10-K 1 form10k_2006.htm FORM 10K 2006 Form 10K 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2006
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________

Commission File Number: 1-12109
 

DELTA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
11-3336165
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

1000 Woodbury Road, Suite 200, Woodbury, New York 11797
(Address of principal executive offices) (Zip code)

(516) 364 - 8500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common stock, par value $0.01 per share
American Stock Exchange
(Title of each class)
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]  No [ x ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
  Yes [ ]  No [ x ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]   Accelerated filer [ x ]  Non-accelerated filer [ ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]  No [ x ]

As of June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of $9.85 for such stock on that date, was approximately $161.5 million.

As of March 2, 2007, 23,495,411 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III, Items 10, 11, 12, 13 and 14 are incorporated by reference from Delta Financial Corporation’s definitive proxy statement to stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2006.



Delta Financial Corporation
Table of Contents
     
 Part I    
     
Item 1.
1
Item 1A.
23
Item 1B.
39
Item 2.
39
Item 3.
40
Item 4.
42
     
Part II
   
     
Item 5.
43
Item 6.
44
Item 7.
47
Item 7A.
77
Item 8.
79
Item 9.
116
Item 9A.
116
Item 9B.
117
     
Part III
   
     
Item 10.
117
Item 11.
117
Item 12.
117
Item 13.
117
Item 14.
117
     
Part IV
   
     
Item 15.
117
     
119
     



PART I

An investment in Delta Financial Corporation common stock involves substantial risks and uncertainties. Delta Financial Corporation encourages you to carefully review the information set forth under the caption “Forward Looking Statements and Risk Factors” on page 22 and “Risk Factors” on page 23 for a description of some of these uncertainties.

Description of Our Business

Delta Financial Corporation (and collectively with its subsidiaries, the “Company,” “we” or “us” and on a stand-alone basis “Delta Financial” or the “Holding Company”) is a specialty consumer finance company that originates, securitizes and sells non-conforming mortgage loans. We were incorporated in 1996 as a Delaware corporation. We were initially organized in 1982 as Delta Funding Corporation, a New York corporation. Our corporate offices are located at 1000 Woodbury Road, Suite 200, Woodbury, NY 11797 and we can be contacted at (516) 364-8500 or through our Internet website at www.deltafinancial.com. We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may access our filings with the SEC at no cost from the SEC’s website at http://www.sec.gov, or on the Investor Relations page of our website, as soon as reasonably practicable after such material is electronically filed with or presented to the SEC. Information appearing on our website will not be deemed to be part of this report.

Our loans are primarily fixed rate and secured by first mortgages on one- to four-family residential properties. Throughout our 25-year operating history, we have focused on lending to individuals who generally do not satisfy the credit, documentation or other underwriting standards set by more traditional sources of mortgage credit, including those entities that make loans in compliance with the conforming lending guidelines of Fannie Mae and Freddie Mac. We make mortgage loans to these borrowers for purposes such as debt consolidation, refinancing, education and home improvements.

We provide our customers with a variety of loan products designed to meet their needs, using a risk-based pricing strategy to develop products for different risk categories. Historically, the majority of our loan production has been fixed-rate with amortization schedules ranging from five years to 30 years. In 2006, our average loan size was approximately $154,000 and, at the time of origination, the weighted average interest rate was 8.9%, the weighted average combined loan-to-value (“CLTV”) ratio was 78.0% and the weighted average credit score of the underlying borrowers was approximately 618. Since 2001, at least 35% of our annual loan production has been related to borrowers located in New York, New Jersey and Pennsylvania.

We adhere to our Best Practice Lending Program aimed at ensuring the origination of quality loans and helping to better protect consumers. This Best Practice Lending Program includes:

 § 
fair lending initiatives aimed at ensuring that all borrowers are treated fairly and similarly regardless of race, color, creed, religion, national origin, sex, sexual orientation, marital status, age, disability and the applicant’s good faith exercise of any right under the Consumer Credit Protection Act;

§ 
oversight of mortgage brokers and closing agents;

§ 
fraud detection and protection;

§ 
plain English disclosures; and

§ 
other origination and underwriting initiatives which we believe help protect consumers.

    We make mortgage loans to individual borrowers, which are a cash outlay for us. At the time we originate a loan, and prior to the time we securitize or sell the loan, we either finance the loan by borrowing under our warehouse lines of credit or utilizing our available working capital. Following this initial holding period, we either securitize our loans or sell them on a whole-loan basis, using the net proceeds from these transactions to repay our warehouse credit facilities and for working capital. Since the first quarter of 2004, we have structured our securitizations to be accounted for as on-balance sheet financings, in which we record interest income on the outstanding portfolio of loans in each securitization trust and interest expense from the asset-backed securities issued by each securitization trust over time. Prior to 2004, we structured our securitizations to be accounted for as sales, which required us to record cash and non-cash revenues as gain-on-sale at the time the securitizations were completed. When we sell loans on a whole-loan basis, we record the premiums received upon sale as revenue, net of any reserves.

1

Origination of Mortgage Loans

We originate mortgage loans through two distribution channels, wholesale and retail. The majority of the mortgage loans we originate occur in 34 states. In the wholesale channel, we receive loan applications from independent third-party mortgage brokers, who submit applications on a borrower’s behalf. In the retail channel, we receive loan applications directly from borrowers. We process and underwrite the submission and, if the loan conforms to our underwriting criteria, approve the loan and lend the money to the borrower. We underwrite loan packages for approval through our Woodbury, New York headquarters, our Cincinnati, Ohio underwriting hub, and our regional offices in Phoenix, Arizona; Jacksonville, Florida; and Dallas, Texas. We also purchase closed loans on a limited basis. (See “-Wholesale Loan Channel”).

For the year ended December 31, 2006, we originated $4.0 billion of loans, an increase of $195.8 million, or 5.1%, over the $3.8 billion of loans originated in the year ended December 31, 2005. The amount originated in 2006 included approximately $2.1 billion of wholesale loans, representing 51.4% of total loan production, and $1.9 billion of retail loans, representing 48.6% of total loan production, compared to $2.0 billion of wholesale loans, or 53.9% of total loan production, and $1.8 billion of retail loans, or 46.1% of total loan production, during the year ended December 31, 2005.

 

2


The following table shows certain data regarding our loan originations, presented by channel of loan origination, for the years ended December 31, 2006, 2005 and 2004:

 
   
For the Year Ended December 31,
 
(Dollars in thousands)
 
2006
 
2005
 
2004
 
Wholesale:
             
Number of loans
   
11,104
   
10,982
   
8,434
 
Principal balance
 
$
2,073,124
 
$
2,065,638
 
$
1,497,743
 
Average principal balance per loan
   
187
   
188
   
178
 
Weighted average initial LTV/CLTV ratio (1)
   
76.6
%
 
77.5
%
 
76.5
%
Weighted average interest rate
   
8.7
%
 
7.7
%
 
7.7
%
Weighted average credit score
   
606
   
618
   
623
 
                     
Retail:
                   
Number of loans
   
15,135
   
13,927
   
9,259
 
Principal balance
 
$
1,958,302
 
$
1,770,007
 
$
1,113,783
 
Average principal balance per loan
   
129
   
127
   
120
 
Weighted average initial LTV/CLTV ratio (1)
   
79.5
%
 
80.2
%
 
80.0
%
Weighted average interest rate
   
9.0
%
 
8.3
%
 
8.1
%
Weighted average credit score
   
630
   
639
   
640
 
                     
Total Wholesale and Retail:
                   
Number of loans
   
26,239
   
24,909
   
17,693
 
Principal balance
 
$
4,031,426
 
$
3,835,645
 
$
2,611,526
 
Average principal balance per loan
   
154
   
154
   
148
 
Weighted average initial LTV/CLTV ratio (1)
   
78.0
%
 
78.8
%
 
78.0
%
Weighted average interest rate
   
8.9
%
 
8.0
%
 
7.9
%
Weighted average credit score
   
618
   
628
   
630
 
                     
Percentage of Loans Secured by:
                   
First mortgages
   
95.4
%
 
97.8
%
 
97.7
%
Second mortgages
   
4.6
%
 
2.2
%
 
2.3
%
                     
Loan Type:
                   
Fixed rate mortgages
   
87.1
%
 
79.5
%
 
78.4
%
Adjustable-rate mortgages
   
12.9
%
 
20.5
%
 
21.6
%
 
(1)  We determine the weighted average initial loan-to-value (“LTV”) ratio of a loan secured by a first mortgage by dividing the amount of the loan by the lesser of the purchase price or the appraised (or Insured Automated Valuation Model (“Insured AVM”)) value of the mortgage property at origination. We determine the weighted average CLTV ratio of a loan secured by a second mortgage by taking the sum of the loan secured by the first and second mortgages and dividing by the lesser of the purchase price or the appraised (or Insured AVM) value of the mortgage property at origination.

 

3


The following table shows the weighted average interest rate and initial LTV or CLTV ratio by lien position for the years ended December 31, 2006, 2005 and 2004:

   
For the Year Ended December 31,
 
   
2006
 
2005
 
2004
 
First Mortgage:
             
Weighted average initial LTV ratio (1)
   
77.8
%
 
78.7
%
 
78.0
%
Weighted average interest rate
   
8.8
%
 
7.9
%
 
7.8
%
                     
Second Mortgage:
                   
Weighted average initial CLTV ratio (1)
   
82.4
%
 
80.2
%
 
80.1
%
Weighted average interest rate
   
10.6
%
 
9.3
%
 
9.1
%

(1)  We determine the weighted average initial LTV ratio of a loan secured by a first mortgage by dividing the amount of the loan by the lesser of the purchase price or the appraised (or Insured AVM) value of the mortgage property at origination. We determine the weighted average initial CLTV ratio of a loan secured by a second mortgage by taking the sum of the loan secured by the first and second mortgages and dividing by the lesser of the purchase price or the appraised (or Insured AVM) value of the mortgage property at origination.

The following table shows the geographic distribution of loan purchases and originations for the years ended December 31, 2006, 2005 and 2004:

 
For the Year Ended December 31,
 
 
2006
 
2005
 
2004
 
 
Percentage
 
Amount
 
Percentage
 
Amount
 
Percentage
 
Amount
 
Region:
       
(Dollars in millions)
         
New York, New Jersey and Pennsylvania
 
35.4
%
$
1,426.7
   
37.7
%
$
1,447.6
   
41.5
%
$
1,083.3
 
Southeast
 
17.7
   
713.1
   
15.5
   
595.6
   
10.1
   
264.1
 
Mid-Atlantic (1)
 
14.5
   
583.1
   
14.4
   
552.7
   
15.3
   
400.7
 
Midwest
 
14.3
   
575.0
   
16.0
   
612.7
   
17.8
   
463.8
 
West
 
11.0
   
445.5
   
8.8
   
336.2
   
4.7
   
121.9
 
New England
 
7.1
   
288.0
   
7.6
   
290.8
   
10.6
   
277.7
 
Total
 
100.0
%
$
4,031.4
   
100.0
%
$
3,835.6
   
100.0
%
$
2,611.5
 

(1) Excluding New York, New Jersey and Pennsylvania.

Wholesale Loan Channel. Through our wholesale loan channel, which is principally conducted out of our Woodbury, New York headquarters, we primarily originate mortgage loans indirectly through independent mortgage brokers and other real estate professionals who submit loan applications on behalf of borrowers. We currently originate our wholesale loans through a network of approximately 3,200 independent brokers. The brokers’ role is to source the business, identify the applicant, assist in completing the loan application, and process the loans, including, among other things, gathering the necessary information and documents, and serving as the liaison between the borrower and us through the entire origination process. We review, process and underwrite the applications submitted by the broker, approve or deny the application, set the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all of the conditions that we impose as the lender, lend the money to the borrower. Because brokers conduct their own marketing and employ their own personnel to complete loan applications and maintain contact with borrowers - for which they charge a broker fee - originating loans through our wholesale network generally allows us to increase our loan volume without incurring the higher marketing and employee costs associated with increased retail originations. Additionally, on a limited basis, we purchase loans on a flow basis from select independent correspondents. This typically involves purchasing individual loans shortly after the loans are originated, as opposed to bulk purchases, which entail purchasing typically larger pools of loans at one time. We re-underwrite each of these loans, in accordance with our underwriting standards, prior to purchasing. As of December 31, 2006, we employed 125 account executives focused exclusively on the wholesale market. For the year ended December 31, 2006, our wholesale network accounted for $2.1 billion, or 51.4% of our loan originations, compared to $2.1 billion, or 53.9%, of our loan originations for the year ended December 31, 2005 and $1.5 billion, or 57.4%, of our loan originations for the year ended December 31, 2004. No single broker contributed more than 4.8%, 5.3% or 5.9% of our total loan production in the years ended December 31, 2006, 2005 and 2004, respectively.

4

Wholesale Marketing. Historically, we have established and maintained relationships with brokers offering non-conforming mortgage products.

Typically, we initiate contact with brokers through our Business Development Department, supervised by a senior officer with over 24 years of sales and marketing experience in the industry. We usually hire account executives that have contacts with brokers that originate non-conforming mortgage loans within their geographic territory. The account executives are responsible for developing and maintaining our wholesale network within their geographic territory by frequently visiting brokers, communicating our underwriting guidelines, disseminating new product information and pricing changes, soliciting loan leads, analyzing applications, providing pre-approvals and by demonstrating a continuing commitment to understanding the needs of the customer. The account executives attend industry trade shows and inform us about the products and pricing being offered by competitors and new market entrants. This information assists us in refining our programs and product offerings in order to remain competitive. Account executives are typically compensated with a base salary or draw, and commissions based on the volume of loans originated as a result of their efforts.

Approval Process for Independent Mortgage Brokers. Before an independent mortgage broker becomes part of our network, the broker must go through our approval process. Once approved, the broker may begin submitting applications to us.

    To be approved, a broker must:
 
 
·
demonstrate that he/she is properly licensed and registered in the state in which he/she seeks to transact business; and

 
·
sign a standard broker agreement with us that requires the signer, among other things, to:

 
·
abide by our fair lending policy;

 
·
follow the National Association of Mortgage Brokers Best Practices Policies;

 
·
comply with all state and federal laws; and

 
·
submit only true and accurate documents and disclosures.

    As part of the approval process we also perform searches on all new brokers using a third-party database that contains public and nonpublic information on individuals and companies that have incidents of potential fraud and misrepresentation. In addition, we regularly review the performance of loans originated through our brokers.

Once approved, a broker may submit loan applications for prospective borrowers. To process broker submissions, our wholesale originations channel is organized by geographic regions and into teams, each consisting of account executives and account managers/processors, which are generally assigned to specific brokers. Since we operate in a highly competitive environment where brokers often submit the same loan application to several prospective lenders simultaneously, we strive to provide brokers with a rapid and informed response. Account executives analyze the application and provide the broker with a preliminary approval, subject to final underwriting approval, or a denial, typically within the same business day. In addition, brokers can obtain preliminary approvals, typically within seconds, directly from our proprietary originations software program - Click & Close® - by logging in and entering the basic loan information. Once a package is received from the broker, and the application is logged into Click & Close (“C&C”), the loan is automatically sent to an underwriting queue for review. If our underwriter approves the application, a “conditional approval” will be issued to the broker with a list of specific conditions to be met and additional documents to be supplied prior to funding the loan. The file is then queued back to the account manager/processor, who works directly with the submitting broker to collect the requested information, meet all underwriting conditions and send out all appropriate documentation and disclosures.

5

In most cases, we fund loans within 14 to 21 days after preliminary approval of the loan application. In the case of a denial, we will use reasonable efforts to ensure that there is no missing information concerning the borrower or the application that might change the denial decision on the loan.

We strive to have our account executives maintain the level of knowledge and experience integral to our commitment to provide the highest quality service for brokers. We believe that by maintaining an efficient, trained and experienced staff, we have addressed four key factors that generally influence where a broker sends its business:

 
§
the service and support a lender provides;

 
§
product offerings and pricing;

 
§
the turn-around time, or speed in which a lender closes loans; and

 
§
the lender’s knowledge concerning the broker and the broker’s business.

Retail Loan Channel. Through our retail distribution channel, we develop retail loan leads primarily through our telemarketing system located in Cincinnati, Ohio, and also through Internet leads, direct mail, and our network of 10 origination centers located in nine states. We continually monitor the performance of our retail operations and evaluate current and potential retail office locations on the basis of selected demographic statistics, marketing analyses and other criteria that we have developed. The retail channel accounted for $1.9 billion, or 48.6%, of our loan originations for the year ended December 31, 2006, compared to $1.8 billion, or 46.1%, of our loan originations for the year ended December 31, 2005 and $1.1 billion, or 42.6%, of our loan originations for the year ended December 31, 2004.

Typically, contact with the customer is handled initially through our telemarketing center. Through our marketing efforts, the retail loan channel is able to identify, locate and focus on individuals who, based on historic customer profiles, are likely customers for our products. Our telemarketing representatives identify interested customers and forward these potential borrowers to a branch manager through our C&C system. The branch managers, in turn, distribute these leads to mortgage analysts via C&C by queuing the loan to a mortgage analyst’s “to do” list in C&C. The assigned mortgage analyst discusses the applicant’s qualifications and available loan products, negotiates loan terms with the borrower, ensures that an appraisal has been ordered from an independent third-party appraisal company (or may, when certain underwriting criteria have been met, obtain an Insured AVM value), orders a credit report from an independent, nationally recognized credit reporting agency and processes the loan through completion. Our mortgage analysts are trained to structure loans that meet the applicant’s needs while satisfying our lending guidelines. C&C is utilized to queue the loan to underwriters at the appropriate times for approvals and help to facilitate the loan application process through closing. At December 31, 2006, we employed 464 mortgage analysts, representing a 12.3% increase over the 413 mortgage analysts employed at December 31, 2005.

Loan Underwriting

Underwriting Guidelines. We maintain written underwriting guidelines that are utilized by all of our employees associated with the underwriting process. Throughout our 25-year history, these guidelines have been reviewed and updated on an on-going basis by senior underwriters and the head of risk management. We provide our underwriting guidelines to all of the brokers from whom we accept loan applications. Loan applications are classified according to particular characteristics, including, but not limited to, the applicant’s:

 
§
ability to pay;

 
§
credit history (with emphasis on the applicant’s existing mortgage payment history);

 
§
credit score (specifically the borrower’s Fair, Isaac & Co. (“FICO”) score, which measures an individual’s record in using credit);

6

 
§
income documentation type;

 
§
lien position;

 
§
LTV ratio;

 
§
property type; and

 
§
general stability, in terms of employment history, time in residence, occupancy and condition and location of the collateral.

We have established classifications with respect to the credit profile of the applicant, and each loan is placed into one of four letter ratings ‘‘A’’ through ‘‘D,’’ with sub-ratings within each of those classifications (referred to as the “credit grade”). Terms of loans that we make, as well as maximum LTV ratios and debt-to-income ratios, vary depending on the classification of the applicant and the borrower’s credit score. Loan applicants with less favorable credit ratings and/or lower credit scores are generally offered loans with higher interest rates and lower LTV ratios than applicants with more favorable credit ratings and/or higher credit scores. The general criteria our underwriting staff uses in classifying loan applicants are set forth in the following table:

Summary of Delta’s Principal Underwriting Criteria (1)

 
“A” Risk
 
“B” Risk
 
“C” Risk
 
“D” Risk
               
Credit Profile
Excellent credit history.
 
Good overall credit history.
 
Good to fair credit history.
 
Fair to poor credit history.
 
Existing Mortgage History
Up to a maximum of two rolling 30-day late payments in the last 12 months.
 
Up to a maximum of one rolling 60-day late payment in the last 12 months.
 
Up to a maximum of one 90-day late payment in the last 12 months.
 
Up to a maximum of one 120-day late payment in the last 12 months. Case by case open foreclosures considered.
 
Credit Scores (2)
Generally, minimum credit score of 500.
 
Generally, minimum credit score of 500.
 
Generally, minimum credit score of 500.
 
Generally, minimum credit score of 525.
 
Bankruptcy Filings
Generally, Ch. 7 discharged or Ch. 13 filed more than two years prior to closing. Open Ch. 13 considered.
 
Generally, Ch. 7 discharged or Ch. 13 filed more than one year prior to closing. Open Ch. 13 is considered.
 
 
Generally, Ch. 7 must be discharged prior to closing. Open Ch. 13 is considered.
 
Generally, Ch. 7 discharged by closing. Open Ch. 13 considered.
Debt Service to Income Ratio
55% or less
 
55% or less
 
55% or less
 
55% or less
 
Maximum LTV ratio:
             
Owner-Occupied
Up to 100% LTV with a 580 credit score for full income check loans if mortgage is 0x30 within last 12 months.
 
Up to 90% LTV with a 600 credit score for full income check loans if mortgage is no worse than 1x60 rolling within the last 12 months (maximum of 3 consecutive months).
 
 
Up to 80% LTV with a 550 credit score for full income check loans if 1x90 within the last 12 months.
 
Up to 70% LTV with a 550 credit score for full income check, one 1x120 within last 12 months.
Non-Owner Occupied
Up to 90% LTV with a 660 credit score for full income check loans if mortgage is no worse than 1x30 rolling within the last 12 months.
 
Up to 80% LTV with a 580 credit score for full income check loans if mortgage is no worse than 0x60 within the last 12 months.
 
Not available.
 
Not available.

 

7

(1) Each lettered risk classification has one or more sub-classifications. For example, within the “A” risk class, there are the following credit program sub-classifications: “A+”, “A1” and “A2”. The letter grades applied to each risk classification in the table reflect our internal standards and do not necessarily correspond to classifications used by other mortgage lenders. 

(2) The minimum credit score and maximum LTV set forth in the table is for borrowers providing full documentation for a first mortgage on a one to two family property. Depending on the risk parameters of the loan, the minimum credit score requirement may be higher and the maximum LTV may be lower, or require a higher credit score for the same LTV. (“0x30” means no payments late by 30 days, “1x30” means one payment late by 30 days; “0x60” means no payments late by 60 days, “1x60” means one payment late by 60 days, “0x90” means no payments late by 90 days, “1x90” means one payment late by 90 days and “1x120” means one payment late by 120 days).

Underwriting Exceptions. We use these underwriting classifications and characteristics as a guideline only. On a case-by-case basis, we may determine that the prospective borrower warrants an exception from our underwriting guidelines if sufficient compensating factors exist. Examples of compensating factors we consider include the following:

 
§
low debt ratio;

 
§
long-term stability of employment and/or residence;

 
§
excellent payment history on past mortgages; or

 
§
a significant reduction in monthly expenses.

The following table sets forth the credit grade of our originations along with the weighted average coupon and weighted average LTV/CLTV, for the years ended December 31, 2006, 2005 and 2004:
 
(Dollars in thousands)
                   
For the Year Ended
 
Credit Grade
 
Total Originations
 
Percent of Total Originations
 
Weighted Average
Coupon
 
Weighted Average LTV/CLTV
                     
December 31, 2006
 
A
 
$                              3,555,222
 
88.2%
 
8.7%
79.7%
   
B
 
258,227
 
6.4    
 
9.4    
 
69.1    
   
C
 
120,296
 
3.0    
 
9.9    
 
65.4    
   
D
 
97,681
 
2.4    
 
10.3    
 
57.2    
Total/Average
     
$                              4,031,426
 
100.0%
 
8.9%
 
78.0%
                     
December 31, 2005
 
A
 
$                              3,466,805
 
90.4%
 
7.9%
 
80.1%
   
B
 
195,085
 
5.1    
 
8.6    
 
69.8    
   
C
 
96,780
 
2.5    
 
8.9    
 
66.0    
   
D
 
76,975
 
2.0    
 
9.6    
 
56.6    
Total/Average
     
$                              3,835,645
 
100.0%
 
8.0%
 
78.8%
                     
December 31, 2004
 
A
 
$                              2,331,952
 
89.3%
 
7.7%
 
79.4%
   
B
 
153,768
 
5.9    
 
8.6    
 
70.4    
   
C
 
81,369
 
3.1    
 
9.0    
 
64.7    
   
D
 
44,437
 
1.7    
 
     10.0    
 
55.7    
Total/Average
     
$                              2,611,526
 
100.0%
 
7.9%
 
78.0%
 
8

The mortgage loans we originate have amortization schedules ranging from five years to 30 years, generally bear interest at fixed rates and require equal monthly payments, which are due on a scheduled day of each month. The adjustable-rate mortgage loans we originate, referred to as “2/28” or “3/27” products, generally contain features where rates are fixed for a period of time (two to three years) and then adjust every six months thereafter. We also offer a product referred to as a stepped fixed-rate mortgage. This product has a fixed rate throughout its term, and a 30-year maturity without a balloon payment. During the first 10 years of the stepped fixed-rate mortgage loan’s term, the fixed monthly payment is based on either a 40-year or (commencing in late December 2006) a 50-year amortization, after which the fixed monthly payment is adjusted based on a 20-year amortization during the remaining 20 years of the term. Both the initial monthly mortgage payments (for the first 10 years of the loan) and the subsequent monthly mortgage payments over the next 20 years are known by the borrower upfront at closing.

The principal amounts of the loans we originate generally range from a minimum of $40,000 to a maximum of $800,000; however we will consider loans up to $1.2 million. We will lend up to 100% of the CLTV ratio. Our loans are generally secured by one- to four-family residences, including condominiums and townhouses, and these properties are usually occupied by the owner. It is our policy not to accept commercial properties or unimproved land as collateral. However, we will accept mixed-use properties, such as a property where a portion of the property is used for residential purposes and the balance is used for commercial purposes, and we will accept small multifamily properties of five to eight units, both at reduced LTV ratios. We do not originate loans where any senior mortgage contains an open-end advance, negative amortization or shared appreciation provisions - all of which could have the effect of increasing the amount of the senior mortgage, thereby increasing the CLTV, and increasing the risk of the loan to us.

We periodically review the loan products we offer to determine the need for changes to or elimination of a product. While interest-only mortgage loans represented less than 1% of our annual 2006 loan origination volume, we stopped offering this product altogether in the fourth quarter of 2006 because of our view of the product’s diminished risk adjusted return. Additionally, during the fourth quarter of 2005 we ceased originating mortgages collateralized by double-wide mobile homes, which represented 2.9% of our annual 2005 loan origination volume, due to decreased interest in such products in the secondary market.

Documentation and Review. Our mortgage loan programs include:

 
·
a full documentation program;

 
·
a limited documentation program;

 
·
a no income verification program for self-employed borrowers; and

 
·
a stated income program.

Our borrowers’ total monthly debt obligations - which include principal and interest on the new loan and all other mortgages, loans, charge accounts and scheduled indebtedness - generally are 50% or less of the borrowers’ monthly gross income. Some of our borrowers will qualify using our maximum debt-to-income ratio of 55%. For loans to borrowers who are salaried employees, we require current employment information in addition to employment history. We verify this information based on one or more of the following: written confirmation from employers, a recent pay-stub, a recent W-2 tax form, recent tax return, bank statements and telephone confirmation from the employer. For our limited documentation program, we require either six months of bank statements or a job letter which contains substantially the same information one would find on a standard verification of employment form, including:

9

 
·
job position;

 
·
length of time on job; and

 
·
current salary.

The job letter should be on the employer’s letterhead and include the telephone number and signature of the individual completing the letter on behalf of the employer.

For our no income verification program, we require proof of self-employment in the same business for two years. We only offer our stated income program, which represents a very small percentage of our loans, to better credit quality borrowers where employment can be verified by an underwriter via telephone. We usually require lower combined LTV ratios with respect to loans made under programs other than our full documentation program.

We assess a borrower’s credit-worthiness primarily based on the borrower’s mortgage history and credit score, and we generally adjust our pricing and LTV ratios based on many other risk parameters. Our borrowers often have either (a) mortgage or other credit delinquencies, (b) problems providing documentation generally required by traditional lenders, and/or (c) collateral types against which traditional lenders may not lend. Qualification for a loan is based primarily upon our risk-based pricing model and guidelines, which we have developed over our 25-year history and our extensive database of prior loan performance. Because there are compelling circumstances with some borrowers, we employ experienced non-conforming mortgage loan underwriters to review the applicant’s credit profile and to evaluate whether an impaired credit history is a result of adverse circumstances or a continuing inability or unwillingness to meet credit obligations in a timely manner. An applicant's credit record will often be impaired by personal circumstances, including divorce, family illnesses or deaths and temporary job loss due to layoffs and corporate downsizing.

We have a staff of 92 underwriters, averaging nine years of non-conforming lending experience and averaging six years working for us. All underwriting functions for broker originations are conducted in our Woodbury, New York headquarters, and our regional offices in Jacksonville, Florida; and Dallas, Texas. All underwriting functions for retail originations are conducted in our Cincinnati, Ohio retail underwriting ‘‘hub’’; our Phoenix, Arizona regional office and our Woodbury, New York headquarters. We do not delegate underwriting authority to any third-party. Our underwriting department functions independently of our business development and sales departments and does not report to any individual directly involved in the sales origination process. Our underwriters are trained to review all components of the loan to determine its compliance with our underwriting guidelines.

As the underwriting department employs underwriters with different levels of experience and seniority, we have instituted underwriting internal controls that limit approval authority based on underwriting position. These limits are based on maximum loan amount and LTV ratios, ensuring that loans at the highest dollar or LTV limits we offer are reviewed and approved only by the underwriting department's most senior members. Also, for all files initially reviewed by lower level underwriters, a second review of the file is performed by a more senior underwriter prior to closing the loan.

Appraisals, Insured AVMs and Quality Control. We underwrite every loan submitted by thoroughly reviewing credit and by performing the following:

 
§
a separate appraisal/valuation review is conducted by our underwriters and/or appraisal review department, except where an appraisal is not centrally ordered by us or when an Insured AVM is utilized; and

 
§
a full compliance review, to ensure that all documents have been properly prepared, all applicable disclosures have been given in a timely fashion, and all federal and state regulations were properly complied with.

10

When we utilize appraisals, we require that they be performed by third-party, fee-based appraisers. Each appraisal includes, among other things, an inspection of both the exterior and interior of the subject property and data from sales within the preceding 12 months of similar properties within the same general location as the subject property. We perform an appraisal review on each loan prior to closing on appraisals that were not centrally ordered by us. In addition to reviewing each of these appraisals for accuracy, we also access alternate sources to validate sales data used in the appraisals to determine market value. These alternate sources include:

 
§
Multiple Listing Services;

 
§
assessment and sales services, such as Comps, Inc., Pace and RealQuest;

 
§
on-line Internet services, such as Realtor.com; and

 
§
other sources for verification, including broker price opinions and market analyses by local real estate agents.

For quality control purposes, using the criteria that we have developed over time, we actively track and grade all appraisers from whom we accept appraisals. We do not accept work from appraisers who have not conformed to our review standards. Our underwriters conduct limited reviews of the appraisals centrally ordered by us and the AVMs utilized in order to determine that the appraisal/AVM meets our guidelines.

When certain underwriting criteria have been met, we may utilize an Insured AVM in lieu of an appraisal for certain originations. If a borrower has a 620 or higher credit score, the property type is either one-family or condominium and the loan amount is $500,000 or less, we may utilize an Insured AVM in lieu of an appraisal. An Insured AVM is the coupling of a third-party valuation estimate and insurance on that value. The third-party AVM providers have created computer programs that use relevant real estate information, such as sales prices, property characteristics and demographics, to calculate a value for a specific property. Public records are the primary data source for an Insured AVM, and the quality of the values that they generate varies depending upon the data they use and the design of their model. AVMs are complex programs incorporating a variety of forecasting techniques, including linear regression, expert systems, neural networks, artificial intelligence and other methodologies. The different methodologies, algorithms, and variables used by the third-party AVM providers may vary greatly and affect their reliability and accuracy.

Once an acceptable AVM has been generated, we will order a property condition report to mitigate one of the weaknesses in using an AVM to value a property - the lack of a physical exterior or interior inspection of the property. For each AVM considered for use, we therefore require a property condition report which is a limited physical external inspection of the property. The primary benefit of using Insured AVMs is that they substantially reduce the time to complete a value estimate on a property. During the years ended December 31, 2006 and 2005, we utilized an Insured AVM for approximately 12% and 11%, respectively, of the loans we originated and those loans had a weighted average LTV of 76% and 77%, respectively, and a weighted average credit score of 680 and 689, respectively.

At the closing of a loan, where an AVM is used, we will purchase insurance, from a company that meets our minimum requirements (i.e., A.M. Best insurer rating of A+), that will insure the value of the property. In the event the borrower defaults upon the loan, resulting in the liquidation of the property, the insurance company may have to pay a portion of any losses we incur. A retroactive appraisal is performed as of the original valuation date when a loss arises involving an Insured AVM. If the Insured AVM value is found to exceed the appraisal value by more than a specific tolerance percentage (i.e., 10%), the insurer must reimburse us for either the losses we incurred from the disposal of the property or the difference between the values, whichever is less, plus certain other expenses.
 
For quality control purposes, we perform post-funding reviews on Insured AVMs, similar to our appraisal post-funding reviews.

After completing the underwriting and processing of a loan, we schedule the closing of the loan with an approved closing attorney or settlement agent. We hold the closing attorney or settlement agent responsible for completing the loan closing transaction in accordance with applicable law and our operating procedures. We also require title insurance to insure our interest as a lender, and evidence of adequate homeowner’s insurance naming us or our servicing agent as an additional insured party on all loans.

11

We perform a post-funding quality control review to monitor and evaluate our loan origination policies and procedures. Our quality control department is separate from our underwriting department and reports directly to a member of senior management.

Our quality control department samples at least 10% of all loan originations and performs a full quality control re-underwriting and review, the results of which are reported to senior management on a quarterly basis. On a daily basis, should the need arise, the manager of quality control department will notify senior management of any critical loan findings. The sample of loans reviewed is selected in the following manner:

 
§
all early default payments and customer complaints;

 
§
at least 5% of all funded loans each month are selected on a random basis; and

 
§
targets, which may be based on sources of business (both internal branches/teams and external brokers, geographic areas or other third parties) or products (perceived riskier products and/or newly offered products).

If any discrepancies are discovered during the quality control review process, a senior quality control underwriter re-reviews the loan and proceeds with any necessary follow-up actions. Discrepancies noted by the review are analyzed and corrective actions are instituted. A typical quality control review currently includes:

 
§
re-verifying the credit report;

 
§
reviewing loan applications for completeness, signature, and consistency with other processing documents;

 
§
obtaining new written and/or verbal verification of income and employment from employer;

 
§
obtaining new written and/or verbal verification of mortgage to re-verify any outstanding mortgages, if necessary;

 
§
obtaining a new verification of value and/or photo for each property; and

 
§
analyzing the underwriting and program selection decisions.

We update the quality control process from time to time as our policies and procedures change.

Click & Close®. C&C is a proprietary web-based system that we developed internally to streamline and integrate our origination process. C&C opens an online channel of communications between us, brokers and a wide range of other mortgage information sources. C&C includes an integrated imaging system that reduces paper flow and allows loans to be handled simultaneously by multiple employees in the originations process. We currently use C&C to automate and facilitate many of our origination processes, including, but not limited to:

 
§
logging in and tracking applications in our retail and wholesale channels;

 
§
increasing the amount of internal loan origination processes that can be handled electronically, which reduces paper flow between account managers, mortgage analysts, loan processors and underwriters;

 
§
generating pre-approvals utilizing our risk-based pricing model;

 
§
generating stipulation sheets, preliminary disclosures and other documents, including closing documents; and

 
§
easy, real-time supervisory oversights to ensure that all applications are being worked on in a timely manner.

We are continuing to improve C&C to further streamline our processes and to reduce the paper flow required throughout the mortgage origination process. Our goal is to reduce our reliance on paper records, which we believe will lower our cost to originate.

12

Pooling of Loans Prior to Securitization or Whole-Loan Sales. After we fund a loan, we typically pledge the loan as collateral under a warehouse credit facility to obtain financing against that mortgage loan. By doing so, we replenish our capital in order to make new loans. Typically, loans are financed though a warehouse credit facility for only a limited time - generally, not more than three months - long enough to enable us to either securitize or sell the loans. During the time we hold the loans prior to securitization or whole-loan sale, we earn interest income from the borrower. The income is partially offset by any interest we pay to our warehouse creditors for providing us with financing. Additionally, we pay a third-party servicer a sub-servicing fee to perform the servicing of the mortgage loans during this pre-securitization or pre-sale holding period.

Securitizations and Whole-Loan Sales. As a fundamental part of our business and financing strategy, we securitize a substantial portion of the mortgage loans we originate. We also sell a portion of our loans as whole-loans. We select the outlet (securitization or whole-loan sale) depending on market conditions, relative profitability and cash flows. In the years ended December 31, 2006 and 2005, whole-loan sales comprised approximately 18.7% and 14.9%, respectively, of the total amount of our combined securitizations and whole-loan sales transactions.

The following table sets forth certain information regarding loan securitizations and loans sold on a whole-loan basis for the years ended December 31, 2006 and 2005:

   
For the Year Ended December 31,
 
(Dollars in thousands)
 
2006
 
2005
 
Loan securitizations - portfolio based
 
$
3,149,976
 
$
3,199,997
 
Whole-loan sales
   
725,112
   
561,487
 
Total securitizations and whole-loan sales
 
$
3,875,088
 
$
3,761,484
 

We apply the net proceeds from securitizations and whole-loan sales to pay down our warehouse lines of credit - in order to make available capacity under these facilities for future funding of mortgage loans - and utilize any additional funds for working capital.

Securitizations. In a securitization, we pool together loans, typically each quarter, and convey these loans to a newly formed securitization trust. These trusts are established for the limited purpose of receiving our mortgage loans and are bankruptcy remote - meaning that purchasers of asset-backed securities may rely on the cash flows generated from the assets held by the securitization trust for payment and not upon us for payment; likewise, the assets held by the securitization trust are not available to our general creditors, despite carrying the securitized loans and securitization financing on our consolidated financial statements. We carry no contractual obligation related to these trusts or the loans conveyed to them, nor do we have any direct or contingent liability related to the trusts, except for the standard representations and warranties typically made as part of a sale of loans on a non-recourse basis. Furthermore, we provide no guarantees to investors with respect to the cash flow or performance of these trusts.

 

13

The following table sets forth information about our securitized mortgage loan portfolio and the corresponding securitization debt balance, for each asset-backed security series, at December 31, 2006:

 
(Dollars in thousands)
 
Issue Date
 
Current Loan Principal Balance (1)
 
Total Securitization Debt Balance (2)
 
Asset-backed Security Series:
             
2004-1
 
March 30, 2004
 
$                                                           199,796
 
$                                                           192,305
2004-2
 
June 29, 2004
 
231,836
 
215,674
2004-3
 
September 29, 2004
 
276,600
 
259,961
2004-4
 
December 29, 2004
 
318,167
 
301,240
2005-1
 
March 31, 2005
 
441,285
 
418,997
2005-2
 
June 29, 2005
 
492,547
 
473,905
2005-3
 
September 29, 2005
 
587,594
 
567,731
2005-4
 
December 30, 2005
 
678,338
 
660,428
2006-1
 
March 30, 2006
 
739,566
 
729,398
2006-2
 
June 29, 2006
 
760,753
 
758,055
2006-3
 
September 29, 2006
 
808,693
 
813,490
2006-4
 
December 29, 2006
 
624,999
 
633,038
                                         Total
     
$                                                        6,160,174
 
$                                                        6,024,222

(1) The current loan principal balance shown includes amounts reflected on the consolidated balance sheet as mortgage loans held for investment - securitized (excluding discounts and net deferred origination fees), real estate owned (“REO”) (at its trust-basis value) and the principal portion of trustee receivables.

(2) The total securitization debt (financing on mortgage loans held for investment) balance shown excludes discounts of $6.3 million at December 31, 2006.

The securitization trust raises cash to purchase the mortgage loans from us generally by issuing securities to the public. These securities, known as “asset-backed securities,” are secured, or backed, by the pool of mortgage loans held by the securitization trust. These asset-backed securities, which are usually purchased by insurance companies, mutual funds and/or other institutional investors, entitle their holders to receive the principal (including prepayments of principal) and a portion of the interest, collected on the mortgage loans in the securitization trust. We structured each of our securitizations in 2006, 2005 and 2004 to be accounted for as a secured financing, which is known as “portfolio accounting.” With portfolio accounting, the mortgage loans held in the securitization trust are recorded on our balance sheet as mortgage loans held for investment, together with the related financing on the mortgage loans held for investment (which are the certificates or notes issued by the securitization trust). Prior to 2004, we structured our securitizations to be accounted for as sales, which is known as “gain-on-sale accounting.” With gain-on-sale accounting, we recorded an upfront gain at the time of securitization and capitalized the excess cashflow certificates on our balance sheet.

Each of the securitizations includes a series of asset-backed securities with various credit ratings, maturities and interest rates. The combined weighted average interest rate of the asset-backed securities in each securitization generally will increase over time as the shorter-term asset-backed securities with higher credit ratings and lower interest costs mature, leaving the longer-term asset-backed securities with lower credit ratings and higher interest costs remaining.

During the years ended December 31, 2006 and 2005, we issued four securitizations totaling $3.1 billion in collateral and four securitizations totaling $3.2 billion in collateral, respectively. All of our 2006 and 2005 securitizations received ratings from a combination of several rating agencies. The ratings received on the various classes of securities issued ranged from AAA to BBB- rated by Standard & Poor's Ratings Services (“S&P”) or Fitch Ratings, Inc. (“Fitch”), Aaa to Ba1 rated by Moody's Investors Service, Inc (“Moody’s”), and AAA to BBB (low) rated by Dominion Bond Rating Service, Inc. (“DBRS”).


 

14

The following table sets forth information with respect to our 2006, 2005 and 2004 securitizations as of their issuance date by offering size (which includes pre-funded amounts), collateral, initial weighted average pass-through rate and type of credit enhancement:

 
 
Securitization
 
Issuance Date
 
Public
Offering Size
 
Collateral
 
Initial Weighted Average Pass-Through Rate
 
 
Credit Enhancement
       
(Dollars in millions)
       
2006-1
 
March 30, 2006
 
$                           848.3
 
$                           875.0
 
5.88
% 
Senior/Sub
2006-2
 
June 29, 2006
 
801.1
 
825.0
 
6.04
 
Senior/Sub
2006-3
 
September 29, 2006
 
800.3
 
825.0
 
5.90
 
Senior/Sub
2006-4
 
December 29, 2006
 
608.4
 
625.0
 
5.60
 
Senior/Sub
       
$                        3,058.1
 
$                        3,150.0
       
                     
2005-1
 
March 31, 2005
 
$                           728.6
 
$                           750.0
 
4.49
% 
Senior/Sub
2005-2
 
June 29, 2005
 
729.0
 
750.0
 
4.57
 
Senior/Sub
2005-3
 
September 29, 2005
 
797.8
 
825.0
 
4.92
 
Senior/Sub
2005-4
 
December 30, 2005
 
848.3
 
875.0
 
5.82
 
Senior/Sub
       
$                        3,103.7
 
$                        3,200.0
       
                     
2004-1
 
March 30, 2004
 
$                           542.3
 
$                           550.0
 
1.71
% 
Senior/Sub
2004-2
 
June 29, 2004
 
504.4
 
520.0
 
4.44
 
Senior/Sub
2004-3
 
September 29, 2004
 
623.4
 
640.0
 
4.18
 
Senior/Sub
2004-4
 
December 29, 2004
 
583.8
 
600.0
 
4.34
 
Senior/Sub
       
$                        2,253.9
 
$                        2,310.0
       

Each of our securitizations of mortgage loans during 2006, 2005 and 2004 were structured and accounted for as secured financings. Under this securitization structure, the securitization trust holds mortgage loans as assets (referred to as “securitized loans”) and issues debt represented by asset-backed securities, comprised of “senior and subordinate notes” and net interest margin (“NIM”) notes or Class N Notes. The securitized loans are recorded as an asset on our balance sheet under “mortgage loans held for investment, net” and the corresponding debt is recorded as a liability under “financing on mortgage loans held for investment, net.” This structure recognizes the related revenue as interest on mortgage loans held for investment and the related expense as interest expense on the financing on mortgage loans held for investment. In contrast, the structures we used prior to 2004 required us to record virtually all of the anticipated income as an upfront gain on sale of mortgage loans under Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125.” We plan to continue to structure our future securitizations to be accounted for as secured financings. We believe structuring, and therefore accounting for, securitizations as secured financings more closely matches the recognition of income with the receipt of cash payments on the individual loans.

Each of our securitizations contains an overcollateralization (“O/C”) provision, which is a credit enhancement that is designed to protect the securities sold from credit losses, which arise principally from defaults on the underlying mortgage loans. In short, O/C occurs when the amount of collateral (i.e., mortgage loans) owned by a securitization trust exceeds the aggregate amount of asset-backed securities (senior and subordinate note portions only). The O/C is created to absorb losses that the securitization trust may suffer, as loans are liquidated at a loss. Beginning with our 2002 securitizations, and in each of our subsequent securitizations, we created the O/C by initially selling asset-backed securities (senior and subordinate note portions) totaling approximately 96.7% to 98.9% of the total amount of mortgage loans sold to the trust. In doing so, we created the full amount of the O/C required by the trust at the time we completed the securitization, instead of over time. For example, if a securitization trust contains collateral of $100 million principal amount of mortgage loans, and our O/C requirement is 2%, we issue approximately $98 million in asset-backed securities (senior and subordinate note portions).

15

The O/C is generally expressed as a percentage of the initial mortgage loan or collateral principal balance sold to the securitization trust to the amount of senior and subordinate notes issued. The required O/C is initially determined by the rating agencies and/or the bond insurer, if any, using various factors, including:

 
·
characteristics of the mortgage loans sold to the trust, such as credit scores of the borrowers and LTV ratios;

 
·
the amount of excess spread between the interest rate on the pool of mortgage loans sold to the securitization trust and the interest paid to the asset-backed securities holders, less the servicing fees, and other related expenses such as trustee fees and bond insurer fees, if any; and

 
·
the structure of the underlying securitization (i.e., issuing BBB- certificates creates greater credit enhancement in the securitization transaction, which generally results in a lower O/C).

During 2006 and 2005, our securitizations required a range of O/C from 2.7% to 3.1% and 2.8% to 3.3%, respectively, of the initial mortgage loans held as collateral by the securitization trust. The required O/C can increase or decrease throughout the life of the transaction depending upon subordination levels, delinquency and/or loss tests and is subject to minimum and maximum levels, as defined by the rating agencies and/or the bond insurer insuring the securitization. As long as the O/C requirement is met, any excess cash flows (defined as the funds available for distribution after all principal, interest and hedging related payments are made in full on the senior, subordinate, and NIM notes or Class N notes)  generated from the securitizations are distributed to us after all other distributions are made in accordance with the “waterfall” described below.

Each month we are entitled to receive payment only after all required payments have been made on all the other securities issued by the securitization trust, because our right of payment is subordinate to all other securities issued by the securitization trust. In addition, before we receive any payments, the excess cash flows are generally applied in a “waterfall” manner as follows:

 
·
first, to cover any losses on the mortgage loans in the related mortgage pool;

 
·
second, to reimburse the bond insurer, if any, of the related series of asset-backed securities for amounts paid by or otherwise owing to that insurer;

 
·
third, to build or maintain the required level of the O/C provision, as described above, for that securitization trust by applying the funds as an accelerated payment of principal to the holders of the asset-backed securities of the related series;

 
·
fourth, to reimburse holders of the subordinate certificates of the related series of asset-backed securities for unpaid interest and for any losses previously allocated to those securities; and

 
·
fifth, to pay “the net rate cap carryover”, if any, which relates to the interest on the related asset-backed securities that exceeded the maximum net interest amount available from the mortgage loans underlying the securitization trust.

Each securitization trust also has the benefit of either a financial guaranty insurance policy from a monoline insurance company or a “senior-subordinated” securitization structure, or a combination of the two (referred to as a “hybrid”). In a securitization trust with a financial guaranty insurance policy that is not a hybrid, all securities are senior securities. The monoline insurance company guarantees the timely payment of principal and interest to all security holders in the event that the cash flows are not sufficient. In “senior-subordinated” securitization structures, the senior security holders are protected from losses (and payment shortfalls) first by the excess cash flows and the O/C, then by subordinated securities which absorb any losses prior to the senior security holders. In a hybrid structure, the senior securities generally have both the subordinated securities to absorb losses and a monoline insurance company that guarantees timely principal and interest payments with respect to the senior securities.

In 2002 through 2004, we utilized a securitization structure in which we completed a concurrent NIM transaction. In a NIM transaction, the excess cash flows (the rights to receive excess cash flows are referred to as the “excess cashflow certificates” or “owner trust certificates”) are sold to a NIM trust without recourse, except for standard representations and warranties. The NIM trust issues NIM note(s) that one or more third-party investors will purchase and we receive the net proceeds from the issuance of the NIM note(s). Commencing in 2005, we began issuing the NIM note(s) through the securitization trust (referred to as “Class N Notes”) as opposed to issuing them through a NIM trust.

16

The NIM note(s), or Class N Notes, entitles the holder to be paid a specified interest rate, and further provides for all cash flows generated by the excess cashflow or owner trust certificates to be used to pay all principal and interest on the NIM note(s), or Class N Notes, until paid in full, which typically occurs approximately 18 to 24 months from the date the NIM note(s), or Class N Notes, were issued. We ultimately will hold the excess cashflow or owner trust certificates after the holder of the NIM note(s), or Class N Notes, has been paid in full.

As part of a NIM transaction, we typically “fully fund” the O/C at closing - as opposed to having it build up over time as we had prior to 2002 - which enables the NIM investors to receive cash flows in the first month. We used a portion of the net proceeds we received from selling NIM note(s), or Class N Notes, to make up for the difference between (1) the principal amount of the mortgage loans sold, and (2) the proceeds from selling the asset-backed securities. During 2006 and 2005, all of our securitizations had fully funded O/Cs at closing.

NIM transactions generally enable us to generate upfront cash flow when the securitization and related NIM transaction close, net of funding the upfront O/C, securitization and NIM costs, which helps offset a substantial portion of our cost to originate the loans included in the transaction.

    Commencing in 2004, we structured our NIM transactions to be accounted for as a secured financing in which the amount of NIM notes, or Class N Notes, are recorded as a liability on our balance sheet, as a component of the financing on mortgage loans held for investment, net. Conversely, in the securitizations and related NIM transactions we completed prior to 2004, the underlying securitization was structured as a gain-on-sale under SFAS No. 140. In these transactions, we recorded the net cash proceeds generated from the sale of the NIM notes as a component of our net gain on sale of mortgage loans. Under this structure, we also retained, and recorded as a component of our net gain on sale of mortgage loans, a relatively small excess cashflow certificate, representing the estimated fair value of the excess cash flows following the repayment of the NIM notes, which normally ranged from 0.0% to 1.0% of the securitized collateral.

Securitizations Structured as a Financing. All of the securitization transactions completed in 2006 and 2005 were structured and accounted for as secured financings. We refer to recordation of these transactions as “portfolio accounting,” and intend to utilize this structure in the foreseeable future. The securitizations were structured for accounting purposes as secured financings under SFAS No. 140. The 2006 and 2005 securitizations do not meet the qualifying special purpose entity (“QSPE”) criteria under SFAS No. 140 and related interpretations, because, after the loans are securitized, we have the option to either contribute a derivative instrument into the trust or purchase up to 1% of the mortgage loans contained in the securitization mortgage pool. Securitization transactions consummated prior to 2004 met the QSPE criteria under SFAS No. 140 and were accounted for, recognized and recorded as sales.

    With portfolio accounting, (1) the mortgage loans we originate remain on our consolidated balance sheet as loans held for investment; (2) the securitization debt replaces the warehouse debt associated with the securitized mortgage loans; and (3) we record interest income on the mortgage loans and interest expense on the securities issued in the securitization over the life of the securitization, instead of recognizing a gain or loss upon completion of the securitization.

Deferred securitization debt issuance costs are amortized on a level yield basis over the estimated life of the debt. We also defer on our balance sheet, as a component of mortgage loans held for investment, net, the incremental direct fees and costs to originate the loans in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17,” which are amortized on a level yield basis over the estimated life of the related loans, on a homogeneous pool basis, using the interest method calculation. In addition, we allocate a portion of the accounting basis of the mortgage loans held for investment to the mortgage servicing rights (“MSRs”), which results in a discount to the mortgage loans held for investment. The fair value of the mortgage servicing rights is determined based upon the price a third-party servicer is willing to pay for the contract right to service that loan in the securitization. The allocation of the cost basis between the loan and the MSR, generally results in a discount being created on the loan retained in the securitization. The MSRs generally are sold to a third-party servicer. The resulting discount is accreted to interest income on a level-yield basis over the estimated life of the related loans, on a pool-by-pool basis, using the interest method calculation.

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Since we began structuring our securitizations in 2004 as secured financings, and recording our income over time instead of upfront, there is a significant difference in our results of operations for the years ended December 31, 2006, 2005 and 2004 as compared to pre-2004 historical results. We believe that portfolio accounting treatment, however, more closely matches the recognition of income with the receipt of cash payments on the individual loans.

Securitizations Structured as a Sale - Off-Balance Sheet Arrangements. Prior to 2004, we structured our securitizations to be accounted for as sales under SFAS No. 140, which is known as “gain-on-sale accounting.” In a securitization structured as a sale, or off-balance sheet, we sold a pool of loans to a trust for a cash purchase price and a certificate (specifically an excess cashflow certificate) evidencing our ownership in the distributions from the trust. With gain-on-sale accounting, we recorded an upfront gain at the time of securitization and recorded the fair value of the excess cashflow certificates on our balance sheet. We allocated our basis in the mortgage loans and excess cashflow certificates between the portion of the mortgage loans and excess cashflow certificates sold through securitization and the portion retained based on the relative fair values of those portions on the date of sale. The excess cashflow certificates are trading securities and are carried at their fair value.

We may recognize gains or losses attributable to the changes in fair value of the excess cashflow certificates, which are recorded at estimated fair value and accounted for as “trading” securities. We are not aware of any active market for the sale of our excess cashflow certificates. Although we believe that the assumptions we use to determine fair value of our excess cashflow certificates are reasonable, there can be no assurance as to the accuracy of the assumptions or estimates.

Whole-Loan Sales. Whole-loan sales are the sale of pools of mortgage loans to banks, consumer finance-related companies and institutional investors on a servicing-released basis. We have found that, from time to time, we can receive better economic results by selling some of our mortgage loans on a whole-loan basis, without retaining servicing rights, generally in private transactions to financial institutions or consumer finance companies. We recognize a gain or loss when we sell loans on a whole-loan basis equal to the difference between the cash proceeds received for the loans and our investment in the loans, including any unamortized loan origination fees and costs. We generally sell these loans without recourse, except that we provide standard representations and warranties to the purchasers of such loans. During the years ended December 31, 2006 and 2005, we sold whole loans without recourse to third-party purchasers (with the exception of a premium recapture and secondary marketing reserves described below) on a servicing-released basis of $725.1 million and $561.5 million, respectively. The average gross premium we received for the whole loans sold during the year ended December 31, 2006 was 3.7%, compared to 3.9% for the year ended December 31, 2005. The gross premium paid to us by third-party purchasers in whole-loan sale transactions does not take into account premiums we pay to originate the mortgage loans, the origination fees we collect (whether deferred or not), premium recapture reserves or secondary marketing reserves - each of which are components of the gain on sale calculation.

We maintain a premium recapture reserve related to our contractual obligation to rebate a portion of any premium paid by a purchaser when a borrower prepays a sold loan within an agreed period of time. The premium recapture reserve is established at the time of the whole-loan sale through a provision, which is reflected as a reduction of the gain on sale of mortgage loans. During the years ended December 31, 2006, 2005 and 2004, we recorded a premium recapture reserve provision of $1.1 million, $1.1 million and $309,000, respectively. The premium recapture reserve is recorded as a liability on the consolidated balance sheet. We estimate recapture based primarily upon historical premium recaptures and by reviewing the types of loan products, interest rates, borrower prepayment fees, if any, and an estimate of the impact of future interest rate changes may have on early repayments. The premium recapture reserve totaled $958,000 and $619,000 at December 31, 2006 and 2005, respectively.

We also maintain a secondary market reserve related to our estimated exposure to losses arising from loan repurchases, or the net settlement, related to representation and warranty claims by investors. During the year ended December 31, 2006, we recorded a secondary market reserve provision of $780,000 for losses that arise in connection with loans that we may be required to repurchase from whole-loan sale investors. No such provision was recorded during the years ended December 31, 2005 or 2004. We estimate the exposure primarily based upon historical repurchases and we estimate losses using a detailed analysis of historical loan performance by product type and origination year, similar to the analysis performed for the allowance for loan losses related to our mortgage loans held for investment portfolio. The secondary market reserve totaled $512,000 at December 31, 2006. We had no such reserve at December 31, 2005.

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Other Income. In addition to the income and cash flows we earn from securitizations (accounted for as sales and secured financings) and whole-loan sales, we also earn income and generate cash flows from:

 
·
any fair value adjustments related to the excess cashflow certificates in accordance with Emerging Issues Task Force (“EITF”) 99-20, “Recognition of Interest and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets;” and

 
·
miscellaneous interest income, gains from the sale of MSRs and prepayment penalties received on some of the mortgage loans we sold in connection with our securitizations prior to 2002.

Loan Servicing

The mortgage loans comprising our mortgage loans held for investment - pre-securitization are sub-serviced for us by a third-party servicer, Ocwen Loan Servicing, LLC, a subsidiary of Ocwen Financial Corporation, under a sub-servicing agreement. The sub-servicer is required, in servicing and administering the mortgage loans, to employ or cause to be employed procedures and exercise the same care that it customarily employs and exercises in servicing and administering mortgage loans for its own account, in accordance with accepted mortgage servicing practices of prudent lending institutions servicing mortgage loans similar to the mortgage loans, in return for a fee.

Currently, we sell the MSRs related to our securitized mortgage loans to Ocwen Loan Servicing, LLC, or another third-party servicer, at the time we securitize our mortgage loans. If we choose to sell the MSRs to another third-party servicer, Ocwen Loan Servicing, LLC will then, on our behalf, transfer the mortgage loans electronically to the other third-party servicer. Normally a servicing transfer can be completed within 45 days following the close of the securitization. We continually assess third-party servicers in order to determine the one to which we will sell the MSRs to on a securitization by securitization basis. We also employ several employees whose job functions are to monitor servicers with regards to delinquent and defaulted loans, as well as aid us in our portfolio retention efforts.

Competition

As an originator of mortgage loans, we face intense competition, primarily from diversified consumer financial companies and other diversified financial institutions, mortgage banking companies, commercial banks, credit unions, savings and loans, savings banks, mortgage real estate investment trusts (“REITs”), government-sponsored entities (such as Fannie Mae and Freddie Mac) and other finance companies. Many of these competitors in the financial services business are substantially larger, have more capital and substantially greater resources than we do, and have a lower cost of funds and a more established market presence than we have. Our competition varies by origination channel, delivery system and geographic region. Some of our competitors originate mortgage loans primarily through the wholesale channel, while others primarily originate directly to the consumer through a retail operation; some deliver their services exclusively via the Internet while others exclusively through “brick and mortar” offices. Additionally, some of our competitors offer products that we do not offer, such as negative amortization loans.

We have experienced increased competition over the Internet, where barriers to entry are relatively low. Competition can take many forms, including interest rates and costs of the loan, less stringent underwriting standards, convenience in obtaining a loan, customer service, amount and term of a loan and marketing and distribution channels. Furthermore, the level of spreads and/or gains realized by us and our competitors on the securitization or sale of the type of loans originated has attracted additional competitors into this market, which has lowered the spreads and gains that may be realized by us on future securitizations and whole-loan sales. Efficiencies in the asset-backed market have generally created a desire for even larger transactions, giving companies with greater volumes of originations a competitive advantage, including a pricing advantage.

We depend primarily on independent mortgage brokers for the origination of our wholesale mortgage loans, which constitute a significant portion of our loan production. These independent mortgage brokers have relationships with multiple lenders and are not obligated by contract or otherwise to do business with us. We compete with other lenders for the independent brokers’ business on the basis of competitive pricing, quality of service, diversification of products offered, use of technology and other factors. Competition from other lenders could negatively affect the volume and pricing of our wholesale loans, which could reduce our loan production and/or increase our cost to originate such loans.

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If our competitors increase their marketing efforts to include our target market of borrowers, we may be forced to reduce the rates and fees we currently charge in order to maintain and/or expand our market share. Any reduction in our rates or fees could reduce our profitability and adversely affect our business.

The sub-prime mortgage industry has undergone rapid consolidation in recent months. Several of our peer competitors have been acquired by large investment banks or other mortgage companies. In order to compete effectively in this business, we must maintain a high level of operational, technological and managerial expertise. The impact of these consolidations on our business has not been significant to date, but it is uncertain whether and to what extent we will be harmed or benefit from this industry consolidation over the long term. Additionally, over the past several years, many larger finance companies, financial institutions and conforming mortgage originators have adapted their conforming origination programs and allocated resources to the origination of non-conforming loans. Some of these companies have begun to offer products similar to those offered by us to customers in our target markets. For example, the government-sponsored entities Fannie Mae and Freddie Mac have begun to adapt some of their programs to include some products similar to those offered by us, and have begun to expand their presence into the non-conforming market. These government-sponsored entities have a size and cost-of-funds advantage that allows them to purchase loans with lower rates or fees than we are willing to offer. A material expansion of their involvement in the market to purchase sub-prime loans could change the dynamics of the industry in which we operate in ways adverse to us by virtue of their size, pricing power and the inherent advantages of a government charter. In addition, if as a result of their purchasing practices, these government-sponsored entities experience higher-than-expected losses, overall investor perception of the sub-prime mortgage industry may suffer. The entrance of these government-sponsored entities and other larger and better-capitalized competitors into our market may reduce our market share and/or our overall level of loan originations.

Regulation

We must comply with the laws, rules and regulations, as well as judicial and administrative decisions, in all of the jurisdictions in which we are licensed to originate mortgage loans, as well as an extensive body of federal law and regulations. Our business is subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities. Our consumer lending activities are subject to, among other laws and regulations, the following:

§ the Federal Truth-in-Lending Act (“TILA”) and Regulation Z, including the Home Ownership and Equity Protection Act of 1994 (“HOEPA”);

§  the Equal Credit Opportunity Act of 1974, as amended (“ECOA”) and Regulation B;

§  the Fair Housing Act (“FHAct”), as amended;

§  the Fair Credit Reporting Act of 1970, as amended (“FCRA”);

§ the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X;

§  the Home Mortgage Disclosure Act (“HMDA”) and Regulation C;

§  the Telephone Consumer Protection Act;

§  the CAN-SPAM Act;

§  the Americans with Disabilities Act;

§  the Sarbanes-Oxley Act of 2002 (“SOX”); and

§  other federal, state and local statutes and regulations affecting our activities.

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Mortgage-Related Rules and Regulations. We are subject to the rules and regulations of, and examinations by, the Department of Housing and Urban Development (“HUD”) and various state regulatory authorities, as well as the various other lending laws cited above, with respect to our core business of originating, processing and underwriting loans (and servicing loans prior to May 2001). These rules and regulations, among other things:

 
§
impose licensing obligations on us;

 
§
establish eligibility criteria for mortgage loans;

 
§
prohibit discrimination;

 
§
require credit reports on loan applicants;

 
§
regulate assessment, collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features;

 
§
mandate specified disclosures and notices to borrowers; and

 
§
in some cases, fix maximum interest rates, fees and mortgage loan amounts.

Failure to comply with these requirements can lead to, among other things, loss of approved status, demands for indemnification or mortgage loan repurchases, rights of rescission for certain mortgage loans, class action and other lawsuits, and administrative enforcement actions.
 
Several states and local municipalities have recently enacted so-called anti-predatory lending laws and/or regulations. While many of these laws and regulations contain some provisions that are similar to one another, there are a variety of provisions that vary from state to state and municipality to municipality, which has significantly increased the costs of compliance. In addition, many other state and local laws and regulations are currently under consideration, with more likely to be proposed in the foreseeable future, that are intended to further regulate our industry. Many of these laws and regulations seek to impose broad restrictions on a number of commonly accepted lending practices, including some of our practices. There can be no assurance that these proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws, rules and regulations could harm our business by:

 
§
substantially increasing the costs of compliance with a variety of potentially inconsistent federal, state and local laws;

 
§
substantially increasing the risk of litigation or administrative action associated with complying with these proposed federal, state and local laws, particularly those aspects of such proposed laws that contain subjective, as opposed to objective, requirements;

 
§
restricting our ability to charge rates and fees adequate to compensate us for the risk associated with a portion of our loans; or

 
§
if the law, rule or regulation is too onerous, potentially limiting our ability or willingness to operate in a particular geographic area.

There are also several potential federal bills being proposed, at least one of which may provide for federal preemption over these existing and proposed state and local laws and regulations. There can be no assurance that any federal law will be passed addressing this matter, or that, if passed, it will contain a provision that preempts these state and local laws and regulations.

In July 2003, regulations adopted by the Office of Thrift Supervision (“OTS”) became effective. These regulations eliminated the ability of state-chartered financial institutions and bankers, such as us, to charge prepayment penalties on certain alternative mortgages under the Federal Alternative Mortgage Transactions Parity Act (“Parity Act”), while federally-regulated entities still enjoy that right. As a result, these regulations provide a competitive disadvantage for state-chartered entities, such as our company, in certain states with respect to alternative mortgages. There can be no assurance that other federal regulations promulgated in the future will not contain similar provisions that give federally-regulated entities greater rights than state-chartered financial institutions and mortgage bankers, such as us.

We believe that we are in compliance in all material respects with applicable federal and state laws and regulations. Changes to the laws and regulations by the federal government or in any state where we do business may affect our operations in substantial and unpredictable ways.

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Environmental Matters

Although we primarily lend to owners of residential properties, in the course of our business, we may acquire properties securing loans that are in default. There is a risk that we could be required to investigate and clean-up hazardous or toxic substances or chemical releases at these properties, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and clean-up costs incurred in connection with the contamination. In addition, the owner or former owners of a contaminated site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. To date, we have not been required to perform any environmental investigation or clean-up activities, nor have we been subject to any environmental claims. There can be no assurance, however, that this will remain the case in the future.

Subsidiary Activities

As of December 31, 2006, Delta Financial Corporation had two wholly-owned direct subsidiaries, Delta Funding Corporation and DFC Financial Corporation. The following is a summary of each of these subsidiaries activities at December 31, 2006:

Delta Funding Corporation - Originates mortgage loans through two distribution channels. The majority of these originations occur in 34 states. In the wholesale channel, Delta Funding Corporation originates mortgage loans indirectly through a network of 3,200 independent mortgage brokers and other real estate professionals who submit loan applications on behalf of borrowers. Through its retail operating division - Fidelity Mortgage - Delta Funding Corporation originates mortgage loans directly with borrowers who submit loan applications. Fidelity Mortgage develops loan leads primarily through a telemarketing system, and also through Internet leads, direct mail and a network of 10 origination centers located in nine states. Additionally, Delta Funding Corporation has 17 wholly owned direct and indirect subsidiaries.

DFC Financial Corporation - Holds certain trademark rights for both Fidelity Mortgage Inc. and Delta Funding Corporation.

Employees

As of December 31, 2006 and 2005, we had a total of 1,395 and 1,327 employees, respectively, including both full-time and part-time employees. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

    Certain information contained in this Annual Report on Form 10-K constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve risk and uncertainties that exist in our operations and business environment, and are subject to change on a variety of important factors. Generally, forward-looking statements can be identified by the use of forward-looking terminology including, but not limited to, “anticipate that,” “believes,” “continue to,” “estimates,” “expects to,” “hopes,” “intends,” “may,” “plans,” “potential,” “predict,” “project,” “should,” “target,” “could,” “is likely to,” “believe,” “to be,” “will be,” “will continue to be,” or similar words or terminology. These statements include, but are not limited to, our future profitability and our future net interest income, our future cash flows and liquidity requirements, the future performance of our loan portfolios, our future originations volume, the size of our loan portfolio, the impact of changes in interest rates, our future hedging strategy, the adequacy of our allowance for loan losses and other reserves, the anticipated impact to our financial statements of our change to our accounting for securitizations, our ability to realize benefits from our deferred tax asset, and our anticipated outcome of litigation and regulatory matters, as well as statements expressing optimism or pessimism about future operating results. Such statements are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act (“PSLRA”) of 1995. The forward-looking statements are based upon management’s views and assumptions as of the date of this Report, regarding future events and operating performance and are applicable only as of the date of such statements. By their nature, all forward-looking statements involve risk and uncertainties. We caution readers that numerous important factors discussed in this Report, or detailed in our other SEC reports and filings, in some cases have caused, and in the future could cause, our actual results to differ materially from those expressed in any forward-looking statements made in this Report.

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These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on any such forward-looking statements. We undertake no obligation to update publicly any of these statements in light of future events, except as required by law. Significant factors affecting these expectations are set forth under “Item 1A - Risk Factors.”


Risks Related to Our Business Operations

We may operate on a negative cash flow basis and may not have sufficient capital resources to satisfy our fixed obligations and fund our operations.

We require substantial amounts of cash to fund our loan originations and operations. We have operated on a negative cash flow basis at times during the past several years. We utilize cash proceeds from our securitizations, including NIM transactions, as well as cash generated from our whole-loan sales, to help offset the costs to originate our loans. We cannot assure you, however, that we will be able to earn a sufficient spread between our cost of funds and our average mortgage rates, or that we will be able to utilize optimal securitization structures (including the sale of NIM notes, Class N Notes or interest-only certificates or bonds), or be able to securitize at all or at terms favorable to us, to generate sufficient revenues and cash flows to offset our current cost structure and cash uses or generate sufficient cash flow from whole-loan sales to offset the cost to originate our loans. Furthermore, we cannot assure you that we will be able to continue to originate a sufficient number of loans, which could also impact our ability to generate enough cash from securitizations, whole-loan sales and net interest income to offset our costs in the future.

In addition, we cannot assure you that we will generate positive cash flow in future periods, or at all, or that we will have sufficient working capital to fund our operations, which includes substantial fixed costs. If we do not have sufficient working capital, we may need to reduce the scope of our operations and may not be able to satisfy our obligations as they become due.

We depend primarily on independent mortgage brokers for the origination of our wholesale mortgage loans.

Independent mortgage brokers produce the majority of our loan production. These independent mortgage brokers have relationships with multiple lenders and are not obligated by contract or otherwise to do business with us. For the years ended December 31, 2006 and 2005, 51.4% and 53.9%, respectively, of our loan originations were originated through approximately 3,200 and 3,000 independent mortgage brokers, respectively. We compete with other lenders for the independent mortgage brokers’ business on the basis of pricing, service, loan fees, costs and other factors. Competition from other lenders could harm the volume and pricing of our wholesale loans, which could reduce our loan production.

Intense competition in the non-conforming mortgage loan industry may result in reduced loan production, reduced net income or in revised underwriting standards, which could harm our business.

As an originator of mortgage loans, we face intense competition, primarily from diversified consumer financial companies and other diversified financial institutions, mortgage banking companies, commercial banks, credit unions, savings and loans, savings banks, mortgage REITs and other finance companies. Compared to us, many of these competitors are substantially larger than we are, have greater access to capital at a lower cost than we do, have substantially greater resources than we do and have a more established market presence than we have. In addition, we have experienced increased competition over the Internet, where barriers to entry are relatively low. Competition can take many forms, including lower interest rates and costs to the borrower, less stringent underwriting standards, convenience in obtaining a loan, customer service, the amount and term of a loan and more desirable or effective marketing and distribution channels. Furthermore, the entrance of additional competitors into our market could adversely affect the overall execution of our securitizations as well as reduce the gains that we may realize in future whole-loan sales. In addition, efficiencies in the asset-backed securities market have generally created a desire for even larger transactions, giving companies with greater volumes of originations a competitive advantage.

If our competitors increase their marketing efforts, we may be forced to expand our marketing efforts, reduce the rates and fees we currently charge or change our underwriting guidelines in order to maintain and expand our market share. Any reduction in our rates or fees, or any change to our underwriting guidelines, could reduce our profitability or the likelihood that our loans will be repaid. Any expansion of our marketing efforts could result in higher costs.

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We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees.

At the time we originate mortgage loans, we rely heavily upon information supplied to us by third parties, including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and we do not detect the misrepresentation prior to funding the loan, the value of the loan may be significantly lower than expected. Whether any misrepresentation or fraudulent act is made by the loan applicant, the mortgage broker, another third party or one of our employees, we may bear the risk of loss. A loan subject to such misrepresentation or fraud is typically unsaleable or subject to repurchase by us if it is sold by us prior to detection of the misrepresentation or fraud. Even though we may have rights against persons and entities who made or knew about the misrepresentation or fraudulent act, these persons and entities are often difficult to locate, making it difficult to collect any monetary losses we may have suffered.

We have controls and processes that are designed to help us identify misrepresentations from our borrowers, mortgage brokers, other vendors and our employees. However, we cannot assure you that we have detected or will detect all misrepresentations or fraud in our loan originations.

We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties in our mortgage loan sales agreements.

In connection with the sale and securitization of our loans, we are required to make customary representations and warranties regarding us and the loans. We are subject to these representations and warranties for the life of the loans and they relate to, among other things:

·    compliance with laws;

·    regulations and underwriting standards;

·    the accuracy of information in the loan documents and loan files; and

·    the characteristics and enforceability of the loans.

A loan that does not comply with these representations and warranties may not be saleable or saleable only at a discount. If the loan is sold before we detect non-compliance with these requirements, we may be obligated to repurchase the loan and bear any associated loss, or we may be obligated to indemnify the purchaser against that loss. We believe that we have qualified personnel and have established controls to help ensure that all loans will be originated to the market’s requirements; however, we cannot provide any assurance that we will succeed in doing so. We seek to minimize losses from defective loans by correcting flaws if possible and then securitizing, selling or re-selling these loans. We also create allowances in our financial statements to provide for defective loans. However, we cannot provide any assurance that losses associated with defective loans will not harm our business, or that the allowances in our financial statements will be sufficient to reflect the actual losses that we may incur.

Our loan products may require payment adjustments during the term of the mortgage loan that may result in increased payment defaults by borrowers and higher losses to us.

Some of our loan products require payment adjustments during the term of the mortgage loan. This can result in payment defaults by borrowers who are unprepared or unable to meet higher payment requirements. In addition, some of our loan products do not amortize evenly and generally enable the borrower to either pay only interest for several years before the loan begins amortizing or pay a reduced principal and interest payment for the first 10 years that the loan is outstanding. These loan products, in addition to possibly having increased payment defaults, also may result in higher losses to us due to higher principal balances outstanding at the time of a borrower default than would be the case for a loan that amortizes evenly throughout its term.

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We depend on key personnel and the continued ability to attract and retain qualified employees, the loss of which could disrupt our operations and result in reduced revenues.

The success of our operations depends on the continued employment of our senior management. If key members of our senior management were unable to perform their duties or were to leave us, we may not be able to find capable replacements, which could disrupt operations and result in reduced revenues. We have entered into employment, change-in control and non-competition agreements with some members of our senior management; however, these individuals may leave us or compete against us in the future. In addition, a court might not enforce the non-competition provisions of these agreements.

Even if we retain our current employees, our management must continually recruit talented professionals in order to grow our business. These professionals must have skills in business strategy, marketing, sales, finance and underwriting loans. Moreover, we depend, in large part, upon our wholesale account executives and retail loan analysts to attract borrowers by, among other things, developing relationships with financial institutions, other mortgage companies and brokers, real estate agents, borrowers and others. The market for these skilled professionals is highly competitive and may lead to increased hiring and retention costs. An inability to attract, motivate and retain qualified professionals could disrupt our operations and limit our growth.

Any disruption to our Click and Close® system could disrupt our operations, expose us to litigation and require expensive investments in alternative technology.

We are highly dependent upon our Click and Close® proprietary software to originate our mortgage loans. Any disruption to this software would substantially curtail our ability to originate new loans. The costs to replace this system may be extremely large.

Despite our efforts to maintain Internet security, we may not be able to stop unauthorized attempts to gain access to, or disrupt communications with, our brokers and our customers. Specifically, computer viruses, break-ins and other disruptions could lead to interruptions, delays, and loss of data or the inability to accept and confirm the receipt of information. Any of these events could substantially damage our reputation. We cannot assure you that our current technology or future advances in this technology or other developments will be able to prevent security breaches. We may need to incur significant costs or employ other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches.

Because our activities involve the storage and transmission of proprietary information, such as a borrower’s personal financial information, if a third party were able to steal a customer’s confidential information, we could be subject to claims, litigation or other potential liabilities that could cause our expenses to increase substantially. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation or a significant loss of revenue.

An interruption in or breach of our information systems may result in lost business.

We rely heavily upon communications and information systems to conduct our business. As we implement our growth strategy and increase our volume of loan production, that reliance will increase. Any failure or interruption or breach in security of our information systems or the third party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received, slower processing of applications and reduced efficiency in loan servicing.

The success, growth and competitiveness of our business will depend upon our ability to adapt to and implement technological changes.

The intense competition in the non-conforming mortgage industry has led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current wholesale and retail structure and information systems to compete effectively. The origination process is becoming more dependent upon technological advancement, such as the ability to process applications over the Internet, accept electronic signatures, process status updates instantly and other conveniences that customers may expect. Implementing this new technology and becoming proficient with it may also require significant capital expenditures. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could reduce our ability to compete.

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Unpredictable delays or difficulties in the development of new loan products or loan programs can harm our business.

We and our competitors are continually striving to develop new loan products and programs to gain a competitive advantage in the marketplace. New loan products and programs can have the effect of obtaining more business in the wholesale channel from mortgage brokers and/or in the retail channel directly with consumers, by providing greater flexibility and more alternatives to meeting borrowers’ needs. Any unpredictable delays or difficulties in developing and introducing new loan products or programs can result in the loss of business to competitors.

Our use of Insured AVMs in lieu of appraisals could increase our losses.

We use Insured AVMs in lieu of appraisals for certain mortgage loan originations (totaling approximately 12% and 11% of our total loan production in 2006 and 2005, respectively). An Insured AVM is the coupling of a third-party valuation estimate and insurance on that value. The third-party AVM providers have created computer programs that use relevant real estate information, such as sales prices, property characteristics and demographics, to calculate a value for a specific property. Public records are the primary data source for an AVM, and the quality of the values that they generate varies depending upon the data they use and their design. AVMs are complex programs incorporating a variety of forecasting techniques, including linear regression, expert systems, neural networks, artificial intelligence and other methodologies. The different methodologies, algorithms and variables used by the third-party AVM providers may vary greatly and affect their reliability and accuracy.

One of the weaknesses in using an AVM to value a property is the lack of a physical exterior or interior inspection of the property. To mitigate some of this inherent weakness, we require a property condition report to be completed for each AVM considered for use. A property condition report is a limited physical external inspection of the property. There can be no assurance, however, that these property inspections will uncover all potential issues with a property that a full appraisal might.

At the closing of the loan, we purchase insurance that insures the value of the property. In the event the borrower defaults upon their loan, resulting in the liquidation of the property, the insurance company may have to pay a portion of any losses incurred by the securitization trust. There can be no assurance, however, that the securitization trust will be able to collect any insurance in the event of a loss, which would affect the interest income we earn from such trust.

If we make any acquisitions, we will incur a variety of costs and may never realize the anticipated benefits, which can harm our business.

If appropriate opportunities become available, we may attempt to acquire businesses that we believe are a strategic fit with our business. We currently have no agreements to consummate any acquisitions. If we pursue any transaction, the process of negotiating the acquisition and integrating an acquired business may result in operating difficulties and expenditures, and may require significant management attention that would otherwise be available for ongoing development of our business, whether or not any such transaction is ever consummated. Moreover, we may never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or the recording of goodwill and other intangible assets, which could increase our expenses, or harm our results of operations, financial condition and business prospects.

 

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Differences in our actual experience compared to the assumptions we used to estimate the value of our excess cashflow certificates could result in losses.

Our securitization transactions prior to 2004 were structured to be accounted for as sales, which required the use of gain-on-sale accounting. At closing, we estimated the fair value of the excess cashflow certificates we received in the securitization based upon various economic factors, including loan types, balances, interest rates, dates of origination, terms and geographic locations. We also use other available information applicable to the types of loans we originate, such as reports on interest rates, collateral value, economic forecasts and historical default and prepayment rates of the portfolio under review. Realization of the estimated fair value of these excess cashflow certificates is subject to the prepayment and loss characteristics of the underlying loans and to the timing and ultimate realization of the stream of cash flow associated with these loans. Significant prepayment or loss experience would impair the future cash flow of the excess cashflow certificates. If actual experience differs from the assumptions we used to determine the asset values, future cash flow and earnings could be harmed and we could be required to write-down the value of our excess cashflow certificates. Actual results could vary significantly from the projections due to a variety of facts, including changes in interest rates, economic conditions, servicer defaults, loan defaults, prepayments, and delinquency triggers resulting in changes in the level of cash held by the securitization trust to prepay the holders of its asset-backed securities. No assurance can be given that our excess cashflow certificates will not experience significant prepayments or losses or as to whether, and in what amounts, we, in the future, may have to write-down the value of the excess cashflow certificates from our securitization transactions. In addition, if the prevailing interest rates rise, the required discount rate might also rise, resulting in fair value adjustments related to the excess cashflow certificates.

If any of our assumptions used to determine the fair value of our stock-based awards change significantly, future share-based compensation expense may differ materially from that recorded currently.

In 2006 we adopted SFAS No. 123(R), “Share-Based Payment,” which required us to measure compensation cost for stock awards at fair value and recognize compensation over the service period the awards are expected to vest. The determination of compensation cost requires us to make many assumptions regarding volatility, expected option life and forfeiture rates. In addition, changes in our stock price or prevailing interest rates will also impact the determination of fair value and compensation cost. If any of our assumptions used to determine fair value change significantly, future share-based compensation expense may differ materially from the amounts currently recorded.

We are subject to certain risks in connection with the level of our allowance for loan losses.

A variety of factors could cause our borrowers to default on their loan payments and the collateral securing such loans to be insufficient to pay any remaining indebtedness. In such an event, we could experience significant loan losses, which could have a material adverse effect on our financial condition and results of operations.

In the process of originating a loan, we make various assumptions and judgments about the ability of the borrower to repay it, based on the creditworthiness of the borrower, and the value of the real estate, among other factors. We establish an allowance for loan losses through an assessment of probable losses in our loan portfolio. Several factors are considered in this process, including historical and projected default rates and loss severities. If our assumptions and judgments regarding such matters prove to be incorrect, our allowance for loan losses might not be sufficient, and additional loan loss provisions might need to be made. Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material. See “Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Policies - Allowance for Loan Losses on Mortgage Loans Held for Investment” for a discussion of the procedures we follow in establishing our loan loss allowance.

Our previous financial statements are not indicative of our future financial results.

In March 2004, we began using a securitization structure that we account for as a secured financing, also known as portfolio accounting. Portfolio accounting recognizes the related revenue as net interest income is received over the life of the securitized loans. In contrast, our prior securitization structures required us to record virtually all of the income received upfront as a gain on sale of mortgage loans. We structured all of our 2006, 2005 and 2004 securitizations as secured financings and plan to continue to utilize this structure, and portfolio accounting, for our future securitization transactions. As a result, income that would have otherwise been recognized upfront as gain-on-sale revenue at the time of a securitization is now recognized over the life of the loans.

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As a result of these changes, our results of operations in 2006, 2005 and 2004 were recorded on a basis that is substantially different from years prior to 2004. We have recorded increased quarterly income during 2006, as compared to the same quarter in 2005. The increasing trend in same quarter over same quarter income we have experienced from the first quarter of 2004 through the fourth quarter of 2006 largely reflects the time it took to build our loan portfolio to a size that generated sufficient net interest income to offset our operating expenses. Accordingly, our financial statements from years prior to 2004, and to a certain extent in 2004 and 2005 when we started building up our loan portfolio, will be of limited use to you in evaluating our performance in future periods.

Risks Related to Our Financing Activities

We depend on third-party financing sources, which may be unavailable to us in the future.

To accumulate loans for securitization or sale, we borrow money on a short-term basis through warehouse credit facilities. We have relied upon a limited number of lenders to provide the primary credit facilities for our loan originations. As of December 31, 2006, we had five warehouse credit facilities for this purpose, each from a different lender. These facilities are due to expire between May 2007 and November 2007. We may not be able to renew or replace these warehouse facilities at their respective maturities, at terms satisfactory to us or at all.

Any failure to renew or obtain adequate funding under these warehouse credit facilities or other financing arrangements, or any reduction in the size of, or increase in the cost of, these types of facilities could increase our interest expense or reduce the number of loans that we can originate. If we are not successful in maintaining adequate financing, we would not be able to hold a sufficient volume of loans pending securitization. As a result, we would have to curtail our loan origination activities or sell loans either through whole loan sales or in smaller securitizations, which could render our operations unprofitable.

During volatile times in the capital markets, our access to warehouse and other financing has been severely limited. If we are unable to maintain adequate financing and other sources of capital are not available, we would be forced to suspend or curtail our operations.

Our warehouse credit facilities contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

Our warehouse credit facilities contain restrictions and covenants that, among other things, require us to satisfy financial, asset quality and loan performance tests. If we fail to satisfy any of these covenants, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements and restrict our ability to make additional borrowings. These agreements also contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.

The covenants and restrictions in our warehouse credit facilities may restrict our ability to, among other things:

·   finance loans which do not have specified attributes;

·   reduce our liquidity below minimum levels; and

·   hold loans for longer than established time periods.

These restrictions may interfere with our ability to enter into other financing arrangements or to engage in other business activities, such as selling new types of loan products.

Our warehouse financing is subject to margin calls based on our lender’s opinion of the value of our collateral. An unanticipated margin call could harm our liquidity.

The amount of financing we receive under our warehouse credit facilities depends in large part on our lenders’ valuation of the mortgage loans securing the financings. Each credit facility provides the lender the right to re-evaluate the loan collateral that secures our outstanding borrowings at any time. If the lender determines that the value of the collateral has decreased, the lender has the right to initiate a margin call. A margin call would require us to provide the lender with additional collateral or to repay a portion of our outstanding borrowings. Any margin call could force us to redeploy our assets in a manner which may not be favorable to us, and if we are not able to satisfy a margin call, could result in the loss of the related line of credit and a default under any other credit facility.

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Our inability to access the securitization market or realize cash proceeds from securitizations and whole-loan sales in excess of the loan acquisition costs could harm our financial position.

We rely, and expect to continue to rely, significantly upon our ability to securitize our mortgage loans - and, to a lesser extent, the premiums we receive on whole-loan sales in excess of the outstanding principal balance of the loans - to generate cash for repayment of our short-term credit and warehouse facilities and to finance mortgage loans for the remainder of each mortgage loan’s life.

We may not be successful in securitizing mortgage loans that we accumulate in the future. Our ability to complete securitizations of our loans at favorable prices or at all will depend on a number of factors, including:

 
·
conditions in the securities markets generally;

 
·
conditions in the asset-backed securities market specifically;

 
·
the availability of credit enhancement on acceptable economic terms or at all; and

 
·
the performance of our portfolio of securitized loans.

Additionally, we may not receive premiums on our future whole-loan sales transactions, and may sell loans at a discount, affecting the amount of cash proceeds we realize. If we are unable to originate loans at a cost lower than the cash proceeds realized from securitizations and loan sales, our ability to operate our business profitably will be impaired.

We typically finance borrowers with lower credit ratings relative to those who would otherwise qualify for prime mortgage loans. This strategy may hinder our ability to obtain financing and to continue securitizing loans or selling loans on attractive terms in the future.

We market a significant portion of our loans to borrowers who are either unable or unwilling to obtain financing from traditional sources, such as commercial banks, credit unions, savings and loans, savings banks, and government-sponsored entities. This type of borrower is commonly referred to as a sub-prime or non-conforming borrower. Loans made to non-conforming borrowers may entail a higher risk of delinquency and loss than loans made to borrowers who use traditional financing sources. This fact may hinder our ability to obtain financing and to continue securitizing loans or sell loans on attractive terms in the future. A borrower’s delinquency in making timely mortgage loan payment will interrupt the flow of projected interest income from the mortgage loans we hold and can ultimately lead to a borrower’s loan default and a loss to us if the net realizable value of the real property securing the mortgage loan is insufficient to cover the principal and interest due on the loan. In addition, our cost of financing a delinquent or defaulted loan is generally higher than for a performing loan. We bear the risk of delinquency and default on loans beginning at the time of origination. We continue to bear this risk until we sell these loans and, thereafter, we continue to bear this risk if we sell the loans with a retained interest or if we securitize the loans. We also reacquire the risk of delinquency and default for loans that we are obligated to repurchase in connection with a securitization or a loan sale. Repurchase obligations are typically triggered in loan sale transactions if the first payment due to the buyer following the loan sale is made more than 30 days after it is due or in any sale or securitization if the loan is not in material compliance with the representations and warranties we provided in our sale documents. Higher than anticipated loan delinquencies, including underestimating the extent of losses that our loans may incur, could cause us to incur substantial loan repurchase obligations, limit our ability to sell or securitize additional loans and limit the cash flow from our securitizations.

Historically, we have experienced higher rates of delinquency on loans made to these credit-impaired, non-conforming borrowers compared to delinquency rates experienced by other financial companies on loans to borrowers who are not credit impaired. While we use underwriting standards designed to mitigate the higher credit risk associated with lending to these non-conforming borrowers, our standards and procedures may not offer adequate protection against the risk of default. In addition, any deterioration of prevailing economic conditions, such as higher unemployment rates, may further increase the risks inherent in making loans to these types of borrowers.

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We are exposed to contingent risks and liabilities related to all of the loans we originate and either securitize or sell.

We have the following contingent risks with respect to loans that we originate and either securitize or sell:

 
·
We retain some degree of credit risk on all loans we originate or purchase during the period of time that we hold loans before securitization or sale. This credit risk includes the risk of borrower default, the risk of foreclosure and the risk that an increase in interest rates would result in a decline in the value of our loans to potential purchasers.

 
·
Our securitizations generally require the use of the excess cash flow distributions related to the owner trust certificates to accelerate the amortization of the securities balances relative to the amortization of the mortgage loans held by the trust, up to specified O/C limits. The resulting O/C serves as credit enhancement for the related securitization trust and, therefore, is available to absorb losses realized on loans held by that securitization trust. Generally, the form of credit enhancement agreement entered into in connection with securitization transactions contains limits on the delinquency, default and loss rates on the loans included in each securitization trust. If, at any measuring date, the delinquency, default or loss rate with respect to any trust exceeds the specified delinquency, default and loss rates, excess cash flow from the securitization trust, if any, would be used to fund the increased O/C limit instead of being distributed to us as the holder of the owner trust certificate, which would reduce our cash flow.

 
·
When we sell or finance mortgage loans, either through securitization or on a whole-loan basis, we make standard representations and warranties regarding these loans and may be required to repurchase mortgage loans that are not in compliance with any of these representations and warranties. In the past, we also have sold loans and/or pools of loans directly to commercial banks, consumer finance companies and accredited investors. In general, we sold these pools of loans or individual loans with recourse, in which case we are obligated to repurchase any loan upon default and to acquire the related mortgage loan. This obligation is subject to various terms and conditions, including, in some instances, a time limit. At December 31, 2006, we had reserved $81,000 in potential losses against $387,000 in aggregate principal amount of loans sold subject to future repurchase should these loans meet the default provisions.

A decline in the quality of servicing could lower the value of our excess cashflow certificates and our ability to sell or securitize loans.

In May 2001, we transferred our servicing portfolio to Ocwen Federal Bank FSB, a subsidiary of Ocwen Financial Corporation and a related predecessor entity to Ocwen Loan Servicing, LLC, which presently services our loan portfolio. Poor servicing by Ocwen Loan Servicing, LLC (or its parent or subsidiaries) or any other third-party servicer who services the loans we originate could harm the value of securitized mortgage loans (and our excess cashflow certificates in pre-2004 securitizations) and our ability to sell or securitize loans. Additionally, regulatory actions and class action lawsuits against these servicers could harm the value of our securitized loans (and our excess cashflow certificates in pre-2004 securitizations) and our ability to sell or securitize loans. Ocwen Financial Corporation and several of its affiliates have been named as defendants in a number of purported class action lawsuits that challenge its servicing practices under applicable federal and state laws. In addition, according to its public filings, Ocwen Financial Corporation and its affiliates maintain high levels of indebtedness. Ocwen Financial Corporation is a non-investment grade company and terminated its banking subsidiary’s status as a federal savings bank under supervision of the OTS and Federal Deposit Insurance Corporation (“FDIC”) and has obtained necessary licensing at the state and local level. If Ocwen Financial Corporation's operations are impaired as a result of litigation, governmental investigations, its inability to repay its indebtedness when due, or further degradation of its capitalization or credit rating, our profitability and operations may be harmed.

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Risks Related to Economic Factors, Market Conditions and Other Factors Beyond Our Control

Interest rate fluctuations may reduce our loan origination volume, increase our prepayment, delinquency, default and foreclosure rates, and reduce the value of and income from our loans.

One of our primary market risks is interest rate risk. Our profitability may be directly affected by the level of, and fluctuation in, interest rates, which affects our ability to earn a spread between the interest received on our loans and the cost of our borrowings, which are tied to various interest rate swap maturities, commercial paper rates and the London Inter-Bank Offered Rate (“LIBOR”). Our profitability is likely to be harmed during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could harm our ability to originate loans because refinancing an existing loan would be less attractive to the borrower, and qualifying for a loan may be more difficult for the borrower.

Risks Associated with Increased Interest Rates. Some of the risks we face relating to an increase in interest rates are:

 
·
reduced customer demand for our mortgage loan products;

 
·
higher delinquency and default rates on the adjustable-rate mortgage loans that we have originated;

 
·
reduced profitability on future securitizations due to wider investor spread requirements or increased O/C requirements for securities issued in securitizations;

 
·
increased cost of funds on our warehouse credit financings or other corporate borrowings, which may result in a reduced spread between the rate of interest we receive on loans and the interest rates we must pay under our credit facilities; and

 
·
limited access to borrowings in the capital markets.

Risks Associated with Lower Interest Rates. A decline in market interest rates generally induces borrowers to refinance their loans, and could reduce our long-term profitability. Because consumers in the United States have recently experienced a prolonged period of low interest rates (predominantly in late 2001 through mid-2004), many borrowers have already refinanced their existing debt, which could reduce the pool of borrowers interested in our mortgage products. Furthermore, a material decline in interest rates could increase the level of loan prepayments, which in turn could decrease the amount of collateral underlying our securitizations, and cause us to earn less income in connection with these loans over time. To the extent excess cashflow certificates have been capitalized on our financial statements (in our securitizations prior to 2004), higher than anticipated rates of loan prepayments or losses could require us to write-down the value of these excess cash flow certificates, and reduce our earnings.

Risks Associated with Fluctuating Interest Rates. Periods of unexpected or rapid changes in interest rates, and other volatility or uncertainty regarding interest rates, also can harm us by increasing the likelihood that asset-backed investors will demand higher than normal spreads to offset that volatility or uncertainty. In that event, the net interest spread we can expect to receive from our securitized assets would decrease.

Fluctuating interest rates may affect the net interest income we earn, based upon the difference between the yield we receive on loans held pending sales and the interest paid by us for funds borrowed under our warehouse facilities. A change in interest rates would reduce the spread between the average coupon rate on fixed rate loans and the weighted average pass-through rate paid to investors for coupons issued in connection with a securitization. Although the average loan coupon rate is fixed at the time the loan is originated, the pass-through rate to investors in a securitization is not fixed until the pricing of the securitization, which occurs shortly before our sale of the loans to the securitization trust. Therefore, if the market rates required by investors increase prior to securitization of the loans, the spread between the average coupon rate on the loans and the pass-through rate to investors may be reduced or eliminated, which would reduce or eliminate our net interest income from our on-balance sheet loan portfolio. Fluctuating interest rates also may affect the excess cash flows we receive from our excess cashflow certificates. A portion of our asset-backed securities are priced based on one-month LIBOR, but the collateral that backs these securities is comprised of mortgage loans with either fixed interest rates or “hybrid” interest rates — that is, fixed for the initial two or three years of the mortgage loan, and adjusting afterwards every six months thereafter. As a result, the cash flows that we receive from these securitized mortgage loans are dependent upon the interest rate environment. This is because “basis risk” exists between the assets and liabilities of the securitization trusts that we create. For example, the interest costs for that portion of our asset-backed securities that are priced on one-month LIBOR bears interest at a floating rate. As a result, each month the interest rate received by the security holders will adjust upwards or downwards as interest rates change. Therefore, as interest rates rise, the spread we earn on these assets (or the value of our excess cashflow certificates in pre-2004 securitizations) will fall, and as interest rates fall, the spread we earn on these assets (or the value of our excess cashflow certificates in pre-2004 securitizations) will rise. The decrease in the interest rate spread we earn (or the loss in value of our excess cashflow certificates in pre-2004 securitizations) as a result of rising interest rates will reduce our cash flow and harm our profitability.

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Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

Although we may seek to mitigate or offset our exposure to interest rate risks by using various hedging strategies, including interest rate swaps and/or “corridors” (corresponding purchase and sale of interest rate caps with similar notional balances at different strike prices), these hedging strategies may not be effective and involve risk. There have been periods, and it is likely that there will be periods in the future, during which we will incur losses after accounting for our hedging strategies. The hedging strategies we select may not have the effect of reducing our interest rate risk. In addition, the nature and timing of our hedging transactions could actually increase our risk and losses. In addition, hedging strategies involve transaction costs and other costs. Our hedging strategies and the derivatives that we may use may not adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.

Our business may be harmed by economic difficulties in the eastern United States, where we conduct a significant amount of our business.

We lend primarily to borrowers that secure their obligations to us with real property located in the eastern half of the United States. Accordingly, an economic downturn in the eastern half of the United States could negatively impact our ability to meet our origination targets or harm the performance of our existing loan portfolio.

An economic slowdown or recession could cause us to experience losses, including increasing delinquencies, decreasing real estate values and increasing foreclosures on our loans.

Periods of economic slowdown or recession may be accompanied by decreased demand for consumer credit, declining real estate values and an increased rate of delinquencies, defaults and foreclosures, and may harm our business. In the mortgage business, any material decline in real estate values reduces the ability of borrowers to use the equity in their homes to support borrowings and increases the LTV ratios of loans we previously made. These factors weaken collateral coverage and increase the possibility of a loss on the loan if a borrower defaults on the loan. Delinquencies, foreclosures and losses on mortgage loans generally increase during economic slowdowns or recessions. However, delinquencies, foreclosures and losses on mortgage loans also have increased during periods of economic growth. As a result, we cannot assure you that any delinquencies, foreclosures and losses will not increase in the future.

Because of our focus on non-conforming credit-impaired borrowers in the home equity loan market, the actual rates of delinquencies, foreclosures and losses on the loans we hold is likely to be higher under adverse economic conditions than delinquencies, foreclosures and losses currently experienced in the mortgage loan industry in general. Any sustained period of increased delinquencies, foreclosures, losses or increased costs could reduce our ability to sell, and could increase the cost of selling loans through securitization or on a whole loan basis. Any sustained increase in delinquencies, defaults or foreclosures is likely to increase losses and harm the pricing of our future securitizations and whole-loan sales as well as our ability to finance our loan originations.  More detailed delinquency information regarding the loans collateralizing each of our securitizations (which comprise our mortgage loans held for investment - securitized portfolio) is available on our website at www.deltafinancial.com/regAB.htm.

Geopolitical risks may harm our business.

Geopolitical risks, such as terrorist attacks in the United States or other parts of the world, conflicts involving the United States or its allies, or military or trade disruptions, may harm our business. These types of events could cause, among other things, the delay or cancellation of plans to finance a mortgage with us on the part of our customers or potential customers, or could negatively impact the capital markets and the asset-backed market in particular. Any of these events could cause business and consumer confidence and spending to decrease further, resulting in increased volatility in the United States and worldwide financial markets and potentially an economic recession in the United States and internationally, which could harm our business.

Additionally, the economic impact of the United States’ military operations in Afghanistan, Iraq and other countries, as well as the possibility of any terrorist attacks in response to these operations, is uncertain, but could have a material adverse effect on general economic conditions, consumer confidence and market liquidity. No assurance can be given as to the effect of these events on consumer confidence and the performance of our mortgage loans. United States military operations also may increase the likelihood of shortfalls under the Servicemembers Civil Relief Act or similar state laws, which provide for reduced interest payments for members of the armed forces while on active duty.

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Natural disasters may harm our business, causing us to experience losses, and increasing delinquencies and foreclosures on our loans.

Natural disasters may adversely affect the performance of mortgage loans in a variety of ways, including but not limited to, impacting borrowers’ abilities to repay their loans, displacing the homeowners due to severe damage to the properties, and decreasing the value of the mortgaged property, which may result in increased losses to us. Additionally, claims for insurance recoveries may be disputed if insured parties and their insurers disagree in their assessments or type of insurable damage, causing the timing and receipt of insurance payments for damages to be delayed or made at amounts lower than expected, if at all. We may not be able to readily determine the particular nature of such economic effects, how long any of these effects may last, or the impact on the performance of mortgage loans affected by the natural disaster.

Risks Related to Laws, Regulations and Legal Actions

The scope of our business exposes us to risks of noncompliance with an increasing and, in some cases, inconsistent body of complex laws, rules and regulations at the federal, state and local levels.

We must comply with the laws, rules and regulations, as well as judicial and administrative decisions, in all of the jurisdictions in which we are licensed to originate mortgage loans, as well as an extensive body of federal laws, rules and regulations. Moreover, our lending business is subject to extensive government regulation, supervision and licensing requirements by various state departments of banking or financial services, and the cost of compliance with such regulations may hinder our ability to operate profitably. Also, individual cities and counties have begun to enact laws that restrict non-conforming loan origination activities in those cities and counties. The laws, rules and regulations of each of these jurisdictions are different, complex and, in some cases, in conflict with each other. As our operations grow, and new laws, rules and regulations are added or amended, it may be more difficult to comprehensively identify, accurately interpret, properly program our technology systems and effectively train our personnel with respect to all of these laws, rules and regulations. Our inability to properly manage regulatory compliance could increase our potential exposure to the risks of noncompliance with these laws, rules and regulations.

Our failure to comply with these laws, rules and regulations may lead to:

 
·
civil and criminal liability, including potential monetary penalties;

 
·
loss of state licenses or other approved status required for continued lending operations;

 
·
legal defenses delaying or otherwise harming the servicers’ ability to enforce loans, or giving the borrower the right to rescind or cancel the loan transaction, or remove the security interest in the property;

 
·
demands for indemnification or loan repurchases from purchases of our loans;

 
·
difficulty in securitizing or selling our mortgage loans;

 
·
our choosing or being forced to severely limit, or even cease our lending activities in a particular area;

 
·
class action lawsuits; or

 
·
administrative enforcement actions.

Any of these results could harm our business.

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Compliance with a variety of potentially inconsistent federal, state and local laws, rules and regulations has increased our compliance costs, as well as the risk of litigation or administrative action associated with complying with these proposed and enacted federal, state and local laws, particularly those aspects of proposed and enacted laws that contain subjective requirements, with which it may be difficult to ensure compliance. In addition, federal, state and local laws, rules and regulations could impact over-collateralization requirements set by the rating agencies, which could decrease the cash proceeds we may receive from our securitizations. In some cases, rating agencies may refuse to rate securitization transactions that contain loans covered by laws, rules and regulations that they determine create too much risk or uncertainty.

If we do not comply with the TILA, aggrieved borrowers could have the right to rescind their loans.

TILA and Regulation Z contain disclosure requirements designed to provide consumers with uniform and understandable information regarding the terms and conditions of loans and credit transactions in order that consumers may compare proposed credit terms. TILA also guarantees consumers a three-day right to cancel certain loan transactions and imposes specific loan feature restrictions on some loans, including the type of loans that we originate. If we do not comply with these requirements, in addition to fines and penalties, aggrieved borrowers could have the right to rescind their loans or to demand, among other things, the return of finance charges and fees paid to us at the time of the loan, as well as statutory, actual and other damages.

If we do not comply with Regulation X under the RESPA, we could be subject to substantial fines and potential limitations upon future business activities.

We also are subject to the RESPA, and Regulation X under RESPA. These laws and regulations, which are administered by HUD, impose limits on the amount of funds a lender can require a borrower to deposit in any escrow account for the payment of taxes, insurance premiums or other charges; limits the types of fees which may be paid to third parties; and imposes various disclosure requirements on the lender. If we do not comply with these requirements, we could be subject to refunding unearned fees, imposition of substantial fines and potential limitations upon future business activities.

The increasing number of federal, state and local “anti-predatory” lending laws may restrict our ability to originate, or increase our risk of liability with respect to, some types of mortgage loans and could increase our cost of doing business.

In recent years, several federal, state and local laws, rules and regulations have been adopted, or are under consideration for adoption, that are intended to eliminate so-called “predatory” lending practices. These laws, rules and regulations impose restrictions on mortgage loans on which certain points and fees, interest rate, or the annual percentage rate (“APR”) exceed specified amounts. Some of these restrictions expose lenders to risks of litigation and penalties no matter how carefully a loan is underwritten. In addition, an increasing number of these laws, rules and regulations seek to impose liability for violations on purchasers of loans, regardless of whether a purchaser knew of or participated in the violation. It is against our policy to engage in predatory lending practices.

We have decided not to originate loans that exceed the interest rate, APR or “points and fees” thresholds of these laws, rules and regulations, because the companies that buy our loans and/or provide financing for our loan origination operations generally do not want to buy or finance those types of loans. The continued enactment of these laws, rules and regulations may prevent us from making these loans and may cause us to reduce the interest rate, APR or the points and fees on loans that we do make. In addition, the difficulty of managing the risks presented by these laws, rules and regulations may decrease the availability of warehouse financing and the overall demand for non-conforming loans, making it difficult to fund, sell or securitize any of our loans. If we decide to originate loans that are subject to these laws, rules and regulations, we will be exposed to greater risks for actual or perceived non-compliance with them. This could lead to demands for indemnification or loan repurchases from our lenders and loan purchasers, class action lawsuits, increased defenses to foreclosure of individual loans in default, individual claims for significant monetary damages and administrative enforcement actions. In any event, the growing number of these laws, rules and regulations will increase our cost of doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect of these requirements.

We are no longer able to rely on the Parity Act to preempt certain state law restrictions on prepayment penalties, which could harm our business.

The value of a mortgage loan depends, in part, upon the expected period of time that the mortgage loan will be outstanding. If a borrower pays-off a mortgage loan in advance of this expected period, the holder of the mortgage loan does not realize the full value expected to be received from the loan. A prepayment penalty payable by a borrower who repays a loan earlier than expected helps offset the reduction in value resulting from the early pay-off. Consequently, the value of a mortgage loan is enhanced to the extent the loan includes a prepayment penalty, and a mortgage lender can offer a lower interest rate and/or lower loan fees on a loan which has a prepayment penalty. Prepayment penalties are an important feature to obtain value on the loans we originate.

34

Several state laws restrict or prohibit prepayment penalties on mortgage loans, and we have relied on the federal Parity Act and related rules issued in the past by the OTS, to preempt state limitations on prepayment penalties for certain types of loans. The Parity Act was enacted to extend to financial institutions, other than federally chartered depository institutions, the federal preemption that federally chartered depository institutions enjoy. However, in September 2002, the OTS released a new rule that reduced the scope of the Parity Act preemption. As a result, since July 1, 2003, we have no longer been able to rely on the Parity Act to preempt state restrictions on prepayment penalties and have, therefore, been required to comply with state restrictions on prepayment penalties. We believe that these restrictions prohibit us from charging any prepayment penalty in eight states and restrict the amount or duration of prepayment penalties that we may impose in an additional 14 states. This may place us at a competitive disadvantage relative to financial institutions that will continue to enjoy federal preemption of such state restrictions. These institutions will be able to charge prepayment penalties without regard to state restrictions and, as a result, may be able to offer loans with interest rates and loan fee structures that are more attractive than the interest rates and loan fee structures that we are able to offer. In addition, the lack of prepayment penalties on loans could harm our ability to complete securitizations and NIM transactions.

We are a defendant in litigation relating to consumer lending practices, including class actions, and we may not prevail in these matters.

We are a defendant in several class action lawsuits that are pending in courts in the states of New York and Illinois. These actions allege that we engaged in improper practices in connection with our origination of mortgage loans, including fraud, unjust enrichment, charging improper fees and making firm offers under the fair credit reporting act. These actions generally seek unspecified compensatory damages, statutory damages, punitive damages and the return of allegedly improperly collected fees. It is difficult to predict how these matters will be ultimately determined. We believe that we have meritorious defenses to these actions, and we intend to vigorously defend these actions. However, an adverse judgment in any of these matters could require us to pay substantial amounts.

Changes in the mortgage interest deduction could decrease our loan production and harm our business.

Members of Congress and government officials have from time to time suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on borrower income, type of loan or principal amount. The competitive advantages of tax deductible interest, when compared to alternative sources of financing, could be eliminated or seriously impaired by this change. Accordingly, the reduction or elimination of these tax benefits could reduce the demand for our mortgage loans.

The “Do Not Call Registries” administered by federal and state authorities, and other regulations affecting our telemarketing activities could reduce our loan production, increase our costs, or result in claims and/or penalties.

To date, a substantial portion of our retail loans have been generated through telemarketing. The federal “Do Not Call Registries,” and similar registries that various state authorities may now or in the future administer, along with Federal and state telemarketing laws, rules and regulations restricting the means, methods and timing of telemarketing, have reduced, and in the future will continue to reduce, our ability to use telemarketing to generate retail leads and originate retail loans. In such an event, we may not be able to offset any loss of business through alternative means, and our ability to effectively market our products and services to new customers may be harmed. Furthermore, compliance with these Do No Call Registries and telemarketing laws, rules and regulations may prove costly and difficult, and we may incur penalties or be subject to claims or lawsuits (including class actions) for improperly conducting our marketing activities.

35

We have been, and in the future may be, subject to various settlement agreements arising from legal issues, and we may be subject to substantial claims and legal expenses if we do not comply with these agreements, or if allegations are made that we are not in compliance with them.

The non-conforming mortgage market in which we operate has been the subject of significant scrutiny by various federal and state governmental agencies and legislators. In particular, in 1999, the lending practices we utilized were the subject of investigations by the New York State Banking Department (“NYSBD”), the New York Office of the Attorney General (“NYOAG”) and the Department of Justice (“DOJ”). The investigations centered on our compliance with various federal and state laws. In September 1999 and March 2000, we entered into related settlement agreements with these regulatory agencies, joined by the HUD and the Federal Trade Commission (“FTC”), which provided for changes to our lending practices on a prospective basis, and retrospective relief to some borrowers. If similar claims are made in the future, defending those claims may result in significant legal expenses to us, which will reduce our profitability. A finding against us, or any settlement we may enter into, may result in our payment of damages, which may be costly to us.

We may be subject to fines or other penalties based upon the conduct of the independent mortgage brokers who place loans with us.

The independent mortgage brokers through which we source mortgage loans have legal obligations to which they are subject. These laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, federal and state agencies have increasingly sought to impose liability upon assignees, as well as wholesale lenders. For example, the FTC recently entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender as the “agent” of the lender; the FTC imposed a fine on the lender in part because, as “principal,” the lender was legally responsible for the mortgage broker’s unfair and deceptive acts and practices. Moreover, in the past, the DOJ has sought to hold non-conforming mortgage lenders responsible for the pricing practices of their mortgage brokers, alleging that the mortgage lenders were directly responsible for the total fees and charges paid by the borrower under the FHAct even if the lenders neither dictated what the mortgage broker could charge nor kept the money for its own account. This was one of the DOJ’s primary allegations against us at the time of our settlement with the DOJ.

Accordingly, we may be subject to fines or other penalties in the future based upon the conduct of our independent mortgage brokers.

Regulatory actions and/or class actions against servicers who service the loans we originate could lower the value of our securitized mortgage loans, our excess cashflow certificates and our ability to sell or securitize our loans.

Federal agencies, including the FTC, HUD and the DOJ, have recently investigated, and/or commenced regulatory actions against, several servicers who specialize in servicing nonconforming loans. Similarly, numerous class actions have been brought against servicers alleging improper servicing policies and procedures. Any regulatory actions and/or class actions of these kinds brought against any of the servicers who service the loans we originate could harm the value of our excess cashflow certificates and our ability to sell or securitize our loans.

Legal actions are pending against us, including class action lawsuits, which if successful, could expose us to substantial liability.

Because the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with federal, state and local lending laws, we are subject to numerous claims and legal actions in the ordinary course of our business. Generally, we are subject to claims made against us by borrowers and investors arising from, among other things:

 
·
losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentation, error and omission by our employees, officers and agents;

 
·
incomplete documentation; and

 
·
failure to comply with various laws, rules and regulations applicable to our business.
 
An adverse outcome in any potential litigation matters could subject us to significant monetary damages and legal fees, which could harm our business. While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to claims and actions, regardless of the merits of a claim and regardless of the outcome, defending against these claims is expensive and time consuming. In addition, these cases could divert management’s attention from our business.

36

We have been named in several lawsuits brought as class actions, alleging violations of various federal and state consumer protection laws, and have entered into settlement agreements with various governmental agencies following investigations of our lending practices. Defending these claims and any claims asserted in the future may result in significant legal expenses. A finding against us could result in the payment of damages, which may be costly.

Our inability to comply with REIT qualification tests for our REIT subsidiary may result in our securitization trusts being taxed as a taxable mortgage pool, which would reduce our earnings and cash flow.

Our inability to comply with REIT qualification tests for our REIT subsidiary (Renaissance REIT Investment Corp.) on a continuous basis would subject our securitization trusts issued by our REIT subsidiary to federal income tax as a corporation (as a taxable mortgage pool) and not allow it to be filed as part of consolidated income tax return with any other corporation. The REIT rules require compliance with asset, income, distribution and ownership tests. The ownership test prohibits five or fewer stockholders from owning more than 50% of our common stock. As of December 31, 2006, members of the Miller family (considered one stockholder under the attribution rule applicable to the ownership of REIT stock) own approximately 33.6% of the common stock (including employee stock options as required by the Internal Revenue Code of 1986, as amended (the “Code”), and related rules and regulations). There can be no assurance that we will be able to comply with these tests or remain compliant.

Failure to remain compliant would result in the imposition of a tax upon our securitization trusts and would reduce the cash flow that would otherwise be available to make payments on the offered asset-backed securities and reduce the amount that we would receive from the securitization trusts. Such a failure would cause us to breach our representation, under each of our securitizations issued since the first quarter of 2005, that we would maintain Renaissance REIT Investment Corp. as a real estate investment trust. In addition, it would result in an event of default, unless waived, under our warehouse and certain other credit facilities. Accordingly, a failure to remain compliant with the REIT qualification tests may reduce our profitability and cash flow and have a material adverse impact on us.

Complying with the Sarbanes-Oxley Act of 2002, as well as other recently-enacted and proposed changes to applicable securities laws, are likely to increase our costs and make it more difficult for us to attract directors, officers and other personnel.

The Sarbanes-Oxley Act of 2002, and the related regulations of the SEC and U.S. stock exchanges, has substantially increased the complexity and cost of corporate governance, financial reporting and disclosure practices for public companies such as ours. These rules and regulations could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve in our finance department and on our audit committee.

Risks Related to Our Capital Structure

We are controlled by principal stockholders, some of whom are also members of our senior management, who may have the ability to influence fundamental corporate changes if they act in concert.

As of March 2, 2007, our principal stockholders, members of the Miller family, beneficially owned approximately 33.1% of the outstanding shares of our common stock. Accordingly, if members of the Miller family were to act in concert, they would have the ability to exercise significant control over us with respect to matters submitted to a stockholder vote, including the approval of fundamental corporate transactions, such as mergers and acquisitions, consolidations and asset sales, and electing all members of our Board of Directors. As long as the Miller family controls such a substantial percentage of our shares, third parties may not be able to gain control of us through purchases of our common stock. In addition, members of the Miller family hold positions as executive officers of our Company, including Chairman, Chief Executive Officer, Executive Vice President and Senior Vice President (General Counsel).

37

Our stock price is volatile.

The trading price of our stock is volatile, and this volatility will likely continue in the future. Wide fluctuations in our trading price or volume can be caused by:

 
·
quarterly variations in our operating results;

 
·
variations in the size and terms of our securitizations;

 
·
conditions in the real estate industry and in the asset-backed securities market;

 
·
announcements by significant investors of their intention to sell our shares;

 
·
investor perception of our Company and the business that we are in generally;

 
·
announcements or implementation by us or our competitors of new products or services;

 
·
financial estimates by securities analysts; and

 
·
general economic and financial services market conditions, including changes in interest rates.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies. If investor interest in financial services companies declines, the price for our common stock could drop suddenly and significantly, even if our operating results are positive. Our common stock has historically traded at low volumes, which may increase the potential illiquidity of an investment in our common stock. If the trading volume of our common stock experiences significant changes, the price of our common stock could also be adversely affected. Furthermore, declines in the trading or price of our common stock could harm employee morale and retention, our access to capital and other aspects of our business.

Our common stock commenced trading on the American Stock Exchange (“AMEX”) in May 2003. However, we cannot assure you that an active public trading market for our common stock will be sustained. If active trading in our common stock does not continue, the price that you may receive in connection with any sale of your shares may be substantially less than the price that you paid for them.

Our financial results or condition in any period may not meet market expectations, which could adversely affect our stock price.

The public trading of our stock is based in large part on market expectations that our business will continue to grow and that we will achieve certain levels of net income. If the securities analysts that follow our stock lower their rating or lower their projections for future growth and financial performance, the market price of our stock is likely to drop significantly. In addition, if our quarterly financial performance does not meet the expectations of securities analysts, our stock price would likely decline. The decrease in the stock price may be disproportionate to the shortfall in our financial performance.

We may need additional capital, which may be dilutive to our stockholders or impose burdensome financial restrictions on our business.

We may seek to raise additional funds through public or private debt or equity offerings. Additional equity financing may be dilutive to the holders of our common stock. If we obtain funds through a bank credit facility or by issuing debt securities or preferred shares, the indebtedness or preferred shares would have rights senior to the rights of holders of our common stock, and their terms could impose significant restrictions on our operations. If we need to raise additional funds, we may not be able to do so on favorable terms, or at all. If we cannot obtain adequate funds on acceptable terms, we may not be able to implement our business strategy as planned, or at all.

Future sales of our common stock in the public market could adversely affect our stock price.

Future sales of shares of our common stock or the availability for future sale of shares of our common stock may reduce the market price of our common stock prevailing from time to time.

38

Our current stockholders hold a substantial number of shares of our common stock, which they are able to sell in the public market today. Sales of these shares or the perception that these sales could occur, could harm the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. In addition, as of December 31, 2006, we had approximately 1.8 million shares of our common stock issuable upon exercise of options, approximately 1.3 million of which were currently exercisable, and 203,775 shares of restricted common stock granted and outstanding.

We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

Provisions of our certificate of incorporation and our bylaws could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

 
·
establishing a classified Board of Directors of which approximately one-third of the members of the board are elected each year, and lengthening the time needed to elect a new majority of the board;

 
·
authorizing the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt; and

 
·
prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders.

We also are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Subject to specified exceptions, this section provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could have the effect of delaying or preventing a change in control of our Company. These factors could also limit the price that investors or an acquirer might be willing to pay in the future for shares of our common stock.


None.


Our executive and administrative offices are located at 1000 Woodbury Road, Woodbury, New York 11797, where we lease approximately 99,000 square feet of office space at an aggregate annual base rent of approximately $2.7 million. The lease provides for certain scheduled rent increases and expires in 2008.

In addition to our headquarters in New York, we also maintain four regional wholesale offices located in Florida, Massachusetts, Ohio and Texas. Our retail operation currently maintains 10 retail mortgage origination centers located in Arizona, Illinois, Missouri, Nevada, New York, North Carolina, Ohio, Pennsylvania (2) and Texas. We also maintain one telemarketing hub located in Ohio and two underwriting hubs located in Arizona and Ohio. The terms of these leases vary as to duration and rent escalation provisions; with the latest expiring in 2012 (see “Part II, Item 8. - Financial Statements and Supplementary Data - Note 13 - Commitments and Contingencies - Operating Lease Obligations” in our audited consolidated financial statements). We consider our leased properties adequate for our current needs. We do not consider any specific leased location to be material to our operations. We believe that alternative locations are available in all areas where we currently do business.

39


Because the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with various state and federal lending laws, we are subject, in the normal course of business, to numerous claims and legal proceedings, including class actions. The current status of the pending class actions and other material litigation is summarized below:

 
·
In or about November 1998, we received notice that we had been named in a lawsuit filed in the United States District Court for the Eastern District of New York. In December 1998, the plaintiffs filed an amended complaint alleging that we had violated the Home Ownership and Equity Protection Act of 1994, the federal Truth-in-Lending Act, and Section 349 of the New York State General Business Law, which relates to consumer protection for deceptive practices. The complaint sought: (a) certification of a class of plaintiffs, (b) declaratory judgment permitting rescission, (c) unspecified actual, statutory, treble and punitive damages, including attorneys’ fees, (d) injunctive relief and (e) declaratory judgment declaring the loan transactions as void and unconscionable. On December 7, 1998, plaintiff filed a motion seeking a temporary restraining order and preliminary injunction, enjoining us from conducting foreclosure sales on 11 properties. The District Court Judge ruled that in order to consider the motion, plaintiff must move to intervene on behalf of these 11 borrowers. Thereafter, plaintiff moved to intervene on behalf of three of these 11 borrowers and sought injunctive relief on their behalf. We opposed the motions. On December 14, 1998, the District Court Judge granted the motion to intervene and on December 23, 1998, the District Court Judge issued a preliminary injunction that enjoined us from proceeding with the foreclosure sales of the three interveners’ properties. We filed a motion for reconsideration of the December 23, 1998 order. In January 1999, we filed an answer to plaintiffs’ first amended complaint. In July 1999, the plaintiffs were granted leave, on consent, to file a second amended complaint. In August 1999, the plaintiffs filed a second amended complaint that, among other things, added additional parties but contained the same causes of action alleged in the first amended complaint. In September 1999, we filed a motion to dismiss the complaint, which was opposed by plaintiffs and, in June 2000, was denied in part and granted in part by the District Court. In or about October 1999, plaintiffs filed a motion seeking an order preventing us, our attorneys and/or the NYSBD from issuing notices to a number of our borrowers, in accordance with the settlement agreement entered into by and between the NYSBD and us. In the fourth quarter of 1999, we and the NYSBD submitted opposition to the plaintiffs’ motion. In March 2000, the District Court issued an order that permitted us to issue an approved form of the notice. In September 1999, the plaintiffs filed a motion for class certification, which we opposed in February 2000, and which was ultimately withdrawn without prejudice by the plaintiffs in January 2001. In February 2002, we executed a settlement agreement with the plaintiffs, under which we denied all wrongdoing, but agreed to resolve the litigation on a class-wide basis. The District Court preliminarily approved the settlement and a fairness hearing was held in May 2002. We submitted supplemental briefing at the District Court’s request in or about April 2004. In August 2004, the District Court conditionally approved the settlement, subject to our submitting supplemental documentation regarding a change in the settlement agreement and proposed supplemental notices to be sent to those borrowers who either opted out or objected. We, plaintiffs and certain objectors submitted our respective supplemental submissions in August 2004 and the District Court granted its final approval to the settlement in January 2005. In February 2005, certain objectors filed a notice of appeal. The objectors filed their appellate brief in July 2005. We filed our appellate papers in opposition in September 2005, and the objectors filed their reply papers in September 2005. In February 2006, the Appellate Court vacated the District Court’s decision to approve the settlement, not based on the merits of the settlement, but because a motion to intervene was decided by the District Court Magistrate Judge and not the District Court Judge. The Appellate Court instructed the District Court Judge to rule on the motion to intervene and, until then, it cannot be determined if the District Court Judge will also have to rule on the fairness of the settlement, or if that issue will have to return to the Appellate Court. Briefing on the intervention motion was re-submitted to the District Court Judge in July 2006, and the motion was denied in November 2006. In January 2007, we executed a proposed amendment to the settlement with the plaintiffs. The settlement amount did not increase, but the Court scheduled a fairness hearing for April 2007. If the settlement is not approved, we believe we have meritorious defenses and intend to vigorously defend this suit, but cannot estimate with any certainty our ultimate legal or financial liability, if any, with respect to the alleged claims.

 
·
In or about March 1999, we received notice that we and certain of our officers and directors had been named in a lawsuit filed in the Supreme Court of the State of New York, New York County, alleging that we had improperly charged certain borrowers processing fees. The complaint sought: (a) certification of a class of plaintiffs, (b) an accounting and (c) unspecified compensatory and punitive damages, including attorneys’ fees, based upon alleged (i) unjust enrichment, (ii) fraud and (iii) deceptive trade practices. In April 1999, we filed an answer to the complaint. In September 1999, we filed a motion to dismiss the complaint, which was opposed by the plaintiffs, and in February 2000, the Court denied the motion to dismiss. In April 1999, we filed a motion to change venue and the plaintiffs opposed the motion. In July 1999, the Court denied the motion. We appealed, and in March 2000, the Appellate Court granted our appeal to change venue from New York County to Nassau County. In August 1999, the plaintiffs filed a motion for class certification, which we opposed in July 2000. In or about September 2000, the Appellate Court granted the plaintiffs’ motion for class certification, from which we appealed. The Appellate Court denied our appeal in December 2001. In or about June 2001, we filed a motion for summary judgment to dismiss the complaint, which was denied by the Court in October 2001. We appealed that decision, but the Appellate Court denied our appeal in November 2002. We filed a motion to reargue in December 2002, which was denied by the Appellate Court in January 2003. Discovery continued in the lower Court. In October 2006, we executed a settlement agreement with the plaintiffs, under which we denied all wrongdoing, but agreed to resolve the litigation on a class-wide basis. The Court preliminarily approved the settlement and scheduled a fairness hearing in March 2007,  at which the Court granted final approval of the settlement agreement.

40

 
·
In July 2003, we commenced a lawsuit in the Supreme Court of the State of New York, Nassau County, against Delta Funding Residual Exchange Company LLC (the “LLC”), an unaffiliated limited liability company, Delta Funding Residual Management, Inc. (“DFRM”), and James E. Morrison, President of the LLC and DFRM, alleging that (1) the LLC breached its contractual duties by failing to pay approximately $142,000 due to us in June 2003, and (2) that Mr. Morrison and DFRM knowingly and intentionally caused the default, thereby breaching their respective fiduciary duties to the LLC. The complaint seeks: (a) payment of amounts past due under our agreement with the LLC, plus interest, (b) specific performance of the LLC’s obligations to us in the future, and (c) monetary damages for breach of fiduciary duty, in an amount to be determined by the Court. In September 2003, Mr. Morrison, the LLC and DFRM filed a motion to dismiss our complaint and the LLC and DFRM filed a countersuit in the Supreme Court of the State of New York, New York County, against several of our directors and officers and us seeking, among other things, damages of not less than $110 million. The countersuit alleges misrepresentation, negligence and/or fraud by defendants in that case relating to our August 2001 exchange offer. In October 2003, we filed our opposition to the motion to dismiss and cross-moved to consolidate the two actions in Nassau County. In November 2003, we answered the New York County action. In February 2004, the Nassau County Supreme Court denied Mr. Morrison’s motion to dismiss our causes of action seeking (a) payment of amounts due under our agreements with the LLC and (b) monetary damages for breach of fiduciary duty, and granted Mr. Morrison’s motion to dismiss our cause of action seeking specific performance to preclude future defaults by Morrison and the LLC. The Supreme Court also granted our motion to consolidate the cases in Nassau County. In April 2004, we filed a motion to dismiss Mr. Morrison’s countersuit, which the Supreme Court denied in September 2004. In or about October 2004, the LLC commenced an action against KPMG LLP, our independent public accountants at that time, based upon similar allegations as asserted in this action. In September 2005, it was agreed that the action against KPMG LLP would be joined with this action. In the countersuit, the LLC was granted permission to serve an amended complaint, which it did in November 2005. The amended complaint included two additional causes of action alleging breach of fiduciary duty owed to the LLC, one against us and the other against several of our officers and directors. In December 2005, we filed a motion to amend our complaint to add claims (both individually and as a member of the LLC) against Mr. Morrison arising from the same and/or similar facts and circumstances, seeking recovery for waste, for improper personal benefit, for breach of fiduciary duty (beyond those already alleged in the complaint) and for a material misstatement in the LLC’s financial statements. In April 2006, the Supreme Court dismissed our motion to amend and granted us permission to revise the motion and re-file it. In July 2006, we re-filed our motion to amend our complaint, which motion was opposed. In November 2006, the Court denied our motion. Discovery is proceeding. We believe we have meritorious claims in our lawsuit and meritorious defenses in the countersuit. We intend to vigorously prosecute our claims and vigorously defend ourselves against the countersuit. We cannot estimate with any certainty our ultimate legal or financial recovery and/or liability, if any, with respect to the alleged claims in the countersuit.

 
·
In or about December 2003, we received a notice that we had been named in two lawsuits filed by the same plaintiff in the Circuit Court, Third Judicial Circuit in Madison County, Illinois. One alleged that we had improperly charged certain borrowers fax fees, and one alleged that we improperly retained extra per diem interest when loans were satisfied. The complaints seek (a) certification of a class of plaintiffs, (b) direction to return fax fees charged to borrowers, and (c) unspecified compensatory and statutory damages, including prejudgment and post judgment interest and attorneys’ fees, based upon alleged (1) breach of contract, (2) statutory fraud and (3) unjust enrichment. In February 2004, we filed a motion to dismiss the case pertaining to fax fees claims. The plaintiff was granted leave to file a motion to amend his complaint in the fax fee case, which rendered our February 2004 motion to dismiss moot. The plaintiff filed an amended complaint in July 2004 and we filed a new motion to dismiss in August 2004, which the court denied in January 2005, and we have since filed an answer in that case. In March 2004, we filed a motion to dismiss the case pertaining to per diem interest claims, which the court denied in September 2004. We have since filed an answer in that case and plaintiffs filed a motion to dismiss our affirmative defenses, which the Circuit Court granted, permitting us leave to replead the defenses with more particularity, which we have done. Discovery has commenced in both cases. In June 2005, we filed opposition papers to the plaintiff’s motion for class certification in the case pertaining to fax fee claims. In June 2006, we filed a motion for summary judgment in the case pertaining to the per diem interest and in July 2006 we filed a motion for summary judgment in the case pertaining to fax fees claims. In December 2006, both of these matters were settled on an individual basis.

41

 
·
In or about November 2004, we received notice that we have been named in a lawsuit styled as a collective action filed in the United States District Court of the Western District of Pennsylvania, alleging that our subsidiary, Fidelity Mortgage Inc. (“Fidelity”, now a division of our other subsidiary, Delta Funding Corporation), did not pay its loan officers overtime compensation and/or minimum wage in violation of the Federal Fair Labor Standards Act. The complaint seeks: (1) an amount equal to the unpaid wages at the applicable overtime rate, (2) an amount equal to the minimum wages at the applicable minimum wage, (3) an equal amount as liquidated damages, (4) costs and attorneys’ fees, (5) leave to add additional plaintiffs, and (6) leave to amend to add claims under applicable state laws. We filed an answer and discovery has commenced. In April 2005, the plaintiff filed his motion for conditional class certification and in May 2005, Fidelity filed its opposition to that motion. In June 2005, the Magistrate Judge issued a Report and Recommendation, recommending that the plaintiff’s motion for conditional class certification be granted, and that plaintiff’s motion to authorize judicial notice be granted (subject to revision and final approval by the District Court). In July 2005, Fidelity filed with the District Court its objections to the Magistrate Judge’s Report and Recommendation and the plaintiff filed its opposition to our objections. In July 2005, the District Court upheld the Magistrate Judge’s Report and Recommendation. Any potential class members who desired to join the collective action were provided an opportunity to do so during an “opt-in” period that ended in October 2005. Approximately 180 individuals, virtually all of whom are former employees, are plaintiffs in the collective action. In April 2006, the plaintiffs filed a motion for summary judgment. By agreement in June 2006, the Court stayed the action while the parties engaged in non-binding mediation, and plaintiffs’ motion for summary judgment was withdrawn without prejudice to it being re-filed. The matter was not resolved through mediation, the stay was lifted in August 2006, the plaintiffs’ motion was re-filed and we filed our opposition to the motion and a cross-motion for partial summary judgment. In September 2006, the plaintiffs filed their papers in response to our opposition to their motion and replied to our cross-motion. In October 2006, we filed our reply papers to the plaintiffs’ opposition to our cross-motion. We believe that we have meritorious defenses and intend to vigorously defend this suit, but cannot estimate with any certainty our ultimate legal or financial liability, if any, with respect to the alleged claims.

 
·
In or about February 2007, we received notice that we had been named in a lawsuit filed in the United States District Court for the Northern District of Illinois, Eastern Division, alleging that we had accessed certain consumers' credit reports without a permissible purpose under the FCRA and sent improper prescreening offers in Illinois. The complaint seeks: (a) certification of a class of plaintiffs, (b) injunctive relief against further violations, (c) statutory damages and general and other damages, and (d) attorneys’ fees, costs and litigation expenses, based upon alleged (i) violations of the FCRA, (ii) common law invasion of privacy and (iii) consumer fraud/unfair acts and practices. We have not yet filed an answer to the complaint. We believe that we have meritorious defenses and intend to vigorously defend this suit, but at this early stage of the litigation, we cannot estimate with any certainty our ultimate legal or financial liability, if any, with respect to the alleged claims.


None.

 

42

PART II


Market Information

Our common stock trades on the AMEX under the symbol “DFC.” The following table sets forth, for the periods indicated, the range of the high and low closing sales prices for our common stock:

   
High
 
Low
 
2006
         
           
First Quarter
 
$
10.00
 
$
8.30
 
Second Quarter
   
10.08
   
8.81
 
Third Quarter
   
9.97
   
8.97
 
Fourth Quarter
   
10.40
   
9.19
 
               
2005
             
               
First Quarter
 
$
10.03
 
$
8.11
 
Second Quarter
   
9.74
   
8.32
 
Third Quarter
   
9.98
   
7.08
 
Fourth Quarter
   
8.60
   
6.55
 
               
2004
             
               
First Quarter
 
$
11.05
 
$
7.41
 
Second Quarter
   
8.25
   
6.12
 
Third Quarter
   
8.86
   
6.08
 
Fourth Quarter
   
10.60
   
7.96
 

Holders

On March 7, 2007, we had approximately 455 stockholders of record. This number does not include beneficial owners holding shares through nominee or “street” names.

Dividends

The following table indicates the quarterly dividends declared during the years ended December 31, 2006 and 2005:

(Dollars in thousands, except per share amounts)
           
 
Quarter
 
 
Record Date
 
 
Payment Date
 
 
Dividend Per Share
 
 
Total Dividends Paid (1)
                 
2006
               
First
 
March 31, 2006
 
April 14, 2006
 
$                                       0.05
 
$                                     1,038
Second
 
June 23, 2006
 
July 6, 2006
 
0.05
 
1,168
Third
 
September 25, 2006
 
October 4, 2006
 
0.05
 
1,169
Fourth
 
December 26, 2006
 
January 5, 2007
 
0.05
 
1,174
                 
                 
2005
               
First
 
March 31, 2005
 
April 15, 2005
 
$                                       0.05
 
$                                     1,015
Second
 
June 20, 2005
 
July 6, 2005
 
0.05
 
1,018
Third
 
September 20, 2005
 
October 7, 2005
 
0.05
 
1,019
Fourth
 
December 16, 2005
 
January 5, 2006
 
0.05
 
1,030

(1) Total dividends paid for the four quarters of 2006 includes approximately $34,000 of dividends (approximately $8,000 per quarter for the first three quarters and approximately $10,000 for the fourth quarter) paid on shares of granted but unvested restricted common stock awards. Total dividends paid for the fourth quarter of 2005 includes approximately $8,000 of dividends paid on 157,275 shares of granted but unvested restricted common stock awards.
43

Any decision to declare and pay dividends in the future will be made at the discretion of our Bard of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors our Board of Directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information about the shares of common stock issuable under our equity compensation plans at December 31, 2006:

Equity Compensation Plan Information
 
Equity Compensation Plan Category
 
Number of Shares to be Issued Upon Exercise of Outstanding Options
 
Weighted Average Exercise Price of Outstanding Options
 
Number of Common Stock Awards Granted and Outstanding
 
Weighted Average Price of Outstanding Common Stock Awards (1)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation
Plans (2)
 
Approved by security holders
   
1,781,750
 
$
3.23
   
203,775
 
$
8.05
   
1,687,475
 
                                 
Not approved by security holders
   
N/A
   
N/A
   
N/A
   
N/A
   
N/A
 
Total
   
1,781,750
 
$
3.23
   
203,775
 
$
8.05
   
1,687,475
 

(1) The weighted average price of outstanding common stock awards represents the average price of the outstanding restricted stock grants on the date of the grant.

(2) Excludes securities reflected under the “number of shares to be issued upon exercise of outstanding options” and “number of common stock awards granted and outstanding” columns in the table above.


The following selected financial information for the years ended December 31, 2006, 2005, and 2004, and as of December 31, 2006 and 2005, has been derived from our audited consolidated financial statements included elsewhere in this report. The financial information for the years ended December 31, 2003 and 2002 and as of December 31, 2004, 2003 and 2002 has been derived from our audited financial statements not included in this report. Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. The historical selected financial information, particularly for the period prior to January 1, 2004, may not be indicative of our future performance due to our change from gain-on-sale accounting to portfolio accounting in 2004. The information in the following table should be read in conjunction with the information contained in “- Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “- Item 8 - Financial Statements and Supplementary Data.”

44

   
At or For the Year Ended December 31,
 
(Dollars in thousands, except share and per share data)
 
 
2006
 
 
2005
 
 
2004
 
 
2003
 
 
2002
 
                       
Interest income (1)
 
$
467,330
 
$
290,829
 
$
100,105
 
$
14,386
 
$
12,058
 
Interest expense (2)
   
319,600
   
167,792
   
39,782
   
5,509
   
5,273
 
Net interest income
   
147,730
   
123,037
   
60,323
   
8,877
   
6,785
 
Provision for loan losses
   
29,085
   
28,592
   
10,443
   
--
   
--
 
Net interest income after provision for loan losses
   
118,645
   
94,445
   
49,880
   
8,877
   
6,785
 
                                 
Non-interest income:
                               
Net gain on sale of mortgage loans
   
33,558
   
27,193
   
16,057
   
94,782
   
57,974
 
Other income
   
11,214
   
14,674
   
1,722
   
1,000
   
2,999
 
Total non-interest income
   
44,772
   
41,867
   
17,779
   
95,782
   
60,973
 
                                 
Non-interest expense:
                               
Payroll and related costs
   
67,436
   
63,524
   
52,005
   
39,147
   
27,120
 
General and administrative
   
47,427
   
42,467
   
30,152
   
23,460
   
22,685
 
Other (3)
   
--
   
--
   
--
   
--
   
2,085
 
(Gain) loss on derivative instruments (2)
   
(147
)
 
908
   
100
   
--
   
--
 
Total non-interest expense
   
114,716
   
106,899
   
82,257
   
62,607
   
51,890
 
                                 
Income (loss) before income tax expense (benefit)
   
48,701
   
29,413
   
(14,598
)
 
42,052
   
15,868
 
Provision for income tax expense (benefit)
   
18,936
   
11,458
   
(5,249
)
 
(25,354
)
 
(1,769
)
Net income (loss)
 
$
29,765
 
$
17,955
 
$
(9,349
)
$
67,406
 
$
17,637
 
                                 
Comprehensive Income (Loss):
                               
Other comprehensive (loss) income
   
(4,040
)
 
4,743
   
(2,207
)
 
--
   
--
 
Comprehensive income (loss), net
 
$
25,725
 
$
22,698
 
$
(11,556
)
$
67,406
 
$
17,637
 

 

45



   
At or For the Year Ended December 31,
 
(Dollars in thousands, except share and per share data)
 
 
2006
 
 
2005
 
 
2004
 
 
2003
 
 
2002
 
Per Share Data:
                     
Basic - weighted average number of shares outstanding
   
22,477,213
   
20,349,515
   
18,375,864
   
16,308,561
   
15,894,913
 
Diluted - weighted average number of shares outstanding (4)
   
23,278,375
   
21,283,220
   
18,375,864
   
18,407,249
   
16,971,028
 
                                 
Net income (loss) applicable to common shares
 
$
29,765
 
$
17,955
 
$
(9,349
)
$
66,015
 
$
17,637
 
                                 
Basic earnings per share - net income (loss)
 
$
1.32
 
$
0.88
 
$
(0.51
)
$
4.05
 
$
1.11
 
Diluted earnings per share - net income (loss)(4)
 
$
1.28
 
$
0.84
 
$
(0.51
)
$
3.59
 
$
1.04
 
Dividends per common share
 
$
0.20
 
$
0.20
 
$
0.15
 
$
--
 
$
--
 
                                 
Selected Balance Sheet Data:
                               
                                 
Cash and cash equivalents
 
$
5,741
 
$
4,673
 
$
5,187
 
$
4,576
 
$
3,405
 
Mortgage loans held for sale, net
   
--
   
--
   
--
   
190,524
   
33,945
 
Mortgage loans held for investment, net
   
6,358,377
   
4,626,830
   
2,340,994
   
--
   
--
 
Excess cashflow certificates
   
1,209
   
7,789
   
14,933
   
19,853
   
24,565
 
Trustee receivable
   
73,361
   
56,164
   
32,915
   
--
   
--
 
Deferred tax asset, net
   
45,760
   
54,875
   
50,326
   
31,184
   
5,600
 
Other assets
   
104,679
   
69,271
   
46,438
   
10,854
   
6,029
 
Total assets
 
$
6,589,127
 
$
4,819,602
 
$
2,490,793
 
$
256,991
 
$
73,544
 
                                 
Warehouse financing
 
$
335,865
 
$
222,843
 
$
135,653
 
$
144,826
 
$
13,757
 
Financing on mortgage loans held for investment, net
   
6,017,947
   
4,436,938
   
2,236,215
   
--