funded sub-prime volume during thefirst nine months of 2006 

32

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was reduced to $246  million, or1% of MortgageIT’s total originations during the period.As of September  30, 2006, all but $21.6  million ofsub-prime inventory had been allocated to trades. The Company continuesto originate sub-prime loans through a division of its traditionalprime retail origination channel. However, the Company'ssub-prime loan volume is not a material component of its totaloriginations. All of the sub-prime loan production is sold to thirdparty investors and we do not hold sub-prime loans in our investmentportfolio.

In October  2006, the Company notifiedthe approximately ninety employees in its correspondent lendingdivision that the Company will be ceasing its correspondent lendingoperations. Although more than one-half of the positions will beeliminated within the Company’s correspondent lending division,many employees are expected to transition over to the DB StructuredProducts correspondent lending group at the time the proposedacquisition of the Company by DB Structured Products is completed.Pending the completion of the proposed acquisition, the Company hasassigned to DB Structured Products’ correspondent lending groupapproximately thirty employees who previously worked in theCompany’s correspondent lending division.

OnJuly  11,  2006, the Company entered into a definitiveagreement to be acquired by DB Structured Products for $14.75 in cashper share of Company common stock, or approximately $429  millionin the aggregate. The transaction is expected to close during the firstquarter of 2007, pending regulatory approvals, approval by theCompany’s stockholders and the satisfaction of other customaryclosing conditions.

DESCRIPTION OF BUSINESS

TheCompany operates its business in two primary segments, mortgageinvestment operations and mortgage banking operations. Mortgageinvestment operations are driven by the net interest income generatedon our leveraged prime mortgage loan investment portfolio. Mortgagebanking operations are driven by income generated from our mortgageloan origination business and include sales, loan processing,underwriting, funding, secondary marketing and brokerageactivities.

Financial information regarding theCompany's business segments can be found in Note 11 to theconsolidated financial statements included elsewhere in this quarterlyreport on Form 10-Q.

Mortgage InvestmentOperations

Our mortgage investment operationsinvolve the acquisition and retention, in a leveraged portfolio, oftraditional ARM loans, hybrid ARM loans, pay option ARMs andmortgage-backed securities (collectively, ‘‘PortfolioAssets’’). Traditional ARM loans are mortgage loans thathave interest rates that reprice in one year or less(‘‘Traditional ARMs’’ or‘‘Traditional ARM loans’’), and hybrid ARMloans are mortgage loans that have a fixed interest rate for an initialperiod of not more than five years and then convert to Traditional ARMsfor their remaining terms to maturity (‘‘HybridARMs’’ or ‘‘Hybrid ARMloans’’, and together with the Traditional ARM loans andpay option ARMs, collectively referred to as (‘‘PortfolioARM Loans’’). Pay optionARMs (‘‘POAs’’) are mortgage loansthat carry a low introductory or ‘‘teaser’’rate for the first 30-90 days, and thereafter reprice monthly on thebasis of an index such as the 12-month Treasury Average. POAs offerthree monthly payment options each month: permitting the borrower topay a fully amortizing amount, including principal and interest;interest only; or an amount that is less than the accrued interest.This last option results in an increase in the loan balance due, whichis commonly referred to as ‘‘negativeamortization.’’ Approximately one-third of the loancollateral in the REMIC securitization completed by the TRS inFebruary  2006 consisted of POAs. Although the loans from thisREMIC remain on the balance sheet of the TRS for reportingpurposes, we consider them to be part of the Company’sinvestment portfolio.

All of the Portfolio ARM Loans weacquire are originated by our mortgage banking operations and must meetthe underwriting criteria and guidelines set forth in our investmentand risk management policy. For purposes of maintaining liquidity forborrowings or as collateral, we may also invest in U.S. Treasurysecurities or debentures and discount notes guaranteed by either of twogovernment-sponsored corporations, Federal National MortgageAssociation (‘‘FNMA’’ or‘‘Fannie Mae’’) and Federal Home LoanMortgage Corporation (‘‘FHLMC’’ or‘‘Freddie Mac’’).

33

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The funding of our mortgage loanportfolio primarily consists of borrowings from our warehouse lines ofcredit for loans awaiting securitization, the issuance ofcollateralized debt obligations (‘‘CDOs’’)and repurchase agreements. We originate ARM loans for our investmentportfolio and either securitize them from the TRS with subsequentpurchase of a portion of the securities by Holdings, or transfer theloans to Holdings with the intention of securitizing them bytransferring them to independent trusts. In order to facilitate thesecuritization of our loans, we generally create subordinatecertificates, which provide a specified amount of credit enhancement tothe higher rated certificates. Upon securitization, we finance theloans through the issuance of CDOs in the capital markets andoccasionally retain certain subordinate certificates. We servicePortfolio ARM Loans through a subservicer.

When asecuritization is accomplished through Holdings, we do not account forCDOs placed with third party investors as sales and, therefore, do notrecord any gain or loss in connection with securitization transactions.The securitizations are accounted for as long-term collateralizedfinancings. Consequently, the Portfolio ARM Loans transferred to theindependent trust are shown as assets on our balance sheet. On ourbalance sheet, our Portfolio ARM Loans consist of ARM loanscollateralizing debt obligations and ARM loans held for securitization.We, therefore, generate revenue in our mortgage investment operationsfrom the spread between the interest income on our Portfolio ARM Loansand our cost of borrowings (i.e., the interest expense on ourCDOs, warehouse lines of credit, and repurchaseagreements).

The loan securitization process benefits usby creating highly liquid securitized assets that can be readilyfinanced in the capital markets.

When a securitization isaccomplished through the TRS and the securitization is structured toqualify as a sale, we account for MBS placed with third party investorsas sales and consequently record a gain or loss in connection with thesecuritization transaction. The TRS may also retain the MSR associatedwith the securitized loans. The securities purchased by Holdings areshown as assets on our balance sheet. These securities are classifiedas available for sale and, therefore, are carried at fair value on thebalance sheet.

When a securitization is accomplishedthrough the TRS and the securitization is structured to qualify as afinancing, we do not record a gain or loss in connection with thesecuritization transaction. The loans used as collateral in thesecuritization are shown as assets on the balance sheet of the TRS.Although the loans from such securitizations remain on the balancesheet of the TRS for reporting purposes, we consider them to bepart of the Company’s investment portfolio.

PortfolioStrategy

It is our general policy to originate100% of the ARM Loans we hold in our investment portfolio.However, we retain the right to purchase mortgage-backed securitiesguaranteed by Fannie Mae or Freddie Mac or the Government NationalMortgage Association (‘‘GNMA’’ or‘‘Ginnie Mae’’).

We selectloans for inclusion in our investment portfolio based on a variety ofcredit risk factors. Our Corporate Risk Committee has establishedspecific loan investment guidelines, including minimum FICO scores,maximum loan-to-value ratios, maximum loan size and other applicablecredit quality criteria.

According to our investmentguidelines, we invest at least 85% of assets in high qualityARMs and Hybrid ARMs, and short-term investments,including:

|              |                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| •  | Traditional ARM andHybrid ARM mortgage loans that have been deposited into trusts thatissue MBS collateralized by the transferredloans; |

|              |                                    |
|--------------|------------------------------------|
| •  | FNMA and FHLMC mortgagesecurities; |

|              |                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | ARM securities rated withinone of the two highest rating categories by at least one of thenationally recognized statistical ratings agencies (Moody'sInvestors Service (‘‘Moody's’’);Standard & Poor's, a division of The McGraw-Hill Companies,Inc. (‘‘S&P’’); or Fitch Ratings(‘‘Fitch’’)); |

34

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|              |                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | securitiesand loans that are unrated but that we determine to be of comparablequality to comparable high-quality rated mortgage securities;and |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | cash and cash equivalents,including short-term investments in U.S. Treasury and agencynon-mortgage securities. |

The portfolio also may retaincertain classes of our MBS that are below investment grade (below BBB).Interests in non-investment grade assets will comprise no more than25% of stockholders' equity on an historical costbasis.

The Company neither transferred any loans to theportfolio nor completed any loan securitizations during the thirdquarter ended September  30, 2006. Rather, the Company’sstrategy during the third quarter of 2006, and the strategy the Companyexpects to employ going forward, is to sell all (and not just certainof) the loans it originates to third partyinvestors.

Mortgage BankingOperations

Our mortgage banking operations areconducted through MortgageIT and its subsidiaries. The TRS is afull-service residential mortgage banking company that is licensed tooriginate loans throughout the United States.

The TRSgenerates revenue through the origination, sale and brokering ofmortgage loans sourced through its loan production channels. Thisrevenue primarily consists of gain on sale of mortgage loans, loanbrokerage revenues and net interest income. Gain on sale of mortgageloans is typically generated from the sale of mortgage loans toinvestors, on a servicing released basis, generally within 30 to 60days of funding. Accordingly, we do not generally capitalize the valueof MSR. Gain is recognized based on the difference between the netsales proceeds and the carrying value of the mortgage loans sold and isrecognized in earnings at the time of sale. The carrying value of themortgage loans sold includes direct loan-related origination costs andfees. When the TRS securitizes loans through a REMIC transaction,structured to qualify as a sale, it generates gain on sale revenue whenthe loans are sold to the REMIC, and it also may capitalize the valueof MSR and amortize it in proportion to, and over the period of,estimated net servicing income (the excess of servicing revenues overservicing costs). Brokerage revenue consists of fees and commissionsearned by brokering mortgage loans ultimately funded by third partylenders. Interest on mortgage loans held for sale accrues on loans fromthe date of funding through the date of sale.

The firstREMIC securitization completed by the TRS in November  2005 wascollateralized by POAs. In this transaction, a pool of POA loanstotaling approximately $388  million was securitized and sold tothe public. We retained the mortgage servicing rights and retainedapproximately $24  million in MBS created in thetransaction.

In February  2006, MortgageIT completedits second REMIC transaction, which was structured to qualify as afinancing. In the February  2006 REMIC transaction, we issued,through a trust, AAA and AA-rated floating-rate pass-throughcertificates totaling $723.0  million and A-rated subordinatedfloating-rate securities totaling $10.1  million to third partyinvestors, and retained $33.3  million of subordinatedcertificates, which provide credit support to the higher-ratedcertificates.

MortgageIT's mortgage bankingoperations expenses consist primarilyof:

|              |                                                             |
|--------------|-------------------------------------------------------------|
| •  | loan origination commissions,salaries and employeebenefits; |

|              |                                   |
|--------------|-----------------------------------|
| •  | mortgage loan processingexpenses; |

|              |                                     |
|--------------|-------------------------------------|
| •  | general andadministrative expenses; |

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|              |                                                                  |
|--------------|------------------------------------------------------------------|
| •  | marketing,loan acquisition and business development expenses;and |

|              |                                                           |
|--------------|-----------------------------------------------------------|
| •  | rent expense, professionalfees, and depreciation expense. |

A substantial portion ofMortgageIT's expenses are variable in nature. Loan originationcommissions are paid to loan production officers only upon theorigination of the mortgage loan, making such commission expenses100% variable. Salaries, benefits and other related payrollcosts may fluctuate based upon management's assessment of currentand predicted future levels of mortgage loan originationvolume.

Loan Underwriting

We follow a specificunderwriting methodology based on the following philosophy —first, evaluate the borrower's ability to repay the loan and,then, evaluate the value of the property securing the loan. We havedeveloped underwriting guidelines and practices that establish clearparameters for our loan underwriters and credit officers to make loanapproval decisions. For mortgage loans retained in our investmentportfolio, we seek those loans that we believe have low risk of defaultand resulting loss. Although our loan underwriting procedures arestructured to predict future borrower payment patterns and financialcapability, based on the borrower's past history and currentfinancial information, as well as our ability to collect the remainingloan balance through foreclosure in the event of a default, noassurance can be made that every loan originated will perform asanticipated.

In evaluating the borrower's abilityand willingness to repay a loan, we review and analyze the followingaspects of the borrower: credit score, income and its source,employment history, debt levels in revolving, installment and othermortgage loans, credit history and use of credit in the past, and theability and/or willingness to provide verification for the above.Credit scores, credit history, use of credit in the past andinformation as to debt levels typically can be obtained from a thirdparty credit report through a credit repository. Those sources are usedin all instances, as available. Sometimes, borrowers have little or nocredit history that can be tracked by one of the primary creditrepositories. In these instances, the reason for the lack of history isconsidered and taken into account. In our experience, most prospectiveborrowers have accessible credit histories.

In evaluatinga potential property to be used as collateral for a mortgage loan, weconsider all of the following aspects of the property: the loan balanceversus the property value, e.g., the loan-to-value ratio, theproperty type, how the property will be occupied (a primary residence,second home or investment property), if the property's apparentvalue is supported by recent sales of similar properties in the same ora nearby area, any unique characteristics of the property and ourconfidence in the data and their sources.

Otherconsiderations that may effect our decision regarding aborrower's loan application are the borrower's purpose inrequesting the loan (e.g., purchase of a home as opposed tocashing equity out of the home through a refinancing), the loan type(e.g., adjustable-rate, including adjustment periods and loanlife rate caps, or fixed-rate), and any items unique to a loan that webelieve could affect credit performance.

BusinessStrategy

All of the loans originated at the TRS aretransferred to our investment loan portfolio, sold or brokered to thirdparty investors, or used in REMIC transactions to collateralize MBSthat are sold to third party investors as well as to the REIT. However,the Company neither transferred any loans to the portfolio norcompleted any loan securitizations or REMIC transactions during thethird quarter ended September 30, 2006. Rather, the Company'sstrategy during the third quarter of 2006, and the strategy the Companyexpects to employ going forward, is to sell to third party investorsall (and not just certain of) the loans it originates. Our mortgagebanking operations consist primarily of the followingactivities:

|              |                                                                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | wholesale prime productionoperations, including loans originated through retail loan brokers andcorrespondents that are not MortgageIT employees and funded byMortgageIT; |

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|              |                                                                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | correspondentlending operations, including loans originated through banks, creditunions and mortgage bankers and funded by MortgageIT through itscorrespondent lending division; |

|              |                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | retailprime production operations, including both brokered loans and fundedloans that are originated through retail branch offices and throughMortgageIT's internet originationchannel; |

|              |                                         |
|--------------|-----------------------------------------|
| •  | secondary loan marketingoperations; and |

|              |                                                                                        |
|--------------|----------------------------------------------------------------------------------------|
| •  | mortgage loan title,settlement and other mortgage related services through HomeCloser. |

Sale of Loans

We generally sell ourmortgage loans on a whole loan, non-recourse basis. However, we do havepotential liability under the representations and warranties we make topurchasers and insurers of the loans. In the event of a breach of suchrepresentations and warranties, we may be required to either repurchasethe subject mortgage loans or indemnify the investor or insurer. Insuch cases, any subsequent credit loss on the mortgage loans isrecognized by MortgageIT. When we execute a REMIC transactionstructured to qualify as a sale from the TRS, we use our loans tocollateralize MBS that are sold to third party investors as well as tothe REIT.

All of our sub-prime loan production is sold tothird party investors.

LoanProducts

MortgageIT originates both mortgage loans tofinance home purchases, referred to as purchase mortgage loans, andloans to refinance existing mortgage loans. For the nine months endedSeptember  30, 2006, MortgageIT's purchase loanoriginations represented approximately 45% of its totalresidential mortgage loan originations measured by principalbalance.

MortgageIT originates prime first lienconventional and non-conventional, conforming single-family residentialmortgage loans. In addition, MortgageIT also originates a lesser amountof non-conforming first lien single-family residential mortgage loanssuch as jumbo loans, sub-prime loans and ‘‘AltA’’ loans, as well as home equity and second lienmortgage loans.

Hedging Activities

Wegenerally do not seek to anticipate the direction of interest rates asa part of our business strategy. We seek to maintain hedge positionsthat avoid the effects of severe interest rate movements, which mightotherwise impair our ability to earn net interest income and gain onsale revenues. Accordingly, we generally seek to mitigate interest raterisk by matching the repricing durations of our Portfolio ARM Loanswith the repricing durations of our liabilities. We also seek tomitigate the interest rate risk associated with our mortgage loans heldfor sale and interest rate lock commitments issued toborrowers.

For our mortgage investment operations, subjectto the limitations imposed by the REIT qualification tests, some or allof the following financial instruments are used for hedging financingcost interest rate risk: Eurodollar futures contracts; interest rateswaps; interest rate caps, collars and floors; and other instrumentsthat may be determined to be advantageous and are permitted under theinvestment and risk management policy adopted by our board ofdirectors.

For our mortgage banking operations, some orall of the following financial instruments are used for hedging thefair value of loans held for sale: forward sale loan commitments andforward sales and purchases of MBS and options on such securities inthe forward delivery TBA market; Eurodollar futures contracts; andother instruments that may be determined to be advantageous and arepermitted under the investment and risk management policy adopted byour board of directors.

For further information on ourinterest rate risk management, see Item 3 Quantitative and QualitativeDisclosures About Market Risk — Interest Rate Risk Management ofthis quarterly report on Form 10-Q and Note 4 — Derivatives andHedging Activities to the consolidated financialstatements.

37

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RESULTS OF OPERATIONS

Thefollowing table sets forth certain financial data as a percentage oftotal revenues for the three and nine months ended September  30,2006 and2005.

|                                                    |  |  |                                |  |        |                              |  |  |      |  |         |         |  |  |  |  |        |          |  |  |  |  |        |         |
|----------------------------------------------------|--|--|--------------------------------|--|--------|------------------------------|--|--|------|--|---------|---------|--|--|--|--|--------|----------|--|--|--|--|--------|---------|
|                                               |  |  | Threemonths endedSeptember 30, |  |        | Nine monthsendedSeptember30, |
|                                               |  |  | 2006                           |  |        | 2005                         |  |  | 2006 |  |         | 2005    |
| Revenues:                                          |  |  |                                |  |   |                         |  |  |      |  |    |    |  |  |  |  |   |     |  |  |  |  |   |    |
| Gainon sale of mortgageloans                       |  |  |                                |  | 97.0   | %                       |  |  |      |  | 73.4    | %  |  |  |  |  | 86.9   | %   |  |  |  |  | 62.0   | %  |
| Brokeragerevenues                                  |  |  |                                |  | 5.9    | %                       |  |  |      |  | 8.9     | %  |  |  |  |  | 7.7    | %   |  |  |  |  | 8.9    | %  |
| Netinterestincome                                  |  |  |                                |  | (1.6   | )%                      |  |  |      |  | 17.4    | %  |  |  |  |  | 3.8    | %   |  |  |  |  | 24.5   | %  |
| Realizedand unrealized gain on hedginginstruments  |  |  |                                |  | (2.4   | )%                      |  |  |      |  | — | %  |  |  |  |  | 0.8    | %   |  |  |  |  | 4.3    | %  |
| Other                                              |  |  |                                |  | 1.1    | %                       |  |  |      |  | 0.3     | %  |  |  |  |  | 0.8    | %   |  |  |  |  | 0.3    | %  |
| Totalrevenues                                      |  |  |                                |  | 100.0  | %                       |  |  |      |  | 100.0   | %  |  |  |  |  | 100.0  | %   |  |  |  |  | 100.0  | %  |
| Operatingexpenses:                                 |  |  |                                |  |   |                         |  |  |      |  |    |    |  |  |  |  |   |     |  |  |  |  |   |    |
| Compensationand employeebenefits                   |  |  |                                |  | 52.9   | %                       |  |  |      |  | 46.4    | %  |  |  |  |  | 52.1   | %   |  |  |  |  | 43.6   | %  |
| Processingexpenses                                 |  |  |                                |  | 22.5   | %                       |  |  |      |  | 19.1    | %  |  |  |  |  | 29.6   | %   |  |  |  |  | 17.7   | %  |
| Generaland administrativeexpenses                  |  |  |                                |  | 9.7    | %                       |  |  |      |  | 7.3     | %  |  |  |  |  | 10.7   | %   |  |  |  |  | 8.4    | %  |
| Rent                                               |  |  |                                |  | 3.7    | %                       |  |  |      |  | 3.2     | %  |  |  |  |  | 4.7    | %   |  |  |  |  | 3.2    | %  |
| Marketing,loan acquisition and businessdevelopment |  |  |                                |  | 1.8    | %                       |  |  |      |  | 1.4     | %  |  |  |  |  | 1.8    | %   |  |  |  |  | 1.4    | %  |
| Professionalfees                                   |  |  |                                |  | 6.1    | %                       |  |  |      |  | 2.9     | %  |  |  |  |  | 5.1    | %   |  |  |  |  | 3.2    | %  |
| Depreciationandamortization                        |  |  |                                |  | 2.3    | %                       |  |  |      |  | 1.2     | %  |  |  |  |  | 2.3    | %   |  |  |  |  | 1.2    | %  |
| Totaloperatingexpenses                             |  |  |                                |  | 99.0   | %                       |  |  |      |  | 81.5    | %  |  |  |  |  | 106.3  | %   |  |  |  |  | 78.7   | %  |
| Income(loss) before incometaxes                    |  |  |                                |  | 1.0    | %                       |  |  |      |  | 18.5    | %  |  |  |  |  | (6.3   | )%  |  |  |  |  | 21.3   | %  |
| Incometaxes                                        |  |  |                                |  | (1.0   | )%                      |  |  |      |  | 8.1     | %  |  |  |  |  | (7.5   | )%  |  |  |  |  | 6.9    | %  |
| Netincome                                          |  |  |                                |  | 2.0    | %                       |  |  |      |  | 10.4    | %  |  |  |  |  | 1.2    | %   |  |  |  |  | 14.4   | %  |
|                                                    |

Threemonths ended September  30, 2006 compared to three months endedSeptember  30, 2005

Net (loss)income

On a consolidated basis, our net incomedecreased from approximately $8.7  million in the third quarterof 2005 to approximately $1.4  million in the third quarter of2006. The decrease is primarily attributable to lower net interestincome from mortgage banking and the investment portfolio. Totalrevenues decreased approximately 13% from $84.0  millionin the third quarter of 2005 to approximately $73.3  million inthe third quarter ended of 2006. Gain on sale of mortgage loansincreased by approximately 15% to $71.1  million in thethird quarter of 2006 compared to approximately $61.6  million inthe third quarter of 2005, while net interest income decreased byapproximately 108% from $14.6  million to a loss of$1.2  million. The realized and unrealized loss on hedginginstruments used in our investment portfolio hedging program increasedfrom zero in the third quarter of 2005 to approximately $1.7million in the third quarter of 2006. Brokerage revenue decreased byapproximately 43% to $4.3  million in the third quarter of2006 compared to approximately $7.5  million in the third quarterof 2005. Total expenses increased by approximately 6% fromapproximately $68.5  million in the third quarter of 2005 toapproximately $72.6  million in the third quarter of 2006,despite a 19% decrease in funded loans from approximately$9.2  billion in the third quarter of 2005 to approximately$7.5  billion in the third quarter of 2006. The increase in totalexpenses for the third quarter of 2006, compared to the third quarterof 2005, is primarily the result of expenses associated with theproposed acquisition of the Company by DB Structured Products. Inaddition, income tax expense decreased approximately $7.5million from income tax expense of $6.8  million in the thirdquarter of 2005 to a $731,000 income tax benefit in the third quarterof 2006. This benefit resulted primarily from a decrease in incomebefore income taxes of the TRS of approximately $19.1  millionfrom income before income taxes of approximately $15.9  millionin the third quarter of 2005 to a loss before income taxes ofapproximately $3.2  million in the third quarter of2006.

38

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The following table presents theaverage balance for each category of our interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                      |  |  |                                        |   |           |                     |  |  |                          |  |        |                |  |  |                     |   |         |                          |  |  |  |   |           |        |  |  |  |  |        |         |  |  |  |   |        |        |
|--------------------------------------|--|--|----------------------------------------|---|-----------|---------------------|--|--|--------------------------|--|--------|----------------|--|--|---------------------|---|---------|--------------------------|--|--|--|---|-----------|--------|--|--|--|--|--------|---------|--|--|--|---|--------|--------|
|                                 |  |  | Forthe three months ended September30, |
|                                 |  |  | 2006                                   |   |           | 2005                |
|                                 |  |  | AverageBalance                         |   |           | EffectiveRate/Yield |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate/Yield |   |         | InterestIncomeandExpense |
| Interest-earningassets:              |  |  |                                        |   |      |                |  |  |                          |  |   |           |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |   |   |
| PortfolioAssets                      |  |  |                                        | $ | 4,827,468 |                |  |  |                          |  | 5.47   | %         |  |  |                     | $ | 65,986  |                     |  |  |  | $ | 4,197,398 |   |  |  |  |  | 4.97   | %  |  |  |  | $ | 52,595 |   |
| Mortgageloans held forsale           |  |  |                                        |   | 3,601,327 |                |  |  |                          |  | 5.34   |           |  |  |                     |   | 48,106  |                     |  |  |  |   | 3,003,055 |   |  |  |  |  | 4.98   |    |  |  |  |   | 37,699 |   |
| Cashand cashequivalents              |  |  |                                        |   | 46,029    |                |  |  |                          |  | 2.16   |           |  |  |                     |   | 249     |                     |  |  |  |   | 77,345    |   |  |  |  |  | 0.46   |    |  |  |  |   | 90     |   |
|                                 |  |  |                                        |   | 8,474,824 |                |  |  |                          |  | 5.40   |           |  |  |                     |   | 114,341 |                     |  |  |  |   | 7,277,798 |   |  |  |  |  | 4.93   |    |  |  |  |   | 90,384 |   |
| Interest-bearingliabilities:         |  |  |                                        |   |      |                |  |  |                          |  |   |           |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |   |   |
| Collateralizeddebtobligations        |  |  |                                        |   | 4,599,786 |                |  |  |                          |  | 5.13   |           |  |  |                     |   | 59,006  |                     |  |  |  |   | 3,648,052 |   |  |  |  |  | 4.14   |    |  |  |  |   | 38,056 |   |
| Warehouselinespayable                |  |  |                                        |   | 3,505,731 |                |  |  |                          |  | 5.76   |           |  |  |                     |   | 51,574  |                     |  |  |  |   | 3,275,739 |   |  |  |  |  | 4.24   |    |  |  |  |   | 35,025 |   |
| Otherdebt                            |  |  |                                        |   | 248,939   |                |  |  |                          |  | 7.78   |           |  |  |                     |   | 4,950   |                     |  |  |  |   | 177,870   |   |  |  |  |  | 5.93   |    |  |  |  |   | 2,660  |   |
|                                 |  |  |                                        |   | 8,354,456 |                |  |  |                          |  | 5.41   |           |  |  |                     |   | 115,530 |                     |  |  |  |   | 7,101,661 |   |  |  |  |  | 4.23   |    |  |  |  |   | 75,741 |   |
| Netinterest-earning assets andspread |  |  |                                        | $ | 120,368   |                |  |  |                          |  | (0.01  | )%        |  |  |                     | $ | (1,189  | )                   |  |  |  | $ | 176,137   |   |  |  |  |  | .70    | %  |  |  |  | $ | 14,643 |   |
| Netinterestmargin(1)                 |  |  |                                        |   |      |                |  |  |                          |  | (0.06  | %)        |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  | .80    | %  |  |  |  |   |   |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Mortgage InvestmentOperations

Revenues

Net interestincome.    Net interest income decreased approximately13% to $7.1  million for the three months endedSeptember  30, 2006 from approximately $8.2  million forthe comparable period ended September  30, 2005. The decrease wasdue to a lower net interest margin, driven by the flattening yieldcurve, partly offset by higher average interest-earning assets ofapproximately $4.9  billion for the three months endedSeptember  30, 2006 compared with average interest-earning assetsof approximately $4.3  billion for the comparable period endedSeptember  30, 2005. Net interest margin for our mortgageinvestment operations declined to .58% for the three monthsended September  30, 2006 from .76% for the comparableperiod ended September  30, 2005 due to continued flattening ofthe yield curve as average one-month LIBOR rose to 5.35% in thethird quarter of 2006 from 3.60% in the third quarter of2005.

39

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The following table presents theaverage balance for each category of REIT interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                          |  |  |                                        |   |           |               |  |  |                          |  |         |                |  |  |               |   |         |                          |  |  |  |   |           |        |  |  |  |  |        |         |  |  |  |   |        |        |
|------------------------------------------|--|--|----------------------------------------|---|-----------|---------------|--|--|--------------------------|--|---------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--------|--|--|--|--|--------|---------|--|--|--|---|--------|--------|
|                                     |  |  | Forthe three months ended September30, |
|                                     |  |  | 2006                                   |   |           | 2005          |
|                                     |  |  | AverageBalance                         |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |         | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                  |  |  |                                        |   |      |          |  |  |                          |  |    |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |   |   |
| PortfolioAssets                          |  |  |                                        | $ | 4,824,894 |          |  |  |                          |  | 5.42    | %         |  |  |               | $ | 65,391  |                     |  |  |  | $ | 4,197,398 |   |  |  |  |  | 4.76   | %  |  |  |  | $ | 50,328 |   |
| Cashand cash equivalents and otherassets |  |  |                                        |   | 94,224    |          |  |  |                          |  | 8.98    |           |  |  |               |   | 2,116   |                     |  |  |  |   | 97,889    |   |  |  |  |  | 1.27   |    |  |  |  |   | 312    |   |
|                                     |  |  |                                        |   | 4,919,118 |          |  |  |                          |  | 5.49    |           |  |  |               |   | 67,507  |                     |  |  |  |   | 4,295,287 |   |  |  |  |  | 4.68   |    |  |  |  |   | 50,640 |   |
| Interest-bearingliabilities:             |  |  |                                        |   |      |          |  |  |                          |  |    |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |   |   |
| Collateralizeddebtobligations            |  |  |                                        |   | 4,599,786 |          |  |  |                          |  | 5.12    |           |  |  |               |   | 58,924  |                     |  |  |  |   | 3,648,052 |   |  |  |  |  | 4.12   |    |  |  |  |   | 37,908 |   |
| Warehouselinespayable                    |  |  |                                        |   | —   |          |  |  |                          |  | — |           |  |  |               |   | — |                     |  |  |  |   | 346,580   |   |  |  |  |  | 4.25   |    |  |  |  |   | 3,711  |   |
| Repurchaseagreements                     |  |  |                                        |   | 97,568    |          |  |  |                          |  | 5.83    |           |  |  |               |   | 1,454   |                     |  |  |  |   | 85,546    |   |  |  |  |  | 3.82   |    |  |  |  |   | 824    |   |
|                                     |  |  |                                        |   | 4,697,354 |          |  |  |                          |  | 5.03    |           |  |  |               |   | 60,378  |                     |  |  |  |   | 4,080,178 |   |  |  |  |  | 4.13   |    |  |  |  |   | 42,443 |   |
| Netinterest-earning assets andspread     |  |  |                                        | $ | 221,764   |          |  |  |                          |  | 0.46    | %         |  |  |               | $ | 7,129   |                     |  |  |  | $ | 215,109   |   |  |  |  |  | .55    | %  |  |  |  | $ | 8,197  |   |
| Netinterestmargin(1)                     |  |  |                                        |   |      |          |  |  |                          |  | 0.58    | %         |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  | .76    | %  |  |  |  |   |   |   |
|                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses decreased approximately 34% to $463,000 for the threemonths ended September  30, 2006 from $699,000 for the comparableperiod ended September  30, 2005. The decrease was primarily dueto a decrease in the number of employees dedicated to the investmentoperations as the business continues to achieve economies ofscale.

Processing expenses.    Mortgage loanprocessing expenses decreased approximately 41% to $825,000 forthe three months ended September  30, 2006 from approximately$1.4  million for the comparable period ended September30, 2005. The decrease was primarily due to a lower provision for loanlosses.

General and administrativeexpenses.    General and administrative expenses decreasedapproximately 64% to $364,000 for the three months endedSeptember  30, 2006 from approximately $1.0  million forthe comparable period ended September  30, 2005. This decreasewas primarily due to lower insurance and other administrativeexpenses.

Professional fees.    Professionalfees increased approximately 128% to $1.1  million for thethree months ended September  30, 2006 from $468,000 for thecomparable period ended September  30, 2005. This increase wasprimarily due to higher legal and other professional expenses,including expenses associated with the proposed acquisition of theCompany by DB Structured Products.

MortgageBanking Operations

Revenues

Gain onsale of mortgage loans.    Gain on sale of mortgage loansincreased by approximately 3% to $71.1  million for thethree months ended September  30, 2006 from $69.2  millionfor the three months 

40

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ended September  30, 2005. Mortgagewhole loan sales to third parties increased by approximately 7%to $7.1  billion for the three months ended September  30,2006 from $6.6  billion for the three months endedSeptember  30, 2005. Gain on sale of sub-prime loans decreased toa loss of approximately $632,000 for the three months endedSeptember  30, 2006 from a gain of approximately $15.6million for the three months ended September  30,2005.

Brokerage revenue.    Brokerage revenuedecreased by approximately 43% to $4.3  million for thethree months ended September  30, 2006 from approximately$7.5  million for the three months ended September  30,2005 due to a 28% decline in brokered loanvolume.

Net interest income.    Net interestincome decreased by approximately $13.5  million to a loss of$9.5  million for the three months ended September  30,2006 from income of $4.3  million for the three months endedSeptember  30, 2005. The decrease is primarily attributable tohigher borrowing costs on warehouse lines payable in the third quarterof 2006 resulting from an increase in average one-month LIBOR to5.35% from 3.60% in the third quarter of 2005, and ahigher percentage of funded POAs carrying low teaser rates. Inaddition, the results of a state regulatory examination led to areduction in net interest income of approximately $1.5  millionin the third quarter of 2006.

The following tablepresents the average balance for each category of mortgage bankinginterest-earning assets and interest-bearing liabilities, with thecorresponding annualized effective rate of interest and the relatedinterest income or expense.

Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                              |  |  |                                          |   |           |               |  |  |                          |  |        |                |  |  |               |   |        |                          |  |  |  |   |           |         |  |  |  |  |         |         |  |  |  |   |         |        |
|----------------------------------------------|--|--|------------------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|--------|--------------------------|--|--|--|---|-----------|---------|--|--|--|--|---------|---------|--|--|--|---|---------|--------|
|                                         |  |  | Forthe three months ended September  30, |
|                                         |  |  | 2006                                     |   |           | 2005          |
|                                         |  |  | AverageBalance                           |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |        | InterestIncomeandExpense |
| Interest-earningassets:                      |  |  |                                          |   |      |          |  |  |                          |  |   |           |  |  |               |   |   |                     |  |  |  |   |      |    |  |  |  |  |    |    |  |  |  |   |    |   |
| Mortgageloans held forsale                   |  |  |                                          | $ | 3,601,328 |          |  |  |                          |  | 5.34   | %         |  |  |               | $ | 48,106 |                     |  |  |  | $ | 3,003,055 |    |  |  |  |  | 4.98    | %  |  |  |  | $ | 37,699  |   |
| PortfolioAssets                              |  |  |                                          |   | 715,985   |          |  |  |                          |  | 6.10   |           |  |  |               |   | 10,910 |                     |  |  |  |   | —   |    |  |  |  |  | — |    |  |  |  |   | — |   |
| Cashand cashequivalents                      |  |  |                                          |   | 42,485    |          |  |  |                          |  | 2.21   |           |  |  |               |   | 234    |                     |  |  |  |   | 9,462     |    |  |  |  |  | 3.60    |    |  |  |  |   | 86      |   |
|                                         |  |  |                                          |   | 4,359,798 |          |  |  |                          |  | 5.44   |           |  |  |               |   | 59,250 |                     |  |  |  |   | 3,012,517 |    |  |  |  |  | 4.98    |    |  |  |  |   | 37,785  |   |
| Interest-bearingliabilities:                 |  |  |                                          |   |      |          |  |  |                          |  |   |           |  |  |               |   |   |                     |  |  |  |   |      |    |  |  |  |  |    |    |  |  |  |   |    |   |
| Warehouselinespayable                        |  |  |                                          |   | 3,505,731 |          |  |  |                          |  | 5.76   |           |  |  |               |   | 51,573 |                     |  |  |  |   | 2,929,159 |    |  |  |  |  | 4.24    |    |  |  |  |   | 31,314  |   |
| Juniorsubordinated debentures and other debt |  |  |                                          |   | 963,467   |          |  |  |                          |  | 6.96   |           |  |  |               |   | 17,142 |                     |  |  |  |   | 122,829   |    |  |  |  |  | 7.13    |    |  |  |  |   | 2,208   |   |
|                                         |  |  |                                          |   | 4,469,198 |          |  |  |                          |  | 6.02   |           |  |  |               |   | 68,715 |                     |  |  |  |   | 3,051,988 |    |  |  |  |  | 4.36    |    |  |  |  |   | 33,522  |   |
| Netinterest-earning assets andspread         |  |  |                                          | $ | (109,400  | )        |  |  |                          |  | (0.58  | )%        |  |  |               | $ | (9,465 | )                   |  |  |  | $ | (39,471   | )  |  |  |  |  | .62     | %  |  |  |  | $ | 4,263   |   |
| Netinterestmargin(1)                         |  |  |                                          |   |      |          |  |  |                          |  | (0.87  | )%        |  |  |               |   |   |                     |  |  |  |   |      |    |  |  |  |  | 0.56    | %  |  |  |  |   |    |   |
|                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensation andemployee benefits.    Compensation and employee benefitsexpenses remained approximately constant at $38.3  million forthe three months ended September  30, 2006 and 2005,respectively.

Processing expenses.    Mortgageloan processing expenses increased approximately 6% to$15.8  million for the three months ended September  30,2006 from approximately $15.0  million for the three months endedSeptember  30, 2005. This increase results from higher taxservice expense, bad debt expense, partially offset by lower otherprocessing expenses due to lower funded volume.

41

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General and administrativeexpenses.    General and administrative expenses increased byapproximately 29% to $6.6  million for the three monthsended September  30, 2006 from approximately $5.1  millionfor the three months ended September  30, 2005. This increase wasprimarily due to higher administrative expenses resulting fromcontinuing branch expansions.

Marketing, loanacquisition and business development expenses.    Marketing,loan acquisition and business development expenses increasedapproximately 10% to $1.3  million for the three monthsended September  30, 2006 from approximately $1.2  millionfor the three months ended September  30, 2005. The increase wasprimarily due to higher business development expenses associated withthe expansion of branches in new geographic areas.

Rentexpense.    Rent expense remained approximately constant at$2.7  million for the three months ended September  30,2006 and 2005, respectively.

Professionalfees.    Professional fees increased approximately 74%to $3.4  million for the three months ended September  30,2006 from approximately $1.9  million for the three months endedSeptember  30, 2005. This increase was primarily due to higherlitigation defense costs, increased regulatory examination andcompliance costs, and expenses associated with the proposed acquisitionof the Company by DB Structured Products.

Depreciationand amortization expenses.    Depreciation and amortizationexpenses increased approximately 73% to $1.7  million forthe three months ended September  30, 2006 from approximately$1.0  million for the three months ended September  30,2005. The increase was primarily due to leasehold improvements forbranch expansions as well as investments in computer systemsoftware.

Income tax expense.    MortgageITmade the election to be treated as a taxable REIT subsidiary and,therefore, is subject to federal and state corporate income taxes.Accordingly, the Company records a tax provision on the taxable incomeof the TRS, which includes intercompany income that is eliminated inour consolidated statements of operations. Income tax expense decreasedapproximately $7.5  million to an income tax benefit of $731,000for the three months ended September  30, 2006 from income taxexpense of approximately $6.8  million for the three months endedSeptember  30, 2005. This benefit resulted primarily from adecrease in income before income taxes of approximately $19.1million from income before income taxes of approximately $15.9million in the third quarter of 2005 to a loss before income taxes ofapproximately $3.2  million in the third quarter of2006.

Nine months ended September  30, 2006 comparedto nine months ended September  30, 2005

Net(loss) income

On a consolidated basis, net incomedecreased from approximately $32.8  million for the nine monthsended September  30, 2005 to approximately $2.6  millionfor the nine months ended September  30, 2006. The decrease isprimarily attributable to losses incurred in the wind-down of ournational wholesale sub-prime operations during 2006, lower net interestincome in mortgage banking and in the investment portfolio, and lowerrealized and unrealized gains on hedging instruments used in ourinvestment portfolio hedging program. Total revenues decreased byapproximately 6% to $213.7  million for the nine monthsended September  30, 2006, from approximately $226.9million for the comparable period in 2005. Gain on sale of mortgageloans increased by approximately 32% to $185.7  million inthe first nine months of 2006 compared to approximately $140.7million in the comparable period in 2005, while net interest incomedecreased by approximately 86% from $55.6  million toapproximately $8.0  million. In addition, the realized andunrealized gain on hedging instruments used in our investment portfoliohedging program decreased by approximately 83% from $9.7million in the first nine months of 2005 to $1.7  million in thefirst nine months of 2006. Brokerage revenue decreased by approximately18% to $16.5  million for the nine months endedSeptember  30, 2006, from approximately $20.2  million forthe comparable period in 2005. Total expenses increased approximately27% to $227.1  million for the nine months endedSeptember  30, 2006 from approximately $178.5  million forthe nine months ended September  30, 2005 primarily driven by

42

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higher sub-prime loan repurchase expenses,expenses associated with the proposed acquisition of the Company by DBStructured Products, and a 11% increase in funded loans fromapproximately $20.0  billion for the nine months endedSeptember  30, 2005 to approximately $22.3  billion for thenine months ended September  30, 2006. In addition, income taxexpense decreased period-over-period by approximately $31.6million from income tax expense of $15.6  million for the ninemonths ended September  30, 2005 to a $16.0  million incometax benefit for the nine months ended September  30, 2006. Thisbenefit resulted primarily from a decrease in income before incometaxes of the TRS of approximately $74.1  million from incomebefore income taxes of approximately $36.3 for the nine months endedSeptember  30, 2005 to a loss before income taxes ofapproximately $37.8  million for the nine months endedSeptember  30, 2006.

The following table presentsthe average balance for each category of our interest-earning assetsand interest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                      |  |  |                                         |   |           |                     |  |  |                          |  |        |                |  |  |                     |   |         |                          |  |  |  |   |           |        |  |  |  |  |        |         |  |  |  |   |         |        |
|--------------------------------------|--|--|-----------------------------------------|---|-----------|---------------------|--|--|--------------------------|--|--------|----------------|--|--|---------------------|---|---------|--------------------------|--|--|--|---|-----------|--------|--|--|--|--|--------|---------|--|--|--|---|---------|--------|
|                                 |  |  | For the nine monthsended September  30, |
|                                 |  |  | 2006                                    |   |           | 2005                |
|                                 |  |  | AverageBalance                          |   |           | EffectiveRate/Yield |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate/Yield |   |         | InterestIncomeandExpense |
| Interest-earningassets:              |  |  |                                         |   |      |                |  |  |                          |  |   |           |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |    |   |
| PortfolioAssets                      |  |  |                                         | $ | 4,960,286 |                |  |  |                          |  | 5.36   | %         |  |  |                     | $ | 199,467 |                     |  |  |  | $ | 3,459,746 |   |  |  |  |  | 4.97   | %  |  |  |  | $ | 128,498 |   |
| Mortgageloans held forsale           |  |  |                                         |   | 3,420,311 |                |  |  |                          |  | 5.63   |           |  |  |                     |   | 144,421 |                     |  |  |  |   | 2,007,816 |   |  |  |  |  | 5.53   |    |  |  |  |   | 83,006  |   |
| Cashand cashequivalents              |  |  |                                         |   | 46,271    |                |  |  |                          |  | 2.87   |           |  |  |                     |   | 996     |                     |  |  |  |   | 64,229    |   |  |  |  |  | 1.11   |    |  |  |  |   | 532     |   |
|                                 |  |  |                                         |   | 8,426,868 |                |  |  |                          |  | 5.46   |           |  |  |                     |   | 344,884 |                     |  |  |  |   | 5,531,791 |   |  |  |  |  | 5.13   |    |  |  |  |   | 212,036 |   |
| Interest-bearingliabilities:         |  |  |                                         |   |      |                |  |  |                          |  |   |           |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |    |   |
| Collateralizeddebtobligations        |  |  |                                         |   | 4,719,113 |                |  |  |                          |  | 4.93   |           |  |  |                     |   | 174,530 |                     |  |  |  |   | 2,806,551 |   |  |  |  |  | 3.89   |    |  |  |  |   | 81,588  |   |
| Warehouselinespayable                |  |  |                                         |   | 3,336,401 |                |  |  |                          |  | 5.90   |           |  |  |                     |   | 149,268 |                     |  |  |  |   | 2,426,919 |   |  |  |  |  | 3.82   |    |  |  |  |   | 69,269  |   |
| Otherdebt                            |  |  |                                         |   | 236,165   |                |  |  |                          |  | 7.29   |           |  |  |                     |   | 13,055  |                     |  |  |  |   | 147,126   |   |  |  |  |  | 5.11   |    |  |  |  |   | 5,625   |   |
|                                 |  |  |                                         |   | 8,291,679 |                |  |  |                          |  | 5.36   |           |  |  |                     |   | 336,853 |                     |  |  |  |   | 5,380,596 |   |  |  |  |  | 3.89   |    |  |  |  |   | 156,482 |   |
| Netinterest-earning assets andspread |  |  |                                         | $ | 135,189   |                |  |  |                          |  | 0.10   | %         |  |  |                     | $ | 8,031   |                     |  |  |  | $ | 151,195   |   |  |  |  |  | 1.24   | %  |  |  |  | $ | 55,554  |   |
| Netinterestmargin(1)                 |  |  |                                         |   |      |                |  |  |                          |  | 0.13   | %         |  |  |                     |   |    |                     |  |  |  |   |      |   |  |  |  |  | 1.34   | %  |  |  |  |   |    |   |
|                                      |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Mortgage InvestmentOperations

Revenues

Net interestincome.    Net interest income for our mortgage investmentoperations decreased approximately 15% to $23.6  millionfor the nine months ended September  30, 2006 from approximately$27.7  million for the comparable period ended September30, 2005. The decrease was due to a lower net interest margin, drivenby the flattening yield curve, partially offset by higher averageinterest-earning assets of $5.1  billion for the nine monthsended September  30, 2006 compared with average interest-earningassets of $3.5  billion for the comparable period endedSeptember  30, 2005. Net interest margin for our mortgageinvestment operations declined to .62% for the nine months endedSeptember  30, 2006 from 1.05% for the comparable periodended 

43

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September  30, 2005 due to continuedflattening of the yield curve as average one-month LIBOR rose to5.02% in the first nine months of 2006 from 3.12% in thefirst nine months of 2005.

The following table presentsthe average balance for each category of REIT interest-earning assetsand interest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income or expensefor the same period:

Average Balance, Rate and InterestIncome/Expense Table (Dollars inthousands)

|                                          |  |  |                                         |   |           |               |  |  |                          |  |        |                |  |  |               |   |         |                          |  |  |  |   |           |        |  |  |  |  |        |         |  |  |  |   |         |        |
|------------------------------------------|--|--|-----------------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--------|--|--|--|--|--------|---------|--|--|--|---|---------|--------|
|                                     |  |  | Forthe nine months ended September  30, |
|                                     |  |  | 2006                                    |   |           | 2005          |
|                                     |  |  | AverageBalance                          |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                  |  |  |                                         |   |      |          |  |  |                          |  |   |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |    |   |
| PortfolioAssets                          |  |  |                                         | $ | 4,957,895 |          |  |  |                          |  | 5.27   | %         |  |  |               | $ | 195,922 |                     |  |  |  | $ | 3,459,746 |   |  |  |  |  | 4.79   | %  |  |  |  | $ | 123,953 |   |
| Cashand cash equivalents and otherassets |  |  |                                         |   | 97,352    |          |  |  |                          |  | 8.34   |           |  |  |               |   | 6,089   |                     |  |  |  |   | 50,672    |   |  |  |  |  | 1.02   |    |  |  |  |   | 388     |   |
|                                     |  |  |                                         |   | 5,055,247 |          |  |  |                          |  | 5.33   |           |  |  |               |   | 202,011 |                     |  |  |  |   | 3,510,418 |   |  |  |  |  | 4.74   |    |  |  |  |   | 124,341 |   |
| Interest-bearingliabilities:             |  |  |                                         |   |      |          |  |  |                          |  |   |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |   |    |  |  |  |   |    |   |
| Collateralizeddebtobligations            |  |  |                                         |   | 4,719,113 |          |  |  |                          |  | 4.93   |           |  |  |               |   | 174,321 |                     |  |  |  |   | 2,806,551 |   |  |  |  |  | 3.89   |    |  |  |  |   | 81,347  |   |
| Warehouselinespayable                    |  |  |                                         |   | 2,275     |          |  |  |                          |  | 4.74   |           |  |  |               |   | 82      |                     |  |  |  |   | 467,417   |   |  |  |  |  | 3.78   |    |  |  |  |   | 13,210  |   |
| Repurchaseagreements                     |  |  |                                         |   | 96,701    |          |  |  |                          |  | 5.49   |           |  |  |               |   | 4,022   |                     |  |  |  |   | 88,600    |   |  |  |  |  | 3.22   |    |  |  |  |   | 2,130   |   |
|                                     |  |  |                                         |   | 4,818,089 |          |  |  |                          |  | 4.88   |           |  |  |               |   | 178,425 |                     |  |  |  |   | 3,362,568 |   |  |  |  |  | 3.84   |    |  |  |  |   | 96,687  |   |
| Netinterest-earning assets andspread     |  |  |                                         | $ | 237,158   |          |  |  |                          |  | 0.45   | %         |  |  |               | $ | 23,586  |                     |  |  |  | $ | 147,850   |   |  |  |  |  | .90    | %  |  |  |  | $ | 27,654  |   |
| Netinterestmargin(1)                     |  |  |                                         |   |      |          |  |  |                          |  | 0.62   | %         |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  | 1.05   | %  |  |  |  |   |    |   |
|                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

Expenses

Compensationand employee benefits.    Compensation and employee benefitsexpenses decreased approximately 52% to $1.1  million forthe nine months ended September  30, 2006 from approximately$2.3  million for the comparable period ended September30, 2005. The decrease was primarily due to a decrease in the number ofemployees dedicated to the investment operations as the businesscontinues to achieve economies of scale.

Processingexpenses.    Mortgage loan processing expenses decreasedapproximately 41% to $2.2  million for the nine monthsended September  30, 2006 from approximately $3.7  millionfor the comparable period ended September  30, 2005. The decreasewas primarily due to a lower provision for loanlosses.

General and administrativeexpenses.    General and administrative expenses decreasedapproximately 70% to $825,000 for the nine months endedSeptember  30, 2006 from approximately $2.8  million forthe comparable period ended September  30, 2005. This decreasewas primarily due to lower insurance and other administrativeexpenses.

Professional fees.    Professionalfees decreased approximately 10% to $1.4  million for thenine months ended September  30, 2006 from approximately$1.6  million for the comparable period ended September30, 2005. This decrease was primarily due to lower legal and otherprofessional expenses, offset by expenses associated with the proposedacquisition of the Company by DB Structured Products.

44

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Mortgage BankingOperations

Revenues

Gainon sale of mortgage loans.    Gain on sale of mortgage loansincreased approximately 15% to $185.6  million for thenine months ended September  30, 2006 from approximately$161.6  million for the nine months ended September  30,2005. Mortgage whole loan sales to third parties increased byapproximately 48% to $20.1  billion for the nine monthsended September  30, 2006 from approximately $13.5  billionfor the nine months ended September  30, 2005. Gain on sale ofsub-prime loans decreased to a loss of approximately $10.8million for the nine months ended September  30, 2006 from a gainof approximately $35.4  million for the nine months endedSeptember  30, 2005.

Brokeragerevenue.    Brokerage revenue decreased by approximately18% to $16.5  million for the nine months endedSeptember  30, 2006, from approximately $20.2  million forthe comparable period in 2005, due to an 18% decline in brokeredloan volume from the comparable period.

Net interestincome.    Net interest income decreased by approximately$43.8  million to a loss of $20.3  million for the ninemonths ended September  30, 2006 from income of $23.5million for the nine months ended September  30, 2005. Thedecrease is attributable to higher borrowing costs on warehouse linespayable in the first nine months of 2006 resulting from an increase inaverage one-month LIBOR to 5.02% from 3.12% in the firstnine months of 2005, as well as a higher percentage of funded POAscarrying low teaser rates. In addition, the results of a stateregulatory examination led to a reduction in net interest income ofapproximately $1.5  million in the third quarter of 2006.

The following table presents the average balance for eachcategory of mortgage banking interest-earning assets andinterest-bearing liabilities, with the corresponding annualizedeffective rate of interest and the related interest income orexpense.

Average Balance, Rate and Interest Income/ExpenseTable (Dollars inthousands)

|                                              |  |  |                                         |   |           |               |  |  |                          |  |        |                |  |  |               |   |         |                          |  |  |  |   |           |        |  |  |  |  |         |         |  |  |  |   |         |        |
|----------------------------------------------|--|--|-----------------------------------------|---|-----------|---------------|--|--|--------------------------|--|--------|----------------|--|--|---------------|---|---------|--------------------------|--|--|--|---|-----------|--------|--|--|--|--|---------|---------|--|--|--|---|---------|--------|
|                                         |  |  | For the nine monthsended September  30, |
|                                         |  |  | 2006                                    |   |           | 2005          |
|                                         |  |  | AverageBalance                          |   |           | EffectiveRate |  |  | InterestIncomeandExpense |  |        | AverageBalance |  |  | EffectiveRate |   |         | InterestIncomeandExpense |
| Interest-earningassets:                      |  |  |                                         |   |      |          |  |  |                          |  |   |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |    |    |  |  |  |   |    |   |
| Mortgageloans held forsale                   |  |  |                                         | $ | 3,420,311 |          |  |  |                          |  | 5.63   | %         |  |  |               | $ | 144,420 |                     |  |  |  | $ | 2,007,816 |   |  |  |  |  | 5.53    | %  |  |  |  | $ | 83,006  |   |
| PortfolioAssets                              |  |  |                                         |   | 615,811   |          |  |  |                          |  | 5.82   |           |  |  |               |   | 26,893  |                     |  |  |  |   | —   |   |  |  |  |  | — |    |  |  |  |   | — |   |
| Cashand cashequivalents                      |  |  |                                         |   | 40,401    |          |  |  |                          |  | 2.92   |           |  |  |               |   | 885     |                     |  |  |  |   | 23,587    |   |  |  |  |  | 2.56    |    |  |  |  |   | 452     |   |
|                                         |  |  |                                         |   | 4,076,523 |          |  |  |                          |  | 5.63   |           |  |  |               |   | 172,198 |                     |  |  |  |   | 2,031,403 |   |  |  |  |  | 5.49    |    |  |  |  |   | 83,458  |   |
| Interest-bearingliabilities:                 |  |  |                                         |   |      |          |  |  |                          |  |   |           |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  |    |    |  |  |  |   |    |   |
| Warehouselinespayable                        |  |  |                                         |   | 3,334,126 |          |  |  |                          |  | 5.90   |           |  |  |               |   | 149,185 |                     |  |  |  |   | 1,959,502 |   |  |  |  |  | 3.83    |    |  |  |  |   | 56,059  |   |
| Juniorsubordinated debentures and other debt |  |  |                                         |   | 848,697   |          |  |  |                          |  | 6.74   |           |  |  |               |   | 43,347  |                     |  |  |  |   | 68,806    |   |  |  |  |  | 7.51    |    |  |  |  |   | 3,866   |   |
|                                         |  |  |                                         |   | 4,182,823 |          |  |  |                          |  | 6.07   |           |  |  |               |   | 192,532 |                     |  |  |  |   | 2,028,308 |   |  |  |  |  | 3.95    |    |  |  |  |   | 59,925  |   |
| Netinterest-earning assets andspread         |  |  |                                         | $ | (106,300  | )        |  |  |                          |  | (0.44  | )%        |  |  |               | $ | (20,334 | )                   |  |  |  | $ | 3,095     |   |  |  |  |  | 1.54    | %  |  |  |  | $ | 23,533  |   |
| Netinterestmargin(1)                         |  |  |                                         |   |      |          |  |  |                          |  | (0.67  | )%        |  |  |               |   |    |                     |  |  |  |   |      |   |  |  |  |  | 1.55    | %  |  |  |  |   |    |   |
|                                              |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------|
| (1) | Netinterest margin is computed by dividing annualized net interest incomeby the average daily balance of interest-earningassets. |

45

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Expenses

Compensationand employee benefits.    Compensation and employee benefitsexpenses increased approximately 14% to $110.3  millionfor the nine months ended September  30, 2006 from approximately$96.7  million for the nine months ended September  30,2005. The increase was primarily due to higher average non-productionstaffing and an 11% increase in funded loans to approximately$22.3  billion in the first nine months of 2006 fromapproximately $20.0  billion in the first nine months endedSeptember  30, 2005.

Processingexpenses.    Mortgage loan processing expenses increasedapproximately 62% to $61.5  million for the nine monthsended September  30, 2006 from approximately $38.0  millionfor the nine months ended September  30, 2005. The increase wasprimarily due to higher sub-prime loan repurchase expenses in the firstnine months of 2006 relative to the first nine months of2005.

General and administrativeexpenses.    General and administrative expenses increased byapproximately 31% to $21.4  million for the nine monthsended September  30, 2006 from approximately $16.3  millionfor the nine months ended September  30, 2005. This increase wasprimarily due to branch expansions, as well as 11% higherorigination volumes.

Marketing, loan acquisition andbusiness development expenses.    Marketing, loan acquisitionand business development expenses increased approximately 24% to$3.9  million for the nine months ended September  30, 2006from approximately $3.1  million for the nine months endedSeptember  30, 2005. The increase was primarily due to higherbusiness development expenses associated with the expansion of branchesin new geographic areas and higher period-over-periodoriginations.

Rent expense.    Rent expenseincreased approximately 37% to $9.9  million for the ninemonths ended September  30, 2006 from approximately $7.3million for the nine months ended September  30, 2005. Thisincrease was primarily due to expansion of existing branches, as wellas fees associated with the termination of leases within our wholesalesub-prime and prime retail divisions during the first nine months of2006.

Professional fees.    Professional feesincreased approximately 67% to $9.5  million for the ninemonths ended September  30, 2006 from approximately $5.7million for the nine months ended September  30, 2005. Thisincrease was primarily due to higher litigation defense costs,increased regulatory examination and compliance costs, as well ashigher technology consulting expenses, and expenses associated with theproposed acquisition of the Company by DB StructuredProducts.

Depreciation and amortizationexpenses.    Depreciation and amortization expenses increasedapproximately 87% to $4.9  million for the nine monthsended September  30, 2006 from approximately $2.6  millionfor the nine months ended September  30, 2005. The increase wasprimarily due to leasehold improvements for branch expansions as wellas investments in computer system software.

Income taxexpense.    MortgageIT made the election to be treated as ataxable REIT subsidiary and, therefore, is subject to federal and statecorporate income taxes. Accordingly, the Company records a taxprovision on the taxable income of the TRS, which includes intercompanyincome that is eliminated in our consolidated statements of operations.Income tax expense decreased period-over-period by approximately$31.6  million from income tax expense of $15.6  millionfor the nine months ended September  30, 2005 to approximately$16.0  million of income tax benefit for the nine months endedSeptember  30, 2006. This benefit primarily resulted from adecrease in income before income taxes of approximately $74.1million from income before income taxes of approximately $36.3 for thenine months ended September  30, 2005 to a loss before incometaxes of approximately $37.8  million for the nine months endedSeptember  30, 2006.

46

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FINANCIALCONDITION

At September  30, 2006 andDecember  31,  2005, our assets consisted of both PortfolioARM Loans and mortgage loans held for sale, representing 55% and41%, respectively, of total assets at September  30, 2006,and 56% and 40%, respectively, of total assets atDecember  31,  2005.

Total assets increased by$88.0  million from December  31,  2005 toSeptember  30, 2006. The increase primarily reflects an increasein mortgage loans held for sale in the amount of $121.7  million,offset by a decrease in Portfolio Arm Loans in the amount of$39.6  million.

The following table presents variouscharacteristics of our Portfolio ARM Loans as of September  30,2006. The aggregate unpaid principal balance of the loans included inthis table is approximately $4.6  billion.

47

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|                                       |  |  |         |   |         |         |  |  |     |   |           |         |  |  |  |   |        |         |
|---------------------------------------|--|--|---------|---|---------|---------|--|--|-----|---|-----------|---------|--|--|--|---|--------|---------|
|                                  |  |  | Average |   |         | High    |  |  | Low |
| Originalloanbalance                   |  |  |         | $ | 286,507 |    |  |  |     | $ | 1,500,000 |    |  |  |  | $ | 21,207 |    |
| Couponrate onloans                    |  |  |         |   | 5.68    | %  |  |  |     |   | 8.75      | %  |  |  |  |   | 3.50   | %  |
| %Grossmargin                          |  |  |         |   | 2.32    | %  |  |  |     |   | 2.75      | %  |  |  |  |   | 2.00   | %  |
| Lifetimecap                           |  |  |         |   | 5.99    | %  |  |  |     |   | 9.95      | %  |  |  |  |   | 5.00   | %  |
| Originalterm(months)                  |  |  |         |   | 360     |    |  |  |     |   | 360       |    |  |  |  |   | 360    |    |
| Remainingterm(months)                 |  |  |         |   | 343     |    |  |  |     |   | 353       |    |  |  |  |   | 326    |    |
| Geographicdistribution (top 5states): |  |  |         |   |    |    |  |  |     |   |      |    |  |  |  |   |   |    |
| California                            |  |  |    |   |         |    |  |  |     |   | 53.3      | %  |
| Arizona                               |  |  |    |   |         |    |  |  |     |   | 7.4       |    |
| Washington                            |  |  |    |   |         |    |  |  |     |   | 6.6       |    |
| Florida                               |  |  |    |   |         |    |  |  |     |   | 5.3       |    |
| Nevada                                |  |  |    |   |         |    |  |  |     |   | 3.1       |    |
| Other                                 |  |  |    |   |         |    |  |  |     |   | 24.3      |    |
| Occupancystatus:                      |  |  |    |   |         |    |  |  |     |   |      |    |
| Owneroccupied                         |  |  |    |   |         |    |  |  |     |   | 89.1      | %  |
| Investor                              |  |  |    |   |         |    |  |  |     |   | 8.3       |    |
| Secondhome                            |  |  |    |   |         |    |  |  |     |   | 2.6       |    |
| Documentationtype:                    |  |  |    |   |         |    |  |  |     |   |      |    |
| FullDocumentation                     |  |  |    |   |         |    |  |  |     |   | 40.6      | %  |
| StatedIncome/VerifiedAssets           |  |  |    |   |         |    |  |  |     |   | 47.8      |    |
| StatedIncome/Stated Assets            |  |  |    |   |         |    |  |  |     |   | 4.2       |    |
| VerifiedAssets                        |  |  |    |   |         |    |  |  |     |   | 2.6       |    |
| NoDocumentation                       |  |  |    |   |         |    |  |  |     |   | 4.8       |    |
| Loanpurpose:                          |  |  |    |   |         |    |  |  |     |   |      |    |
| Purchase                              |  |  |    |   |         |    |  |  |     |   | 55.9      | %  |
| Cash-outrefinance                     |  |  |    |   |         |    |  |  |     |   | 27.8      |    |
| Rate& termrefinance               |  |  |    |   |         |    |  |  |     |   | 16.3      |    |
| Originalloan-to-value:                |  |  |    |   |         |    |  |  |     |   |      |    |
| 80.01%andover                         |  |  |    |   |         |    |  |  |     |   | 2.0       | %  |
| 70.01%-80.00%                         |  |  |    |   |         |    |  |  |     |   | 71.5      |    |
| 60.01%-70.00%                         |  |  |    |   |         |    |  |  |     |   | 15.7      |    |
| 50.01%-60.00%                         |  |  |    |   |         |    |  |  |     |   | 6.1       |    |
| 50.00%or less                         |  |  |    |   |         |    |  |  |     |   | 4.7       |    |
| Weightedaverage originalloan-to-value |  |  |    |   |         |    |  |  |     |   | 73.9      | %  |
| Propertytype:                         |  |  |    |   |         |    |  |  |     |   |      |    |
| Singlefamily                          |  |  |    |   |         |    |  |  |     |   | 60.3      | %  |
| PUD                                   |  |  |    |   |         |    |  |  |     |   | 23.6      |    |
| Condominium                           |  |  |    |   |         |    |  |  |     |   | 11.9      |    |
| Otherresidential                      |  |  |    |   |         |    |  |  |     |   | 4.2       |    |
| ARMloan type:                         |  |  |    |   |         |    |  |  |     |   |      |    |
| 3-yearhybrid                          |  |  |    |   |         |    |  |  |     |   | 18.7      | %  |
| 5-yearhybrid                          |  |  |    |   |         |    |  |  |     |   | 75.8      |    |
| PayOption                             |  |  |    |   |         |    |  |  |     |   | 5.0       |    |
| Other                                 |  |  |    |   |         |    |  |  |     |   | 0.5       |    |
| ARMinterest ratecaps:                 |  |  |    |   |         |    |  |  |     |   |      |    |
| Initialcap:                           |  |  |    |   |         |    |  |  |     |   |      |    |
| Under3.00                             |  |  |    |   |         |    |  |  |     |   | 5.3       | %  |
| 3.01-4.00                             |  |  |    |   |         |    |  |  |     |   | 0.0       |    |
| 4.01-5.00                             |  |  |    |   |         |    |  |  |     |   | 22.0      |    |
| 5.01-6.00                             |  |  |    |   |         |    |  |  |     |   | 72.7      |    |
| Periodiccap:                          |  |  |    |   |         |    |  |  |     |   |      |    |
| None                                  |  |  |    |   |         |    |  |  |     |   | 0.2       | %  |
| Under1.00%                            |  |  |    |   |         |    |  |  |     |   | 0.0       |    |
| Over1.00%                             |  |  |    |   |         |    |  |  |     |   | 99.8      |    |
| Percentof interest-only loanbalances  |  |  |    |   |         |    |  |  |     |   | 78.9      | %  |
| FICOscore atorigination:              |  |  |    |   |         |    |  |  |     |   |      |    |
| 801andover                            |  |  |    |   |         |    |  |  |     |   | 2.7       | %  |
| 751to 800                             |  |  |    |   |         |    |  |  |     |   | 31.8      |    |
| 701 to750                             |  |  |    |   |         |    |  |  |     |   | 43.3      |    |
| 651 to700                             |  |  |    |   |         |    |  |  |     |   | 21.5      |    |
| 650 orless                            |  |  |    |   |         |    |  |  |     |   | 0.7       |    |
| Weighted averageFICO(1)score:         |  |  |    |   |         |    |  |  |     |   | 732       |    |
|                                       |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                     |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | FICOis a credit score, ranging from 300 to 850, with 850 being the bestscore, based upon the credit evaluation methodology developed by Fair,Isaac and Company, a consulting firm specializing in creating creditevaluation models. |

48

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CRITICAL ACCOUNTING POLICIES ANDESTIMATES

Management's discussion and analysis offinancial condition and results of operations is based on the amountsreported in our consolidated financial statements. These consolidatedfinancial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America(‘‘GAAP’’), many of which require the useof estimates, judgments and assumptions that affect reported amounts.Changes in the estimates and assumptions could have a material effecton these consolidated financial statements. In accordance with recentSEC guidance, those material accounting policies that we believe arethe most critical to an investor's understanding of our financialresults and condition, and require complex management judgment aredescribed below. Additional information regarding our accountingpolicies is contained in Note 1 to the consolidated financialstatements included elsewhere in this quarterly report on Form10-Q.

Derivatives and Hedging Activities

Weutilize derivatives to manage interest rate risk exposure. Inaccordance with SFAS No. 133, ‘‘Accounting for DerivativeInvestments and Hedging Activities,’’ all derivativeinstruments are recorded at fair value. We designate every derivativeinstrument as either (1) a hedge of the fair value of a recognizedasset or liability or of an unrecognized firm commitment, (2) a hedgeof the variability of cash flows to be paid related to either aforecasted or recognized liability, or (3) a free-standing derivativeinstrument.

To qualify for hedge accounting under SFAS No.133, we must demonstrate, on an ongoing basis, that our interest raterisk management activity is highly effective. We determine theeffectiveness of our interest rate risk management activities usingstandard statistical measures. If we are unable to qualify certain ofour interest rate risk management activities for hedge accounting, thenthe gain or loss on the associated derivative financial instrumentswould be reflected in current period earnings. See Note 4 of ourconsolidated financial statements included elsewhere in this quarterlyreport on Form 10-Q for further information pertaining to ouraccounting for derivatives and hedging activities.

Changesin the fair value of a derivative that is highly effective and that isdesignated and qualifies as a fair value hedge, along with the changein the fair value of the hedged asset or liability, are recorded inearnings. Our fair value hedges are used primarily for mortgage loansheld for sale.

Gains and losses on a derivative that ishighly effective and that is designated and qualifies as a cash flowhedge are recorded in accumulated other comprehensive income (loss) tothe extent that the derivative is effective as a hedge, until earningsare affected by the variability in cash flows of the designated hedgeditem. Our cash flow hedges are used primarily to hedge the financingcost for forecasted or recognized mortgage-backed collateralized debtobligations.

We obtain the fair value of Eurodollarfutures, forward delivery contracts on MBS (‘‘TBASecurities’’), options on TBA Securities and interestrate swaps and caps from quoted market prices.

The fairvalue of forward sale commitments to deliver mortgages is estimatedusing current quoted market prices for dealer or investor commitmentsas applies to our existing positions.

The fair value of aninterest rate lock commitment (‘‘IRLC’’) isbased on an estimate of the fair value of the underlying mortgage loan,and given the probability that the loan will fund within the terms ofthe IRLC. After issuance, the value of an IRLC can change and be eitherpositive or negative, depending on the change in value of theunderlying mortgage loan. The probability that the underlying loan willfund is driven by a number of factors, in particular, the change, ifany, in mortgage rates after the lock date. In general, the probabilityof funding increases if mortgage rates rise and decreases if mortgagerates fall. The probability that a loan will fund within the terms ofthe IRLC also is influenced by the source of the applicant, purpose forthe loan (purchase or refinance) and the application approvalrate.

Fair value estimates are made as of a specific pointin time based on estimates using present value or other valuationtechniques. These techniques may involve uncertainties and aresignificantly affected by the assumptions used and the judgments maderegarding risk characteristics of various financial 

49

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instruments, discount rates, estimates offuture cash flows, future expected loss experience and other factors.Changes in assumptions could significantly affect these estimates andthe resulting fair values.

Interest Income on Portfolio ARMLoans

Interest income is accrued based on the outstandingprincipal amount and contractual terms of our loans. Direct loanorigination fees and costs are deferred and amortized as an interestincome yield adjustment over the life of the related loans using theeffective yield method. Estimating prepayments and estimating theremaining lives of the loans requires management judgment, whichinvolves consideration of possible future interest rate environments.The actual lives could be more or less than the amount estimated bymanagement. See Item 3 — Quantitative and QualitativeDisclosures About Market Risk — Interest Rate Risk Management inthis quarterly report on Form 10-Q for further details.

LoanLoss Reserves

MortgageIT's historical operationshad an insignificant amount of loan losses due to default ornon-performance on the loans primarily because mortgage loans were soldsoon after being originated. Because we now hold loans for investment,we record an allowance for loan losses reflecting our estimate offuture loan default losses. Our Portfolio ARM Loans are collectivelyevaluated for impairment, as the loans are homogeneous in nature. Theallowance is based upon management's assessment of the variousrisk factors affecting our investment loan portfolio, including currenteconomic conditions, the makeup of the portfolio based on credit grade,loan-to-value ratios, delinquency status, historical credit losses,purchased mortgage insurance and other factors deemed to warrantconsideration. The allowance is maintained through ongoing lossprovisions charged to operating income and is reduced by loans that arecharged off. Determining the allowance for loan losses is subjective innature due to the estimates required and the potential for imprecision.Two critical assumptions used in estimating the loan loss reserves arean assumed rate of default, which is the expected rate at which loansgo into foreclosure over the life of the loans, and an assumed rate ofloss severity, which represents the expected rate of realized loss upondisposition of the properties that have gone intoforeclosure.

REMIC Securitization

MortgageITstructured its November  2005, REMIC securitization so thatcontrol over the collateral was transferred and the transfer wasaccounted for as a sale. In accordance with SFAS No. 140, a gainor loss on the sale is recognized based on the carrying amount of thefinancial assets involved in the transfer, allocated between the assetstransferred and the retained interests based on their relative fairvalue at the date of transfer. In the REMIC securitization, MortgageITretained the right to service the underlying mortgage loans andHoldings also purchased certain mortgage securities issued by the trust(see Note 5 to the consolidated financial statements included elsewherein this quarterly report on Form 10-Q). The gain recognized uponsecuritization depends on, among other things, the estimated fair valueof the components of the REMIC securitization — the loanstransferred, the mortgage securities purchased and the mortgageservicing rights. We obtain the estimated fair value of the MBS fromdifferent sources, including broker dealers. The initial value of theMBS we purchase in a REMIC securitization is derived from the allocatedcost, based upon the relative fair value of the entire REMICsecuritization.

An implied yield (discount rate) iscalculated based on the initial value derived above and using projectedcash flows generated using assumptions for prepayments, expected creditlosses and interest rates. Additionally, this yield serves as theinitial accretable yield used to recognize income on thesecurities.

Mortgage Servicing Rights

MortgageITrecorded MSR arising from the sale of mortgages in the November2005, REMIC securitization at the allocated cost, utilizing therelative fair value allocation method based upon an 

50

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estimate of what a third party would pay forthe MSR. The MSR are amortized in proportion to and over the estimatedperiod of net servicing income. MortgageIT subsequently evaluates andmeasures the MSR for impairment by comparing the unamortized balanceagainst the fair value obtained from a broker dealer. An impairmentloss is recognized for MSR that have an unamortized balance in excessof the estimated fair value.

LIQUIDITY AND CAPITALRESOURCES

Liquidity is a measure of our ability to meetpotential cash requirements, including ongoing commitments to repayborrowings, fund and maintain investments, pay dividends to ourstockholders and other general business needs. It is our policy to haveadequate liquidity available at all times. We manage liquidity toensure that we have the continuing ability to maintain cash flows thatare adequate to fund operations and meet commitments on a timely andcost-effective basis.

Liquidity from Mortgage InvestmentOperations

The principal sources of liquidity from ourmortgage investment operations are the issuance of MBS, repurchaseagreements, and principal payments and net interest earned from ourPortfolio ARM Loans. The net interest income earned from our PortfolioARM Loans is the primary source of income and liquidity for the paymentof dividends to our stockholders. We believe that our liquidity levelis in excess of that necessary to pay dividends to our stockholders andto satisfy our operating requirements.

Loansecuritizations are the primary funding source for our Portfolio ARMLoans.

We securitize mortgage loans by transferring themto independent trusts that issue securities collateralized by thetransferred mortgage loans. The loan securitization process benefits usby creating highly liquid securitized assets that can be readilyfinanced in the capital markets. We believe there is a reliable andstable market for term financing of investment grade MBS that we issue.Through September  30, 2006, we completed seven securitizationtransactions, in which we securitized ARM loans into a series of prorata pay, floating-rate securities, and the February  2006 REMICsecuritization.

In these transactions, we issued AAA andAA− rated floating-rate pass-through certificates totaling$5.97  billion and A+/BBB+ subordinated floating-rate securitiestotaling $65.2  million to third party investors, and retained$145.5  million of subordinated certificates, which providecredit support to the higher-rated certificates. The interest rates onthe floating-rate pass-through certificates reset monthly and areindexed to the one-month LIBOR rate. In connection with the issuance ofthese MBS, we incurred securitization costs of $15.5  million,including investment banking fees, legal fees and other related costs.The securitization costs are amortized over the expected life ofMBS.

Outstanding MBS were collateralized by ARM loans witha remaining principal balance of $4.6  billion, as of bothSeptember  30, 2006 and December  31,  2005. TheseMBS mature between 2033 and 2036 and are callable at par by us afterthe total remaining balance of the loans collateralizing the debt ispaid down to 20%, or 10% for the February  2006REMIC securitization, of its original balance. The balance of our debtis also reduced as the underlying loan collateral is paid down, and isexpected to have an average life of approximately 2.5years.

We also utilize repurchase agreements as a sourceof financing for our mortgage investment operations. These arrangementsvary in size and other characteristics among multiple providers. Inparticular, repurchase agreements have terms that will vary withrespect to advance rates, interest spreads, size, duration and othercharacteristics depending on the nature of the underlying collateral inthe program.

Under these agreements, we sell some or allof the retained interest in our MBS to a counterparty and we agree torepurchase those assets at a future date. At maturity, we repurchasethe assets from the counterparty at an amount equal to the originalsales price plus interest. During the term of a repurchase agreement,we continue to earn principal and interest on the underlying mortgageassets. As of September  30, 2006 and December  31,2005, we had $94.7  million and $87.1  million ofsecurities outstanding under the repurchase agreements,respectively.

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These financing arrangements areshort-duration facilities, generally 30 days, secured by the retainedinterest in our MBS, the value of which may move inversely with changesin interest rates. A decline in the market value of our investments maylimit our ability to borrow or result in lenders requiring additionalcollateral. As a result, we could be required to sell some of ourinvestments under adverse market conditions in order to maintainliquidity. If such sales are made at prices lower than the amortizedcosts of such investments, we will incur losses.

Inaddition, we draw down on all but one of our warehouse creditfacilities to finance loans that are held for securitization by theREIT.

Liquidity from Mortgage BankingOperations

The principal sources of liquidity from ourmortgage banking operations are our warehouse credit facilities and ourprincipal use of liquidity is the origination of new mortgageloans.

To originate a mortgage loan, MortgageIT utilizesits short-term warehouse credit facilities that are available to fundmortgage loans held for sale. These facilities are secured by themortgage loans owned by MortgageIT and by certain other assets,including cash deposited in interest-bearing collateral accounts.Advances drawn under these facilities bear interest at rates that varydepending on the type of mortgage loans securing the advances. Thesefacilities are subject to sub-limits, advance rates and terms that varydepending on the type of mortgage loans securing these financings andthe ratio of MortgageIT's liabilities to its tangible net worth.Warehouse credit facilities generally have a term of one year and havebeen renewed annually. As of September  30, 2006, the aggregateamount of our warehouse facilities was $11.3  billion and theamount available for additional borrowings under these facilities wasapproximately $8.0  billion.

These facilities bearinterest at LIBOR plus a spread based on the types of loans beingfunded. The weighted average effective rate of interest for borrowingsunder all warehouse credit facilities was approximately 5.9% and4.3% for the nine months ended September  30, 2006 and theyear ended December  31,  2005,respectively.

As of September  30, 2006, the Companyhad eight warehouse credit facilities with major lenders that it usedto fund mortgage loans. During October 2006, the Company’swarehouse credit facilities with JPMorgan Chase Bank, NationalAssociation, Greenwich Capital Financial Products Inc. and ResidentialFunding Corporation expired according to their terms, bringing thetotal number of facilities it may draw upon to five. The Companyexpects to terminate its warehouse credit facility with UBS Real EstateSecurities Inc., under which it has no outstanding borrowings, inNovember 2006.

All mortgage loans held for sale have beenpledged as collateral under the above warehouse credit facilities. Thedocuments governing MortgageIT's warehouse credit facilitiescontain a number of compensating balance requirements and restrictivefinancial and other covenants that, among other things, require it tomaintain minimum levels of tangible net worth, liquidity andstockholders' equity, and maximum leverage ratios, as well as tocomply with applicable regulatory and investorrequirements.

The Company was not in compliance with acovenant contained in one of its warehouse credit facilities as ofJuly  31,  2006 and August  31,  2006, forwhich waivers have been obtained. No assurance can be made that theCompany's lenders will waive future covenant violations, ifviolations occur. These facilities contain covenants limiting theCompany's ability to:

|              |                                                                    |
|--------------|--------------------------------------------------------------------|
| •  | consolidate,merge or enter into similar extraordinarytransactions; |

|              |                                                 |
|--------------|-------------------------------------------------|
| •  | transfer or sell asubstantial amount of assets; |

|              |                                             |
|--------------|---------------------------------------------|
| •  | createadditional liens on the collateral;or |

|              |                                                                                                                                      |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------|
| •  | change the nature of its business,without obtaining the prior consent of the lenders, which consent maynot be unreasonably withheld. |

These limits may in turnrestrict the Company's ability to pay cash or stock dividends onits common stock. In addition, under the facilities, the Company cannotcontinue to finance a mortgage loan that it holds through the facilityif:

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|              |                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | the loan isrejected as ‘‘unsatisfactory for purchase’’by the ultimate investor and/or has exceeded its permissible warehouseperiod, which varies by facility; |

|              |                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------|
| •  | theCompany fails to deliver the applicable note, mortgage or otherdocuments evidencing the loan within the requisite timeperiod; |

|              |                                                                                                                      |
|--------------|----------------------------------------------------------------------------------------------------------------------|
| •  | the underlying property thatsecures the loan has sustained a casualty loss in excess of 5%of its appraised value; or |

|              |                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------|
| •  | the loan ceasesto be an eligible loan (as determined pursuant to the warehouse creditfacility agreement). |

In addition to the warehousefacilities, MortgageIT issues junior subordinated debentures (the‘‘Debentures’’).

DuringMarch  2006, MortgageIT issued $51.5  million of theDebentures. The Debentures were issued to a trust subsidiary ofMortgageIT in order to fund the trust's obligations with respectto an aggregate of $50  million of trust preferred securitieswhich were issued by such trust subsidiary. The Debentures arefloating-rate and bear a variable interest rate of 360 basis pointsabove 3-month LIBOR, paid quarterly, and mature in 2036. They areredeemable, by MortgageIT, at par after five years and at a premium topar in certain limited circumstances over the first five years. Inconnection with the issuance of the Debentures, the Company incurredcosts of $1.5  million. These costs are being amortized over theexpected life of the securities.

During April andMay  2005, MortgageIT issued $77.3  million of theDebentures in two separate private placements. The Debentures wereissued to a trust subsidiary of MortgageIT in order to fund thetrust's obligations with respect to an aggregate of $75million of trust preferred securities which were issued by such trustsubsidiary. The Debentures are floating-rate securities and bear avariable interest rate of 375 basis points above 3-month LIBOR, paidquarterly, and mature in 2035. They are redeemable, by MortgageIT, atpar after five years and at a premium to par in certain limitedcircumstances over the first five years. In connection with theissuance of the Debentures, the Company incurred costs of $2.5million. These costs are being amortized over the expected life of thesecurities.

Also, MortgageIT entered into a note purchaseagreement in March  2004, whereby MortgageIT sold an aggregateprincipal amount of $15  million of senior secured notes (the‘‘Notes’’) to an investor; MortgageIT soldan additional aggregate principal amount of $15  million of Notesto the investor in February  2006. The proceeds from the sale ofthe Notes provide working capital for MortgageIT. Under the relatednote purchase agreement, as amended, the Notes bore interest at (i) arate of 10% per annum through September  30, 2004, (ii) arate of 7.5% per annum from October  1,  2004through March  31,  2005, (iii) a rate of 10% perannum from April  1,  2005 to August  23,2005, (iv) a rate of 5.5% per annum from August24,  2005 to February  20,  2006 and (v) a rate of6.5% per annum from February  21,  2006 to maturity.Interest on the Notes is payable quarterly in arrears. The Notesprovide for a single payment of the entire amount of the unpaidprincipal and any unpaid accrued interest on the Notes on March29,  2007. In August  2006, MortgageIT repaid an aggregateprincipal amount of $15  million of senior secured notes to theinvestor. In September  2006, the investor notified MortgageITthat it intends to exercise its purchaser put right for all amountsowed under the note purchase agreement on December  19,2006. As of September  30, 2006, MortgageIT was in compliancewith all of the restrictions and covenants contained in the notepurchase agreement. If covenant violations occur in the future, therecan be no assurance that the investor will waivethem.

MortgageIT makes certain representations andwarranties, and is subject to various affirmative and negativefinancial and other covenants, under the terms of both the warehousecredit facilities and certain investor loan sale agreements regarding,among other things, the loans' compliance with laws andregulations, their conformity with the investors' underwritingstandards and the accuracy of information. In the event of a breach ofthese representations, warranties or covenants or in the event of anearly payment default, these loans may become ineligible collateral forthe warehouse credit facilities or may become ineligible for sale to aninvestor, and MortgageIT may be required to repurchase the loans fromthe warehouse lender or the investor. MortgageIT has implemented

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procedures to help ensure quality control andconformity to underwriting standards and to minimize the risk of beingrequired to repurchase loans. MortgageIT has been required torepurchase loans it has sold from time to time; however, to date, theserepurchases have not had a material impact on the results of operationsof MortgageIT.

MortgageIT's ability to originate andfund loans has historically depended in large part on its ability tosell the mortgage loans it originates at a premium in the secondarymarket so that it may generate cash proceeds to repay borrowings underits warehouse facilities. The value of MortgageIT's loans isrelevant in determining the overall amount of borrowings that will beavailable to it under its financing facilities. The value of our loansdepends on a number of factors,including:

|              |                                                               |
|--------------|---------------------------------------------------------------|
| •  | interest rates on our loanscompared to market interest rates; |

|              |                                        |
|--------------|----------------------------------------|
| •  | theborrower credit riskclassification; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | loan-to-value ratios, loanterms, underwriting and documentation;and |

|              |                             |
|--------------|-----------------------------|
| •  | general economicconditions. |

Cash and Cash Equivalents

TheCompany's cash and cash equivalents increased to $43.9million at September  30, 2006 from $36.8  million atDecember  31,  2005. The Company's primary sources ofcash and cash equivalents during the nine months ended September30, 2006 were as follows:

|              |                                                     |
|--------------|-----------------------------------------------------|
| •  | a $140.9million increase in warehouse linespayable; |

|              |                                                                                                |
|--------------|------------------------------------------------------------------------------------------------|
| •  | a $48.5  million increasefrom net proceeds from the issuance of junior subordinateddebentures; |

|              |                                                  |
|--------------|--------------------------------------------------|
| •  | a $39.6  milliondecrease in Portfolio ARM Loans; |

|              |                                                                      |
|--------------|----------------------------------------------------------------------|
| •  | a$7.6  million increase in borrowings from repurchase agreements;and |

|              |                                         |
|--------------|-----------------------------------------|
| •  | a $5.1  million decrease inreceivables. |

The Company's primary uses of cash andcash equivalents during the nine months ended September  30, 2006were as follows:

|              |                                                           |
|--------------|-----------------------------------------------------------|
| •  | a $121.7  millionincrease in mortgage loans held forsale; |

|              |                                                              |
|--------------|--------------------------------------------------------------|
| •  | a $42.6  million decrease incollateralized debt obligations; |

|              |                                                                                          |
|--------------|------------------------------------------------------------------------------------------|
| •  | a$40.8  million decrease in accounts payable, accrued expenses andother liabilities; and |

|              |                                      |
|--------------|--------------------------------------|
| •  | a $29.2million distribution payment. |

Payment ofDistributions

On December  16,  2004, wedeclared our initial distribution on our common stock of $0.44 pershare. The distribution was made in January  2005 and, forfinancial reporting purposes, was reflected as an increase in ouraccumulated deficit. The total cash distribution of approximately$8.5  million exceeded the minimum taxable income distributionrequirements for the year.

On March  16,2005, we declared a cash dividend on our common stock of $0.48 pershare. The dividend was distributed in April  2005 and, forfinancial reporting purposes, was reflected as an increase in ouraccumulated deficit. The total cash dividend of approximately$9.3  million exceeded the minimum taxable income distributionrequirements for the quarter.

On May  17,2005, we declared a cash dividend on our common stock of $0.48 pershare. The dividend was distributed in July  2005 and, forfinancial reporting purposes, was reflected as an increase in ouraccumulated deficit. The total cash dividend of approximately$9.3  million exceeded the minimum taxable income distributionrequirements for the quarter.

On September21,  2005, we declared a cash distribution on our common stock of$0.48 per share. The distribution was made in October  2005 and,for financial reporting purposes, was reflected as an 

54

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increase in our accumulated deficit. Thetotal cash distribution of approximately $13.6  million exceededthe minimum taxable income distribution requirements for thequarter.

On December  12,  2005, we declared acash distribution on our common stock of $0.48 per share. Thedistribution was made in January  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $13.6million exceeded the minimum taxable income distribution requirementsfor the quarter.

On March  17,  2006, wedeclared a cash distribution on our common stock of $0.25 per share.The distribution was made in April  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $7.1million exceeded the minimum taxable income distribution requirementsfor the quarter.

On June  14,  2006, wedeclared a cash distribution on our common stock of $0.30 per share.The distribution was made in July  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $8.5million exceeded the minimum taxable income distribution requirementsfor the quarter.

On September  14,  2006, wedeclared a cash distribution on our common stock of $0.30 per share.The distribution was made in October  2006 and, for financialreporting purposes, was reflected as an increase in our accumulateddeficit. The total cash distribution of approximately $8.6million exceeded the minimum taxable income distribution requirementsfor the quarter.

We are required to make annualdistributions of our income to our stockholders in order to maintainour REIT status and to avoid corporate income tax and the nondeductibleexcise tax. However, differences in timing between the recognition ofREIT taxable income and the actual receipt of cash could require us tosell assets or to borrow funds on a short-term basis to meet the REITdistribution requirements and to avoid corporate income tax and thenondeductible excise tax. Further, certain of our assets may generatesubstantial mismatches between REIT taxable income and available cash.Such assets could, for example, include MBS we hold that have beenissued at a discount and require the accrual of taxable income inadvance of the receipt of cash. As a result, our taxable income mayexceed our cash available for distribution and the requirement todistribute a substantial portion of our net taxable income could causeus to: (1) sell assets under adverse market conditions; (2) borrow onunfavorable terms; or (3) distribute amounts that would otherwise beinvested in future acquisitions, capital expenditures or repayment ofdebt in order to comply with the REIT distributionrequirements.

INFLATION

For the periods presentedherein, inflation has been relatively low and we believe that inflationhas not had a material effect on our results of operations. To theextent inflation increases in the future at a rate that is faster thanthe market currently anticipates, interest rates are also likely torise, which would likely reduce the number of mortgage loans weoriginate. A reduction in the number of loans we originate resultingfrom increased inflation would adversely affect our future results ofoperations. Additionally, to the extent that the investment portfolioearnings are sensitive to rising interest rates, unanticipatedincreases in inflation may adversely affect our results ofoperations.

OFF-BALANCE SHEET ARRANGEMENTS

In ourREMIC securitization, we pooled the loans we originated and sold themto a trust where they serve as collateral for asset-backed securities,which the trust issues to the public and to the REIT. See Note 5 of ourconsolidated financial statements included elsewhere in this quarterlyreport on Form 10-Q for further information pertaining to our REMICsecuritization.

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CONTRACTUAL OBLIGATIONS

Wehad the following commitments (excluding derivative financialinstruments) at September  30,2006:

|                                   |  |  |                                             |  |  |                 |   |           |           |  |  |           |   |           |                  |  |  |  |   |           |        |  |  |                                 |  |         |        |  |  |  |
|-----------------------------------|--|--|---------------------------------------------|--|--|-----------------|---|-----------|-----------|--|--|-----------|---|-----------|------------------|--|--|--|---|-----------|--------|--|--|---------------------------------|--|---------|--------|--|--|--|
|                              |  |  | Paymentsdue byPeriod                        |
|                              |  |  | (Dollars in thousands)(unaudited) |
|                              |  |  | Total                                       |  |  | Lessthan 1 year |   |           | 1-3 years |  |  | 3-5 years |   |           | Morethan 5 years |
| Collateralized debtobligations(1) |  |  | $4,442,590                                  |  |  |                 | $ | 953,440   |      |  |  |           | $ | 1,854,135 |             |  |  |  | $ | 1,555,977 |   |  |  |     $79,038 |
| Warehouselinespayable             |  |  | 3,318,868                                   |  |  |                 |   | 3,318,868 |      |  |  |           |   | —   |             |  |  |  |   | —   |   |  |  |                                 |  | — |   |
| Repurchaseagreements              |  |  | 94,692                                      |  |  |                 |   | 94,692    |      |  |  |           |   | —   |             |  |  |  |   | —   |   |  |  |                                 |  | — |   |
| Juniorsubordinateddebentures      |  |  | 128,871                                     |  |  |                 |   | —   |      |  |  |           |   | —   |             |  |  |  |   | —   |   |  |  |                                 |  | 128,871 |   |
| Operatingleases(2)                |  |  | 41,146                                      |  |  |                 |   | 12,580    |      |  |  |           |   | 20,117    |             |  |  |  |   | 8,449     |   |  |  |                                 |  | — |   |
| Notespayable                      |  |  | 15,000                                      |  |  |                 |   | 15,000    |      |  |  |           |   | —   |             |  |  |  |   | —   |   |  |  |                                 |  | — |   |
|                                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Paymentson our collateralized debt obligations are dependent upon cash flowsreceived from underlying loans receivable. Our estimate of theirrepayment is based on scheduled principal payments on the underlyingloans receivable, adjusted for pre-payments. This estimate will differfrom actual pre-paymentamounts. |

|     |                 |
|-----|-----------------|
| (2) | Net ofsubleases |

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|              |                                                           |
|--------------|-----------------------------------------------------------|
| ITEM3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK |

Market risk is the exposure to lossesresulting from changes in interest rates, credit spreads, foreigncurrency exchange rates, commodity prices and equity prices. As we areinvested solely in U.S. dollar-denominated instruments, primarilysingle-family residential mortgage instruments, and our borrowings arealso domestic and U.S. dollar denominated, we are not subject toforeign currency exchange, or commodity and equity price risk. Theprimary market risk that we are exposed to is interest rate risk andits related ancillary risks. Interest rate risk is highly sensitive tomany factors, including governmental monetary and tax policies,domestic and international economic and political considerations, andother factors beyond our control. Our interest bearing assets,liabilities and related derivative instruments used for hedgingpurposes, are market risk sensitive and may change in value if interestrates fluctuate. The following table presents information as to thenotional amount, carrying amount and estimated fair value of certain ofour market risk sensitive assets, liabilities and hedging instrumentsat September  30,  2006 and December  31,2005:

|                                                     |  |  |                              |   |            |                 |  |  |                     |   |           |  |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|------------------------------|---|------------|-----------------|--|--|---------------------|---|-----------|--|--|--|--|---|-----------|--|
|                                                |  |  | September30, 2006(unaudited) |
|                                                |  |  | NotionalAmount               |   |            | Carrying Amount |  |  | Estimated FairValue |
|                                                |  |  | (Dollars inthousands)        |
| Assets:                                             |  |  |                              |   |       |                 |  |  |                     |   |      |  |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  |                              | $ | 3,434,301  |                 |  |  |                     | $ | 3,499,918 |  |  |  |  | $ | 3,521,076 |  |
| ARMloans collateralizing debt obligations,net       |  |  |                              |   | 4,597,856  |                 |  |  |                     |   | 4,642,282 |  |  |  |  |   | 4,598,891 |  |
| Mortgage-backedsecurities – available forsale |  |  |                              |   |       |                 |  |  |                     |   | 20,982    |  |  |  |  |   | 20,982    |  |
| Hedginginstruments                                  |  |  |                              |   | 6,357,928  |                 |  |  |                     |   | 46,639    |  |  |  |  |   | 46,639    |  |
| Liabilities:                                        |  |  |                              |   |       |                 |  |  |                     |   |      |  |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  |                              | $ | 3,318,868  |                 |  |  |                     | $ | 3,318,868 |  |  |  |  | $ | 3,318,868 |  |
| Collateralizeddebtobligations                       |  |  |                              |   | 4,442,590  |                 |  |  |                     |   | 4,442,590 |  |  |  |  |   | 4,452,057 |  |
| Repurchaseagreements                                |  |  |                              |   | 94,692     |                 |  |  |                     |   | 94,692    |  |  |  |  |   | 94,692    |  |
| Juniorsubordinateddebentures                        |  |  |                              |   | 128,871    |                 |  |  |                     |   | 128,871   |  |  |  |  |   | 128,871   |  |
| Hedginginstruments                                  |  |  |                              |   | 11,052,813 |                 |  |  |                     |   | 7,422     |  |  |  |  |   | 7,422     |  |
|                                                     |

|                                                     |  |  |                       |   |            |                |  |  |                     |   |           |  |  |  |  |   |           |  |
|-----------------------------------------------------|--|--|-----------------------|---|------------|----------------|--|--|---------------------|---|-----------|--|--|--|--|---|-----------|--|
|                                                |  |  | December31,2005       |
|                                                |  |  | NotionalAmount        |   |            | CarryingAmount |  |  | Estimated FairValue |
|                                                |  |  | (Dollars inthousands) |
| Assets:                                             |  |  |                       |   |       |                |  |  |                     |   |      |  |  |  |  |   |      |  |
| Mortgageloans held forsale                          |  |  |                       | $ | 3,327,144  |                |  |  |                     | $ | 3,378,197 |  |  |  |  | $ | 3,383,752 |  |
| ARMloans held for securitization,net                |  |  |                       |   | 278        |                |  |  |                     |   | 282       |  |  |  |  |   | 277       |  |
| ARM loanscollateralizing debt obligations,net       |  |  |                       |   | 4,641,588  |                |  |  |                     |   | 4,681,554 |  |  |  |  |   | 4,624,237 |  |
| Mortgage-backedsecurities – available forsale |  |  |                       |   |       |                |  |  |                     |   | 23,357    |  |  |  |  |   | 23,357    |  |
| Hedginginstruments                                  |  |  |                       |   | 11,152,164 |                |  |  |                     |   | 54,472    |  |  |  |  |   | 54,472    |  |
| Liabilities:                                        |  |  |                       |   |       |                |  |  |                     |   |      |  |  |  |  |   |      |  |
| Warehouselinespayable                               |  |  |                       | $ | 3,177,990  |                |  |  |                     | $ | 3,177,990 |  |  |  |  | $ | 3,177,990 |  |
| Collateralizeddebtobligations                       |  |  |                       |   | 4,485,197  |                |  |  |                     |   | 4,485,197 |  |  |  |  |   | 4,485,197 |  |
| Repurchaseagreements                                |  |  |                       |   | 87,058     |                |  |  |                     |   | 87,058    |  |  |  |  |   | 87,058    |  |
| Juniorsubordinateddebentures                        |  |  |                       |   | 77,324     |                |  |  |                     |   | 77,324    |  |  |  |  |   | 77,324    |  |
| Hedginginstruments                                  |  |  |                       |   | 7,242,693  |                |  |  |                     |   | 8,801     |  |  |  |  |   | 8,801     |  |
|                                                     |

INTERESTRATE RISK MANAGEMENT

We utilize a variety of derivativeinstruments in order to hedge our interest rate risk. Our hedgingtransactions using derivative instruments involve certain risks such ascounterparty credit risk, the enforceability of hedging contracts andthe risk that unanticipated and significant changes in interest rateswill cause a significant loss of basis in the contract. Thecounterparties to our derivative arrangements are major financialinstitutions and securities dealers that are well capitalized with highcredit ratings and with which we may also have other financialrelationships. While we do not 

57

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anticipate nonperformance by anycounterparty, we are exposed to potential credit losses in the eventthe counterparty fails to perform. Our exposure to credit risk in theevent of default by a counterparty can be measured as the differencebetween the value of the contract and the current market price. Wemanage this risk by using multiple counterparties and limiting ourcounterparties to major financial institutions with good creditratings, and in some cases, establishing rights to collateral posted bythe derivative counterparty. In addition, we monitor the credit qualityof our derivative counterparties. Accordingly, we do not expect anymaterial losses as a result of default by such counterparties. However,there can be no assurance that we will be able to adequately manage theforegoing risks, or ultimately realize an economic benefit that exceedsthe costs related to these hedging strategies.

MortgageInvestment Operations

Our investment risk exposure islargely due to interest rate risk. Interest rate risk is defined as thesensitivity of our current and future earnings to interest ratevolatility, variability of spread relationships, the difference inrepricing intervals between our assets and liabilities, and the effectthat interest rates may have on our cash flows, especially PortfolioARM Loan prepayments. Interest rate risk may affect our interestincome, interest expense and the market value of our interest raterisk-sensitive assets and liabilities. Our policies to manage interestrate risk aim to produce earnings stability and preserve capital byminimizing the negative effects of changing market interest rates andthe impact of prepayment risk.

We are subject to interestrate exposure with respect to our financing costs relating to ourPortfolio ARM Loans. Changes in interest rates impact our earnings invarious ways. While we invest primarily in ARM Loans, rising short-terminterest rates may temporarily negatively affect our earnings and,conversely, falling short-term interest rates may temporarily increaseour earnings. This impact can occur for several reasons and is affectedby portfolio prepayment activity as discussed below. First, ourborrowings may react to changes in interest rates sooner than our ARMLoans because the weighted average next repricing dates of theborrowings are likely to be shorter time periods than those of the ARMLoans. Second, interest rates on ARM Loans may be capped per adjustmentperiod (commonly referred to as the periodic cap), and our borrowingsmay not have similar limitations. Third, changes in interest rates onARM Loans typically lag behind changes in applicable interest rateindices due to the required notice period provided to ARM Loanborrowers when the interest rates on their loans are scheduled tochange.

Interest rates can also affect our net return onHybrid ARM loans. During a declining interest rate environment, theprepayment of Hybrid ARM loans may accelerate, possibly resulting in adecline in our net return on Hybrid ARM loans, as replacement HybridARM loans may have a lower yield than the older ones paying off. Incontrast, during an increasing interest rate environment, Hybrid ARMloans may prepay slower than expected, requiring us to finance agreater amount of Hybrid ARM loans than originally anticipated at atime when interest rates may be higher, resulting in a decline in ournet return on Hybrid ARM loans.

The rate of prepayment onmortgage loans may increase if interest rates decline or if thedifference between long-term and short-term interest rates diminishes.Increased prepayments would cause us to amortize the deferredorigination costs and fees for our mortgage loans over a shorterperiod, resulting in a reduced yield on our mortgage loans.Additionally, to the extent proceeds of prepayments cannot bereinvested at a rate of interest at least equal to the rate previouslyearned on such mortgage loans, our portfolio yield could be adverselyaffected.

Conversely, the rate of prepayment on mortgageloans may decrease if interest rates rise or if the difference betweenlong-term and short-term interest rates increases. Decreasedprepayments would cause us to amortize the deferred origination costsand fees for our mortgage loans over a longer period. Therefore, inrising interest rate environments where prepayments are declining, theyield on our ARM Loan portfolio could be expected to increase due tohigher interest rates and decreased amortization expense attributableto slower prepayments.

The positions we take to hedge ournet interest income recognize the effect of prepayments on the size andcomposition of the portfolio. We manage prepayment risk by regularlyrecalculating the 

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notional amount of the required hedgepositions through the application of a prepayment model and implementhedge adjustments, as required.

While we have notexperienced any significant credit losses to date, such losses arepossible. For example, a rising interest rate environment or economicdownturn could cause our mortgage loan default rate and credit lossesto increase, which would adversely affect our liquidity and operatingresults.

The following table summarizes the repricingcharacteristics of our Portfolio ARM Loans:

RepricingCharacteristics of Portfolio ARMLoans

|                                   |  |  |                         |   |           |              |  |  |  |  |        |   |
|-----------------------------------|--|--|-------------------------|---|-----------|--------------|--|--|--|--|--------|---|
|                              |  |  | September30, 2006       |
|                              |  |  | UnpaidPrincipal Balance |   |           | PortfolioMix |
|                              |  |  | (Dollars inthousands)   |
| Traditional ARMLoans:             |  |  |                         |   |      |              |  |  |  |  |   |   |
| Index:                            |  |  |                         |   |      |              |  |  |  |  |   |   |
| Six-monthLIBOR                    |  |  |                         | $ | 14,476    |              |  |  |  |  | 0.3    | % |
| One-yearconstant maturitytreasury |  |  |                         |   | 6,598     |              |  |  |  |  | 0.2    | % |
|                              |  |  |                         |   | 21,074    |              |  |  |  |  | 0.5    | % |
| HybridARMLoans:                   |  |  |                         |   |      |              |  |  |  |  |   |   |
| Index:                            |  |  |                         |   |      |              |  |  |  |  |   |   |
| 3years orless                     |  |  |                         |   | 858,712   |              |  |  |  |  | 18.6   | % |
| Over3 years to 5years             |  |  |                         |   | 3,487,832 |              |  |  |  |  | 75.9   | % |
|                              |  |  |                         |   | 4,346,544 |              |  |  |  |  | 94.5   | % |
| PayOption ARMLoans                |  |  |                         |   | 230,238   |              |  |  |  |  | 5.0    | % |
|                              |  |  |                         | $ | 4,597,856 |              |  |  |  |  | 100.0  | % |
|                                   |

Ourrisk management is focused on protecting against possible‘‘compression’’ in the net interest marginearned on our investment portfolio. The ‘‘yieldcurve’’ creates this risk because of different repricingdurations for instruments with different maturities. In substance, thehedging objective is to protect the net interest margin by matchingrepricing durations for the ARM and Hybrid ARM loan portfolio and thecorresponding funding sources. As discussed below, Hybrid ARM loans arethe primary loans requiring hedging of the corresponding fundingsources.

Traditional ARM loans have shorter repricingperiods (one year or less) than do Hybrid ARM loans. The interest rateon Traditional ARM loans will reset monthly, semi-annually or annuallyat a contractual margin over a U.S. Treasury index or a LIBOR index.The corresponding funding liabilities will similarly have shortercontractual repricing frequencies. Additionally, when Hybrid ARM loansreach the end of their fixed rate period and become‘‘rolled Hybrids,’’ they reprice based onsemi-annual or annual LIBOR or U.S. Treasury indices and behave muchlike Traditional ARMs. While there exists some ‘‘basisrisk’’ between the repricing of both the Traditional ARMsand rolled Hybrids versus the typical one month funding costs of theportfolio, management believes this basis risk is manageable. HybridARM loans initially have longer repricing periods than TraditionalARMs. We may not be able to obtain matched repricing features for thecorresponding funding sources since our borrowings generally haveshorter repricing contractual terms than most of our Hybrid ARM loanswhere the initial rate is fixed for up to five years.

Tomitigate the effect of interest rate fluctuations on our net interestincome, including the effect of prepayment rates, we hedge thefinancing costs of our issued mortgage-backed securities with interestrate swap agreements, Eurodollar futures contracts and interest ratecap agreements (collectively, ‘‘Portfolio HedgingInstruments’’) in order to better match the repricingdurations of our Portfolio ARM Loans and our issued mortgage-backedsecurities.

We may also use other instruments that may bedetermined to be advantageous and are permitted under the hedgingpolicy adopted by our board of directors.

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We use Eurodollar futures contractsto hedge for forecasted and recognized LIBOR-based borrowings.Eurodollar futures contracts have the effect of fixing the interestrate on LIBOR-based liabilities in the event that LIBOR-based fundingcosts change.

We enter into interest rate cap agreements(‘‘Cap Agreements’’) by incurring aone-time fee or premium. Pursuant to the terms of the Cap Agreements,we will receive cash payments if the LIBOR-based interest rate indexspecified in any such Cap Agreement increases above contractuallyspecified levels. Therefore, such Cap Agreements have the effect ofcapping the interest rate expense on a portion of our borrowings abovea level specified by the Cap Agreement. The purchase price of these CapAgreements is amortized over the life of the Cap Agreements, and theamortization expense generally increases as the Cap Agreements approachmaturity. Therefore, the cap premium amortization expense in futureperiods can be expected to increase from the current amortizationrate.

We enter into interest rate swap agreements(‘‘Swap Agreements’’) to fix the interestrate on a portion of our borrowings as specified in the Swap Agreement.When we enter into a Swap Agreement, we generally agree to pay a fixedinterest rate, generally based on LIBOR. These Swap Agreements have theeffect of converting our variable-rate debt into fixed-rate debt overthe life of the Swap Agreements.

Both Cap Agreements andSwap Agreements represent a way to lengthen the average repricingperiod of our variable-rate borrowings such that the average repricingof the borrowings more closely matches the average repricing of ourPortfolio ARM Loans.

Management relies on a variety oftools to assess the interest rate risk exposure of the investmentportfolio under various interest rate scenarios. Using financialmodeling, the fair value and interest rate sensitivity of financialinstruments, or groups of similar instruments, is estimated and thenaggregated to form a comprehensive picture of the risk characteristicsof the investment portfolio.

The table below presents thesensitivity of the market value of our portfolio using a discountedcash flow simulation model. Application of this method results in anestimation of the change in the market value of our assets and hedgedliabilities per 50 basis point (‘‘bp’’)incremental instantaneous parallel shifts in the LIBOR yield curve asof September  30,  2006 — a measure commonlyreferred to as sensitivity of equity. Positive sensitivity of equityindicates an increase in the market value of our assets relative to themarket value of our hedged liabilities corresponding to the indicatedshift in the yield curve.

As of September30,2006

|                                                     |  |  |                                                |   |         |      |  |  |     |   |         |      |  |  |  |   |         |    |  |  |  |   |         |    |
|-----------------------------------------------------|--|--|------------------------------------------------|---|---------|------|--|--|-----|---|---------|------|--|--|--|---|---------|----|--|--|--|---|---------|----|
|                                                |  |  | BasisPoint Increase (Decrease) in InterestRate |
|                                                |  |  | (100)                                          |   |         | (50) |  |  | +50 |   |         | +100 |
|                                                |  |  | (Dollarsin thousands)                          |
| Change in market valuesof:                          |  |  |                                                |   |    |      |  |  |     |   |    |      |  |  |  |   |    |    |  |  |  |   |    |    |
| Assets                                              |  |  |                                                | $ | 52,700  |      |  |  |     | $ | 28,600  |      |  |  |  | $ | (36,300 | )  |  |  |  | $ | (76,000 | )  |
| Hedgedliabilities                                   |  |  |                                                |   | (39,600 | )    |  |  |     |   | (24,000 | )    |  |  |  |   | 33,100  |    |  |  |  |   | 71,700  |    |
| Netchange in market value of portfolioequity        |  |  |                                                | $ | 13,100  |      |  |  |     | $ | 4,600   |      |  |  |  | $ | (3,200  | )  |  |  |  | $ | (4,300  | )  |
| Percentagechange in market value of portfolioequity |  |  |                                                |   | 5.30    | %    |  |  |     |   | 1.90    | %    |  |  |  |   | (1.30   | )% |  |  |  |   | (1.70   | )% |
|                                                     |

Theuse of Portfolio Hedging Instruments is a critical part of our interestrate risk management strategies, and the effects of these PortfolioHedging Instruments on the market value of the investment portfolio arereflected in the model's output. This analysis also takes intoconsideration the value of options embedded in our mortgage assets,including constraints on the repricing of the interest rate of ARMassets resulting from periodic and lifetime cap features, as well asprepayment options. Assets and liabilities that are not interestrate-sensitive, such as cash, payment receivables, prepaid expenses,payables and accrued expenses are excluded. The sensitivity of equitycalculated from this model is a key measure of the effectiveness of ourinterest rate risk management strategies.

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Changes in assumptions including,but not limited to, volatility, mortgage and financing spreads,prepayment behavior, defaults, as well as the timing and level ofinterest rate changes, will affect the results of the model. Therefore,actual results are likely to vary from modeledresults.

The table below presents the duration of ourassets and liabilities as of September  30,  2006, underthe then prevailing yield curve, as well as with instantaneous parallel50 bp shifts in the curve. Positive portfolio duration indicates thatthe market value of the investment portfolio, net of borrowings andhedges, will decline if interest rates rise and increase if interestrates decline. The closer duration is to zero, the less interest ratechanges are expected to affect the market value of portfolioequity.

As of September  30,2006

|                                 |  |  |                                                |  |      |      |  |  |      |  |      |     |  |  |      |  |      |  |  |  |  |  |      |  |  |  |  |  |       |   |
|---------------------------------|--|--|------------------------------------------------|--|------|------|--|--|------|--|------|-----|--|--|------|--|------|--|--|--|--|--|------|--|--|--|--|--|-------|---|
|                            |  |  | BasisPoint Increase (Decrease) in InterestRate |
|                            |  |  | (100)                                          |  |      | (50) |  |  | Base |  |      | +50 |  |  | +100 |
|                            |  |  | (Years)                                        |
| DurationofAssets                |  |  |                                                |  | 1.04 |      |  |  |      |  | 1.17 |     |  |  |      |  | 1.33 |  |  |  |  |  | 1.53 |  |  |  |  |  | 1.69  |   |
| Durationof Borrowings andHedges |  |  |                                                |  | 0.59 |      |  |  |      |  | 0.91 |     |  |  |      |  | 1.23 |  |  |  |  |  | 1.53 |  |  |  |  |  | 1.80  |   |
| NetPortfolioDuration            |  |  |                                                |  | 0.45 |      |  |  |      |  | 0.26 |     |  |  |      |  | 0.10 |  |  |  |  |  | 0.00 |  |  |  |  |  | (0.11 | ) |
|                                 |

Althoughmarket value sensitivity analysis is widely accepted in identifyinginterest rate risk, it does not take into consideration changes thatmay occur such as, but not limited to, changes in investment andfinancing strategies, changes in market spreads, changes in the shapeof the yield curve and changes in business volumes.

MortgageBanking Operations

Movements in interest rates can pose amajor risk to our mortgage banking operations in either a rising ordeclining interest rate environment. MortgageIT utilizes warehouselines of credit to fund its origination activity. The cost of theseborrowings is at variable interest rate terms that increase or decreaseas short term interest rates increase or decrease. In addition, we areexposed to price risk from the time an interest rate lock commitment ismade to a mortgage applicant (or financial intermediary) to the timethe related mortgage loan is sold. During this period, we are exposedto losses if mortgage rates rise, because the value of the IRLC ormortgage declines.

The committed pipeline consists of loanapplications in process where we have issued IRLCs to the applicants(or financial intermediaries). IRLCs guarantee the rate and points onthe underlying mortgage for a specified period, generally from seven tosixty days. Managing the price risk related to the committed pipelineis complicated by the fact that the ultimate percentage of applicationsthat close within the terms of the IRLC is variable. The primary factorthat drives the variability of the closing percentage is change inmortgage rates. In general, the percentage of applications in thecommitted pipeline that ultimately close within the terms of the IRLCincreases if mortgage rates rise and decreases if mortgage rates fall.This is due primarily to the relative attractiveness of currentmortgage rates compared to the applicants' committed rates. Theclosing percentage is also influenced by the source of theapplications, age of the applications, purpose for the loans (purchaseor refinance) and the application approval rate. We have developedclosing ratio estimates for the committed pipeline using empirical datataking into account all of these variables. To mitigate the effect ofthe interest rate risk inherent in issuing an IRLC from the lock-indate to the funding date of a loan, MortgageIT uses various derivativeinstruments, including forward sale loan commitments, Eurodollarfutures contracts and forward sales and purchases of mortgage-backedsecurities and options on such securities in the forward delivery TBAmarket to economically hedge the IRLCs.

If MortgageIT doesnot deliver into forward sale loan or TBA commitments, such instrumentscan be settled on a net basis. Net settlement entails paying orreceiving cash based upon the change in market value of the existinginstrument. All forward sale loan commitments and forward sales andpurchases of TBA commitments are typically settled within 90 days ofthe contract date.

MortgageIT also hedges the economicvalue of funded loans that are held for sale but not yet allocated toan investor sale commitment. Once a loan has been funded,MortgageIT's risk 

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management objective for its mortgage loansheld for sale is to protect earnings from an unexpected decline invalue of its mortgage loans. Similar to IRLCs, MortgageIT'sstrategy is to use forward sale loan commitments, Eurodollar futurescontracts and TBAs to hedge its mortgage loans held for sale. Thenotional amount of the derivative contracts, along with the underlyingrate and terms of such contracts, are equivalent to the unpaidprincipal amount of the mortgage inventory being hedged; hence, thederivative contracts effectively fix the forward sales price and,thereby, substantially mitigate interest rate and price risk toMortgageIT.

The following further describes the derivativeinstruments we may use in our risk management activities related to thecommitted pipeline and mortgage loan inventory. The value of thesederivative instruments generally moves in the opposite direction to thevalue of the mortgage loan inventory. We review our committed pipelineand mortgage inventory risk profiles on a dailybasis.

|              |                                                                                                                                                                                                 |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Forward sales of mortgage-backedsecurities: represents an obligation to sell a mortgage-backed securityat a specific price in the future; therefore, its value increases asmortgage rates rise. |

|              |                                                                                                                                                                                                   |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Forward purchases ofmortgage-backed securities: represents an obligation to buy amortgage-backed security at a specific price in the future; therefore,its value increases as mortgage ratesfall. |

|              |                                                                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long call options on mortgage-backedsecurities: represents a right to buy a mortgage-backed security at aspecific price in the future; therefore, its value increases asmortgage rates fall. |

|              |                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long put options onmortgage-backed securities: represents a right to sell amortgage-backed security at a specific price in the future; therefore,its value increases as mortgage ratesrise. |

|              |                                                                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long call options on Treasuryfutures: represents a right to acquire a Treasury futures contract at aspecific price in the future; therefore, its value increases as thebenchmark Treasury rate falls. |

|              |                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Long putoptions on Treasury futures: represents a right to sell a Treasuryfutures contract at a specific price in the future; therefore, itsvalue increases as the benchmark Treasury raterises. |

|              |                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Short Eurodollar futures contracts:represents a standardized exchange-traded contract, the value of whichis tied to spot Eurodollar rates at specified future dates; therefore,its value increases when Eurodollar rates rise. |

Finally,the mortgage banking industry is generally subject to seasonal trends.These seasonal trends reflect the pattern in the national housingmarket. Home sales typically rise during the spring and summer seasons,and decline during the fall and winter seasons. Seasonality has less ofan effect on mortgage refinancing activity, which is primarily drivenby prevailing mortgage rates.

ITEM 4.    CONTROLS ANDPROCEDURES

Evaluation of disclosure controls andprocedures

The Company carried out an evaluation, withthe participation of management, including its Chief Executive Officerand Chief Financial Officer, of the effectiveness of its disclosurecontrols and procedures (pursuant to Rule 13a-15(e) under theSecurities Exchange Act of 1934) as of the end of the period covered bythis quarterly report on Form 10-Q. Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that theCompany's disclosure controls and procedures are effective toensure that it is able to record, process, summarize and report theinformation the Company is required to disclose in the filings itsubmits to the SEC within the time periods required.

Changes ininternal control over financial reporting

During thequarter ended September  30,  2006, there has been nochange in our internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financialreporting.

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PARTII.    OTHER INFORMATION

Item 1.    LegalProceedings

On July  13,  2006, as amended onSeptember  15,  2006, Mr.  Jerry  Pressner, apurported stockholder of the Company, filed a complaint styled Pressnerv. MortgageIT Holdings, Inc., et al., (Index No. 602472/06) in theSupreme Court of the State of New York in New York County against theCompany and seven of its eight directors. The complaint alleged, amongother things, that the Company’s directors breached theirfiduciary duties by failing to maximize stockholder value with regardto the proposed acquisition by DB Structured Products. Among otherthings, the complaint sought class action status, a court orderenjoining the Company and its directors from proceeding with orconsummating the merger, and the payment of attorneys' fees andexpenses.

On September  25,  2006, the Companyentered into a Memorandum of Understanding with the plaintiff in theabove referenced action that led to the execution of a Stipulation andAgreement of Compromise, Settlement and Release on October6,  2006 (the ‘‘Stipulation’’).Pursuant to the Stipulation, the Company agreed to include certainadditional disclosures in its proxy statement relating to the specialstockholders’ meeting to vote on the proposed acquisition by DBStructured Products from that which were included in its preliminaryproxy statement that was filed on August  11,  2006. OnOctober  18,  2006, the Court entered an Order RegardingPreliminary Approval of Class Action and Notice to Class, which, amongother things, approved the Notice of Pendency of Class Action andHearing Thereon, and contained additional information regarding thelitigation, the settlement of the litigation according to the terms ofthe Stipulation (the ‘‘Settlement’’), andprocedures for objecting to the Settlement, among otherthings.

The parties have agreed to seek final Courtapproval of the Settlement, which will provide for certification of anon-opt-out class of the Company’s stockholders, for entry of ajudgment dismissing the purported class action with prejudice and acomplete release and settlement of all claims that were made or couldhave been made in the litigation. The parties entered into theStipulation to eliminate the burden, risk and expense of furtherlitigation. The Stipulation is not an admission by the Company or itsdirectors of any breach of duty, liability or wrongdoing. Subject tothe occurrence of certain events, including the consummation of themerger and final Court approval of the Settlement, the entity survivingthe merger has agreed to pay plaintiff's counsel attorney'sfees in an amount not to exceed $250,000 and documented expenses in anamount not to exceed $25,000.

On February16,  2006, EMC Mortgage Corp.(‘‘EMC’’) filed suit against MortgageIT inthe 95th Judicial District Court of Dallas County, Texas. This suitalleges, among other things, that MortgageIT is obligated to repurchasefrom EMC approximately $70.5  million in sub-prime mortgage loanssold to EMC pursuant to a Mortgage Loan Purchase and Interim ServicingAgreement dated January  1,  2003, as amended, due toalleged breaches of representations and warranties as well as allegedearly payment default repurchase obligations with respect to suchloans. The case was subsequently removed to the U.S. District Court forthe Northern District of Texas, Dallas Division. MortgageIT moved todismiss EMC’s third amended complaint, which motion was denied,except with respect to EMC’s claim for attorneys’ fees.MortgageIT is in the process of evaluating the claims and itscounterclaims and preparing an answer. MortgageIT intends to vigorouslydefend the suit. At this stage of the proceedings, it is not possibleto predict the outcome of this litigation.

In addition tothese cases, in the ordinary course of business, the Company is adefendant in or party to a number of pending and threatened legalactions and proceedings, and is also involved from time to time ininvestigations and administrative proceedings by governmental agencies.Certain of such actions and proceedings involve alleged violations ofconsumer protection laws, including claims relating to theCompany’s loan origination and collection efforts, and otherfederal and state banking laws. Certain of such actions and proceedingsinclude claims for breach of contract, restitution, compensatorydamages, punitive damages and other forms of relief. Due to thedifficulty of predicting the outcome of such matters, the Company cangive no assurance that it will prevail on all claims made against it;however, management believes, based on current knowledge and afterconsultation with counsel, that these legal matters and administrativeproceedings and the losses, if any, resulting 

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from the final outcome thereof, will not havea material adverse effect on the Company’s financial position,results of operations or liquidity, but can give no assurance that theywill not have such an effect.

Although it is difficult topredict the outcome of any litigation, the Company has establishedlitigation reserves where necessary in accordance with generallyaccepted accounting principles.

Item 1A.    RiskFactors

Except as set forth below, there have been nomaterial changes in our risk factors from those disclosed in our 2005Annual Report on Form 10-K.

Risks Relating to theCompany’s Proposed Acquisition by DeutscheBank.

On July  11,  2006, the Company enteredinto a definitive agreement to be acquired by DB Structured Productsfor $14.75 in cash per share of Company common stock, or approximately$429  million in the aggregate. The transaction is subject to thefulfillment or waiver of a number of conditions to closing, includingthe receipt of Company stockholder approval and all requisiteregulatory approvals, and other customary closing conditions. If any ofthe closing conditions are not fulfilled or waived, or if the requisitestockholder votes in favor of the transaction are not obtained, theacquisition of the Company by DB Structured Products will notclose.

Item 2.    Unregistered Sales of Equity Securitiesand Use of Proceeds

None.

Item 3.    DefaultsUpon Senior Securities

None.

Item4.    Submission of Matters to a Vote of SecurityHolders

None.

Item 5.    OtherInformation

None.

ITEM 6.    EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES

Exhibits filed with thisForm 10-Q

|            |                                                                                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certification of ChiefExecutive Officer pursuant to Rule 13a — 14(a)/15d-14(a) of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of2002 |

|            |                                                                                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of ChiefFinancial Officer pursuant to Rule 13a — 14(a)/15d-14(a) of theSecurities Exchange Act of 1934, as adopted pursuant to Section 302 ofthe Sarbanes-Oxley Act of2002 |

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibitshall not be deemed ‘‘filed’’ for purposesof Section 18 of the Securities Exchange Act of 1934, as amended, orotherwise subject to the liability of that section. Further, thisexhibit shall not be deemed to be incorporated by reference into anyfiling under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, asamended.) |

|            |                                                                                                                                                                                  |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (This exhibitshall not be deemed |

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|        |                                                                                                                                                                                                                                                                                                                                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ‘‘filed’’ forpurposes of Section 18 of the Securities Exchange Act of 1934, asamended, or otherwise subject to the liability of that section.Further, this exhibit shall not be deemed to be incorporated byreference into any filing under the Securities Act of 1933, as amended,or the Securities Exchange Act of 1934, asamended.) |

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned thereunto dulyauthorized:

|  | MORTGAGEIT HOLDINGS,INC. |
|--|--------------------------|

|  | By:    /s/ DOUG W.NAIDUS                                   |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |        |                                                                                                                                                             |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   |    Name:Doug W. Naidus   Title: Chairman and Chief ExecutiveOfficer   Date:    November  8,2006 |

|  | By:    /s/ GLENN J.MOURIDY                             |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  |        |                                                                                                                                                                                |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |   |    Name:   GlennJ. Mouridy   Title: President and Chief FinancialOfficer   Date:    November 8,2006 |

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