10-K 1 form10-k.htm 123107 UMT form10-k.htm


 



 

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, 2007.

[ ] 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 000-32409


UNITED MORTGAGE TRUST
(Exact name of registrant as specified in its charter)

MARYLAND                                                                           75-6493585
(State or other jurisdiction of                                                                           (I.R.S. Employer
incorporation or organization)                                                                           Identification Number)

1702 N Collins Blvd, Suite 100, Richardson TX 75080
(Address of principal executive offices) (Zip Code)

Issuer's telephone number:  (214) 237-9305

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

Securities registered pursuant to Section 12(g) of the Act:  Shares of Beneficial interest, par value $0.01 per share

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 in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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 [X]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
.

Large accelerated Filer[ ] Accelerated Filer[ ] Non-accelerated filer [X] Smaller reporting company [  ]


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

Yes []                                           No [X]

1

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed with reference to the price at which the common equity as last sold, or the average of the bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter.

There is currently no established public market on which the Company’s common shares are traded. The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates of the registrant at June 30, 2007 computed by reference to the price at which the common equity was last sold was $136,952,338.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

As of March 17, 2008, 6,582,509 of the Registrant's Shares of Beneficial Interest were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the Registrant’s definitive proxy statement for the 2008 annual meeting of shareholders.


 
 
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Table of Contents
 
PART I
Page No.
Item 1. Business
4
Item 1A. Risk Factors
9
Item 1B. Unresolved Staff Comments
13
Item 2. Properties
13
Item 3. Legal Proceedings
13
Item 4. Submission of Matters to a Vote of Security Holders
13
   
PART II
   
Item 5. Market for Registrant’s Common Equity Related Shareholder Matters and Issuer Purchases of Equity Securities
14
Item 6. Selected Financial Data
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company
16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
34
Item 8. Consolidated Financial Statements and Supplementary Data
35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
53
Item 9A. Controls and Procedures
53
Item 9B. Other Information
53
     
PART III
   
Item 10. Directors and Executive Officers of the Registrant
54
Item 11. Executive Compensation
59
Item 12. Security Ownership of Certain Beneficial Owners and management and Related Stockholder Matters
60
Item 13. Certain Relationships and Related Transactions
60
Item 14. Principal Accounting Fees and Services
62
Item 15. Exhibits and Financial Statement Schedules
63



 
 
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PART I

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, our ability to find suitable mortgage investments; the difficulties of the real estate industry generally in response to the “sub-prime crisis,” changes in the overall economic environment and the requirement to maintain qualification as a real estate investment trust. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore we cannot give assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or by any other person that the results or conditions described in such statements or in our objectives and plans will be realized. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in Item 1A and in our other filings with the Securities and Exchange Commission.


ITEM 1. BUSINESS.

GENERAL

United Mortgage Trust (which we refer to in this report as “we,”, “us”, “our” and the “Company”) is a Maryland real estate investment trust formed on July 12, 1996. We acquire mortgage investments from several sources, including from affiliates of our Advisor.  The amount of mortgage investments acquired from such sources depends upon the mortgage investments that are available from them or from other sources at the time we have funds to invest. We believe that all mortgage investments purchased from affiliates of the Advisor are at prices no higher than those that would be paid to unaffiliated third parties for mortgages with comparable terms, rates, credit risks and seasoning.

We invest exclusively in:  (i) first lien secured mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single family homes, which we refer to as “interim loans”; (ii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “land development loans”; (iii) lines of credit and loans secured by developed single-family lots, referred to as “finished lot loans”; (iv) lines of credit and loans secured by completed model homes, referred to as “model home loans”; and, formerly we invested in (v) first lien secured construction loans for the acquisition of lots and construction of single-family homes, which we refer to as “construction loans”; and (vi) first lien, fixed rate mortgages secured by single-family residential property, which we refer to as “residential mortgages”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”

The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The line of credit we have extended to United Development Funding, L.P. (“UDF”) has a five year term. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months.  The majority of  interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its bank lines of credit. In addition, as an enhancement, in October 2006, United Development Funding III, L.P. (“UDF III”), a newly formed public limited partnership that is affiliated with UDF and with our Advisor, entered into a limited guaranty, effective as of September 1, 2006, for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of up to $30 million under the Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF.  We anticipate the UDF III Guarantee will be released in 2008 as a result of UDF’s increased net worth.

We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders.  We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes.  As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).

The overall management of our business is vested in our Board of Trustees.  UMTH General Services, L.P., a Delaware limited partnership (“Advisor” or “UMTHGS”) and a subsidiary of UMT Holdings, L.P. (“UMTH”), has been retained to manage our day-to-day operations and to use its best efforts to seek out and present, whether through its own efforts or those of third parties retained by it, investment opportunities that are consistent with our investment policies and objectives and consistent with the investment programs the trustees may adopt from time to time in conformity with our Declaration of Trust.  Our President, Christine “Cricket” Griffin, is a limited partner of UMTH.

In addition to this annual report, we file quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). All documents that we file with the SEC are available free of charge on our website, which is www.unitedmorgagetrust.com. You may also read and copy any document that we file at the public reference facilities of the SEC at 450 Fifth Street NW, Washington DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also my be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the internet (http://www.sec.gov).

Our principal executive offices are located at 1702 N Collins Blvd, Suite 100, Richardson TX 75080, telephone (214) 237-9305 or (800) 955-7917, facsimile (214) 237-9304.


TERMINATION OF THE MERGER AGREEMENT

On June 13, 2006, the Board of Trustees voted to take no action to prevent the Agreement and Plan of Merger dated September 1, 2005 ("Merger Agreement") between the Company and UMTH pursuant to which the Company would have merged with and into UMTH ("Merger") from terminating for failure to satisfy the condition that the Merger would terminate if the Merger was not consummated by June 30, 2006. On June 13, 2006, the Company received a letter from UMTH in which UMTH also expressed the view that the Merger would terminate on June 30, 2006. On June 30, 2006 the merger terminated and as a result the Company wrote-off approximately $1,040,000 in capitalized merger costs as reflected in the statements of income. The Company did not incur any termination penalties as a result of the termination of the merger.


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RESTATED INVESTMENT OBJECTIVES AND POLICIES OF UNITED MORTGAGE TRUST
January 23, 2008

PRINCIPAL INVESTMENT OBJECTIVES

Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in five types of investments:

 
(i)
first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single family homes, which we refer to as  "Interim    Loans”;
 
(ii)
secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans;
 
(iii)
lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”;
 
(iv)
lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; and,
 
(v)
lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”.

We collectively refer the above listed loans as “Mortgage Investments”.

In addition, we intend to generate fee income by providing credit enhancements associated with residential real estate financing transactions in the various forms as recommended from time-to-time by our Advisor and approved by our Board of Trustees, including but not limited to, guarantees, pledges of cash deposits, letters of credit and tri-party inter-creditor agreements, all of which we refer to as “Credit Enhancements”. Mortgage Investments and Credit Enhancements are expected to:

 
(1)
produce net interest income and fees;
 
(2)
provide monthly distributions from, among other things, interest on Mortgage Investments and fees from credit enhancements; and
 
(3)
permit reinvestment of payments of principal and proceeds of prepayments, sales and insurance net of expenses.

There is no assurance that these objectives will be attained.


INVESTMENT POLICY

Most of our Mortgage Investments to date are geographically concentrated in the Texas market. We anticipate that the concentration will continue in the near future, but it is our intention to expand our geographic presence through the purchase of Mortgage Investments in other geographic areas of the United States. In making the decision to invest in other areas, we consider the market conditions prevailing at the time we invest.

As of December 31, 2007, our portfolio was comprised of:

Asset Category:
Percentage of Portfolio:
Interim loans secured by conventionally built homes
19.21%
Land development loans
20.71%
Interim loans secured by modular and manufactured homes
18.51%
Construction loans and lot banking loans
12.39%
Recourse obligations of affiliates
14.38%
Residential mortgages and contracts for deed
4.87%
Cash and other assets
9.93%

We no longer purchase Interim Loans that are secured by modular and manufactured homes or Residential Mortgages, and we no longer purchase Construction Loans.  We are reducing our investment in Interim Loans until conventional financing options for homes secured by Interim Loans improve.  We plan to continue to invest in Land Development Loans, Finished Lot Loans, Model and Home Loans and a subordinate line of credit secured by Interim Loans  because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; 2) the subordinate line of credit secured by Interim Loans provides us with suitable collateral positions, full recourse from our borrowers and attractive yields; and, 3) Model Home Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans.  As we phase out of Interim Loans secured by modular and manufactured homes and Construction Loans, we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans and Model Home Loans, until market conditions indicate the need for an adjustment of the portfolio mix.

UNDERWRITING CRITERIA

We will not originate loans, except to facilitate the resale of a foreclosed property.  Funds awaiting investment in Mortgage Investments will be invested in government securities, money market accounts or other assets that are permitted investments for REITs.  See “Temporary Investments” below.

The underwriting criteria for Mortgage Investments are as follows:
 
(1)
Priority of Lien.

 
·
Land Development Loans and Finished Lot Loans must be secured by a first lien, second lien or a pledge of partnership interest that is insured by a title company.   Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below.
 
·
Subordinate Line of Credit Secured by Interim Loans will be secured by a second lien, insured by a title company, and is subject to the Loan-to-Value limitations set forth below.
 
·
Interim Loans purchased must be secured by a first lien that is insured by a title insurance company.
 
·
Model Home Loans will be secured by a first or subordinate lien that is insured by a title insurance company.
 
·
Credit Enhancements must be secured by first or second liens or pledges of partnership interests.

(2)
Rate and Fees.

 
·
Our advisor, UMTH General Services, L.P. (“UMTHGS” or our “Advisor”) seeks to acquire Mortgage Investments that will provide us with a satisfactory net yield.  Net yield is determined by the yield realized after payment of note servicing fees, if any, and administrative costs (ranging from 1% to 2% of our average invested assets).   Rates will be either adjustable or fixed.  No loans will be purchased at a premium above the outstanding principal balance.  Our investment policy allows for acquisition of loans at various rates.  Fees charged for Credit Enhancements will be determined by the degree of risk as determined and recommended by our Advisor.  Credit Enhancement fees are expected to range between 0.5% and 3% per annum.

(3)
Term and Amortization.

 
·
There is no minimum term for the loans we acquire.
 
·
Land Development Loans, Finished Lot Loans and Model Home Loans will generally have terms from 24 to 48 months.
 
·
Interim Loans and Subordinate Interim Loans will generally have terms of 12 months or less.
 
·
Generally, Land Development Loans, Finished Lot Loans, Model Home Loans and Interim Loans do not amortize.  They are interest only loans with the principal paid in full when the loans mature or as lots or models are sold
 
·
Credit Enhancements will range from 12 to 48 months.


5

(4)           LTV, Investment-to-Value Ratio (“ITV”), Combined LTV Ratio (“CLTV”).


 
·
Land Development Loans and Finished Lot Loans:  Except as set forth below, loans purchased may not exceed an 85% ITV.  Except as set forth below, Land Development Loans and Finished Lot Loans will not exceed 85% of the value of the collateral securing the indebtedness (the LTV of the loan).  The purchase of, or investment in, subordinate liens secured loans or partnership interests securing loans will not exceed a CLTV of 85%, (subject to the exceptions listed below).  CLTV shall mean the sum of all indebtedness senior to us plus the sum of our investment or loan.

 
·
Model Home Loans:  LTV may not exceed 93% on each loan, will be a part of a pool of model home collateral and will also be cross-collateralized.  All expenses associated with the model home are borne by the home builder.
 
·
Subordinated Interim Loans and Interim Loans: Loans will not exceed a 75% CLTV without approval by our Board of Trustees.

The aggregate debt on any loan in our portfolio, other than cited above, shall not exceed an amount equal to 85% of the appraised value of the property unless substantial justification exists. Such justification may include, a pledge of partnership equity interest, cross-collateralization by the pledge of other properties from the same borrower, by the assignment of rents, royalties or other cash flow, and other sound security, including consideration of the net worth of the borrower or guarantor, the credit rating of the borrower or guarantor, and/or historical financial performance of the borrower or guarantor.

(5)           Seasoning.

·               None of the types of loans we currently purchase, or intend to purchase, are subject to seasoning requirements.

(6)           Borrower, Loan and Property Information.

 
·
Land Development Loans, Finished Lot Loans, Model Homes Loans and Credit Enhancements:  Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, United Development Funding and UMTH Land Development, L. P., including economic feasibility studies, engineering due diligence reports, exit strategy analysis, and construction oversight requirements.  UMTH General Services, L.P. (“UMTHGS” or our “Advisor”), our Advisor, will periodically monitor compliance and changes to underwriting guidelines.
 
·
Interim Loans:  Loans shall be underwritten in accordance with the guidelines established by the originating company, UMTH Lending Company, L.P., including borrower and property information.  Our Advisor will periodically monitor compliance and changes to underwriting guidelines.

(7)           Appraisals.

 
·
Land Development Loans, Finished Lot Loans and Model Home Loans:  Appraisal must demonstrate that the LTV, ITV or CLTV is in compliance with the above referenced LTV, ITV and CLTV standards. Loans exceeding LTV, ITV and CLTV guidelines must note the criteria on which the exception was based.
 
·
Subordinate Interim Loans and Interim Loans: Appraisal must demonstrate that the CLTV or ITV is not more than 75% (subject to the exceptions set forth in 4 above).
 
·
The appraisals must be performed by appraisers approved by our Advisor.

(8)           Credit.

 
·
Subordinate Interim Loans and Interim Loans:  Minimum credit scores and corresponding down payment requirements will be in accordance with the guidelines set by the originating company (currently UMTH Lending Company, L.P.).   UMTHGS will periodically monitor compliance and changes to underwriting guidelines.
 
·
Land Development Loans, Finished Lot Loans, Model Home Loans and Credit Enhancements:   Extensions of credit to borrowers will be determined in accordance with net worth and down payment requirements prescribed by the originating companies (currently United Development Funding and UMTH Land Development, L.P.).  UMTHGS as Advisor to UMT shall periodically monitor compliance and changes to underwriting guidelines.

6

(9)           Hazard Insurance.

 
·
Loans that are secured by a residence must have an effective, prepaid hazard insurance policy with a mortgagee's endorsement for our benefit in an amount not less than the outstanding principal balance on the loan.  We reserve the right to review the credit rating of the insurance issuer and, if deemed unsatisfactory, request replacement of the policy by an acceptable issuer.

(10)           Geographical Boundaries.

 
·
We may purchase Mortgage Investments and provide Credit Enhancements for real estate projects in any of the 48 contiguous United States.

(11)           Mortgagees' Title Insurance.

 
·
Each Mortgage Investment purchased must have a valid mortgagees' title insurance policy insuring our lien position in an amount not less than the outstanding principal balance of the loan.

(12)           Guarantees, Recourse Agreements, and Mortgage Insurance.

 
·
Subordinate Interim Loans and Interim Loans purchased shall contain personal guarantees of the borrower or principal of the borrower.
 
·
Subordinate Interim Loans and Interim Loans shall afford full recourse to the originating company.
 
·
Land Development Loans, Finished Lot Loans, Model Home Loans and Credit Enhancements shall have guarantees and collateral arrangements as determined by the originating companies (United Development Funding and UMTH Land Development, L.P).  Our Advisor shall review guarantees and recourse obligations.

(13)           Pricing.

 
·
Mortgage Investments will be purchased at no minimum percentage of the principal balance, but in no event in excess of the outstanding principal balance.
 
·
Yields on our loan portfolio and fees charged for Credit Enhancements will vary with perceived risk, interest rate, credit, LTV ratios, down payments, guarantees or recourse agreements among other factors.  Our objectives will be accomplished through purchase of high rate loans, reinvestment of principal payments and other short-term investment of cash reserves and, if utilized, leverage of capital to purchase additional Mortgages Investments.

The principal amounts of Mortgage Investments and the number of Mortgage Investments in which we invest will be affected by market availability and also depends upon the amount of capital available to us from proceeds of our dividend reinvestment plan, retained earnings, repayment of our loans and borrowings.  There is no way to predict the future composition of our portfolio since it will depend in part on the loans available at the time of investment.

TEMPORARY INVESTMENTS

We intend to use proceeds from our dividend reinvestment plan, retained earnings, proceeds from the repayment of our loans and bank borrowings to acquire Mortgage Investments.  There can be no assurance as to when we will be able to invest the full amount of capital available to us in Mortgage Investments, although we will use our best efforts to invest or commit for investment all capital within 60 days of receipt.  We will temporarily invest any excess cash balances not immediately invested in Mortgage Investments or for the other purposes described above, in certain short-term investments appropriate for a trust account or investments which yield "qualified temporary investment income" within the meaning of Section 856(c)(6)(D) of the Code or other investments which invest directly or indirectly in any of the foregoing (such as repurchase agreements collateralized by any of the foregoing types of securities) and/or such investments necessary for us to maintain our REIT qualification or in  short-term highly liquid investments such as in investments with banks having assets of at least $50,000,000, savings accounts, bank money market accounts, certificates of deposit, bankers' acceptances or commercial paper rated A-1 or better by Moody's Investors Service, Inc., or securities issued, insured or guaranteed by the United States government or government agencies, or in money market funds having assets in excess of $50,000,000 which invest directly or indirectly in any of the foregoing.

7

OTHER POLICIES

We will not: (a) issue senior securities; (b) invest in the securities of other issuers for the purpose of exercising control; (c) invest in securities of other issuers, other than in temporary investments as described under  "Investment Objectives and Policies - Temporary Investments"; (d) underwrite the securities of other issuers; or (e) offer securities in exchange for property.

We may borrow funds to make distributions to our shareholders or to acquire additional Mortgage Investments.  Our ability to borrow funds is subject to certain limitations set forth in the Declaration of Trust, specifically, the Trust may not incur indebtedness in excess of 50% of the Net Asset Value of the Trust

Other than in connection with the purchase of Mortgage Investments or issuance of Credit Enhancements, which may be deemed to be a loan from us to the borrower, we do not intend to loan funds to any person or entity.  Our ability to lend funds to the Advisor, a Trustee or Affiliates thereof is subject to certain restrictions as described in "Summary of Declaration of Trust - Restrictions on Transactions with Affiliates.”

We will not sell property to our Advisor, a Trustee or Affiliates thereof at terms less favorable than could be obtained from a non-affiliated party.

Although we do not intend to invest in real property, to the extent we do, a majority of the Trustees shall determine the consideration paid for such real property, based on the fair market value of the property.  If a majority of the Independent Trustees so determine, or if the real property is acquired from the Advisor, as Trustee or Affiliates thereof, a qualified independent real estate appraiser shall determine such fair market value selected by the Independent Trustees.

We will use our best efforts to conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940 and so as not to be deemed a "dealer" in mortgages for federal income tax purposes.  See "Federal Income Tax Considerations.”

We will not engage in any transaction which would result in the receipt by the Advisor or its Affiliates of any undisclosed "rebate" or "give-up" or in any reciprocal business arrangement which results in the circumvention of the restrictions contained in the Declaration of Trust and in applicable state securities laws and regulations upon dealings between us and the Advisor and its Affiliates.

The Advisor and its Affiliates, including companies, other partnerships and entities controlled or managed by such Affiliates, may engage in transactions described in our prospectus, including acting as Advisor, receiving distributions and compensation from us and others, the purchasing, warehousing, servicing and reselling of mortgage notes, property and investments and engaging in other businesses or ventures that may be in competition with us.

CHANGES IN INVESTMENT OBJECTIVES AND POLICIES

The investment restrictions contained in the Declaration of Trust may only be changed by amending the Declaration of Trust with the approval of the shareholders.  However, subject to those investment restrictions, the methods for implementing our investment policies may vary as new investment techniques are developed.  The Board of Trustees shall periodically, no less than annually restate our investment objectives and publish same in a public filing and direct mail communication to our shareholders.

COMPETITION

We believe that our principal competition in the business of acquiring and holding mortgage investments is from financial institutions such as banks, saving and loan associations, life insurance companies, institutional investors such as mutual funds and pension funds, and certain other mortgage REITs. While most of these entities have significantly greater resources than we do, we believe that we are able to compete effectively and to generate relatively attractive rates of return for shareholders due to our relatively low level of operating costs, our relationships with our sources of mortgage investments and the tax advantages of our REIT status.

EMPLOYEES

We have no employees however, our Advisor is staffed with employees who possess expertise in all areas required to fulfill its obligation as manager of our day-to-day management. Our President is a limited partner of UMTH.  UMTH owns 99.9% of UMTHGS, our Advisor.

8

ITEM 1A. RISK FACTORS.

The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected. We caution readers to keep these risk factors in mind and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.

Our operations and results are subject to the risks associated with the real estate industry.  

Our operations and results and the value of our mortgage investments, and consequently the value of your shares, are subject to the risk that if our mortgage investments do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to you will be adversely affected.  The following factors, among others, may adversely affect our results:  

- downturns in the national, regional and local economic climate;

- competition from other real estate lenders;

-local real estate market conditions, such as oversupply or reduction in demand for properties;

-trends and developments in the homebuilding industry;

- conditions in financial markets, including changes in interest rates, the availability and cost of financing, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System and international financial conditions;

-unemployment rates;

- increased operating costs, including, but not limited to, insurance expense, utilities, real estate taxes, state and local taxes;

- civil disturbances, natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; and

-declines in the financial condition of our borrowers and our ability to collect on the loans we make to our borrowers.

Recent Developments in the Residential Sub-prime Mortgage Market Could Adversely Affect Our Results.

During 2007, the mortgage lending industry experienced significant instability due to, among other things, defaults on sub-prime loans and a resulting decline in the market value of such loans. These developments are often referred to as the “sub-prime crisis.” As part of the sub-prime crisis, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led generally to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity and increased credit risk premiums.

The deterioration in the housing market resulting from the sub-prime crisis may have an adverse impact on our portfolio of mortgage investments because our interim loan borrowers rely on prosepective home buyers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, seasoning, employment history and liquidity requirements of conventional mortgage financing.  These factors place the loans in the “non-conforming” category, meaning that they are not insured or guaranteed by a federally owned or guaranteed mortgage agency.  Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing.

Currently, we believe that the impact of these factors on our operations has not been significant, in part because the Texas real estate market, where most of our mortgage investments are located, has not experienced a downturn in its residential real estate market and also because we have adopted active strategies to monitor and manage our credit risk and our portfolio of mortgage investments, such as reducing our investments in interim loans secured by conventionally built homes, with the objective of limiting to the extent possible adverse financial effects from the sub-prime crisis. However, we have two loans in California, which is one of the states where the sub-prime crisis has been felt the most and conditions could change in Texas and in our other markets. Therefore, we can give no assurances that there will not be a marked increase in defaults under our interim loans accompanied by a rapid decline in real estate values that could have a material adverse effect upon our financial condition and operating results.

9

We may not be successful in managing credit risk, particularly as such risk is impacted by the sub-prime crisis, which could adversely affect our results and our ability to pay distributions to our shareholders. 

Despite our efforts to manage credit risk, there are many aspects of credit risk that we cannot control. In addition, the sub-prime crisis has created new circumstances that increase the difficulty of predicting the credit risks to which we will be exposed and limiting future delinquencies, defaults, and losses. Our borrowers may default and we may experience delinquencies at a higher rate than we anticipate. Our underwriting reviews may not be effective. Our loan loss reserves may prove to be inadequate. The value of the homes collateralizing our mortgage investments may decline. We may have difficulty selling any homes that are repossessed which could delay or prevent us from recovering our investment. Changes in lending trends, consumer behavior, bankruptcy laws, tax laws, regulations impacting the mortgage industry, and other laws may exacerbate loan losses. Other changes or actions by judges or legislators regarding mortgage loans and contracts including the voiding of certain portions of these agreements may reduce our earnings, impair our ability to mitigate losses, or increase the probability and severity of losses. Our loss mitigation efforts will impact our operating costs and may not be effective in reducing our future credit losses.

Our dividend can fluctuate because it is based on earnings.

The dividend rate is fixed quarterly by our trustees, based on earnings projections. As such, the dividend rate may fluctuate up or down. Earnings are affected by various factors including use of leverage, cash on hand, current yield on investments, loan losses, general and administrative operating expenses and amount of non-income producing assets. We distributed in excess of earnings between 1999 and 2005. The amount of the excess constituted a return of capital.

A portion of our investments are subject to a higher risk of default than conventional mortgage loans.

Most of our mortgage investments are “non-conforming” in that they are not insured by a federally owned or guaranteed mortgage agency. Also, a portion of our loans involve, directly or indirectly, borrowers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, employment histories and liquidity requirements of conventional mortgage financing.  Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing.   The three year average default rate for our residential mortgages and contracts for deed was 10.35% and for our interim loans was 4.24%.

Fluctuations in interest rates may affect our return on investment.

Mortgage interest rates may be subject to abrupt and substantial fluctuations.  Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. If prevailing interest rates rise above the average interest rate being earned by our mortgage investments, we may be unable to quickly liquidate our existing investments in order to take advantage of higher returns available from other investments.  Furthermore, interest rate fluctuations may have a particularly adverse effect on the return we realize on our mortgage investments if we use money borrowed at variable rates to fund fixed rate mortgage investments. A portion of the loans we finance for UDF are junior in the right of repayment to senior lenders, who will provide loans representing 70% to 80% of total project costs.  As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.


We have a heavy dependence upon the UDF line of credit which also concentrates our credit risk.

Our line of credit to UDF is currently $45 million, and we generate a significant amount of our total earnings through that lending arrangement. The line of credit expires December 31, 2009. The large amount that we have committed to the UDF line of credit means that we face a concentrated credit risk with UDF so that, in the event of delinquencies or defaults by UDF, a significant portion of our total portfolio of mortgage investments could be adversely affected. In addition, if we are unable to renew the line of credit when it expires or to find an alternative lending arrangement either with UDF or other borrowers that will allow us to use an equivalent amount of our lending resources and that will generate an equivalent or better return to us, our earnings will be negatively impacted which may result in an adverse impact on our ability to make distributions to our shareholders.


Our loans to UDF are junior to other lenders and exposes us to the risks of the homebuilding industry.

10

Our loans to UDF are secured by UDF’s interest in mortgages and equity participations that it has obtained to secure its loans to real estate developers. Some of those mortgages are junior mortgages. The developers obtain the money to repay the development loans by reselling the residential home lots to home builders or individuals who build single-family residences on the lots.  The developer’s ability to repay their loans is based primarily on the amount of money generated by the developer’s sale of its inventory of single-family residential lots. As a result, we are exposed to the risks of the homebuilding industry, which is undergoing a significant downturn due in large part to the sub-prime crisis, the duration and ultimate severity of which are uncertain. Accordingly, continued or further deterioration of home building conditions or in the broader economic conditions of the homebuilding market could cause the number of homebuyers to decrease, which would increase the likelihood of defaults on the development loans and, consequently, increase the likelihood of a default on the UDF line of credit loan.   If this were to occur, we may face the inability to recover the outstanding loan balance on foreclosure of collateral securing our loans because our rights to this collateral will be junior to the rights of senior lenders and because of the potentially reduced value of the underlying properties.


We purchase mortgage investments from affiliates of our Advisor, which may present a conflict of interest from our Advisor.

We acquire many of our mortgage investments from affiliates of the Advisor.  Due to the affiliation between the Advisor and those entities and the fact that those entities may make a profit on the sale of mortgage investments to us, the Advisor has a conflict of interest in determining if mortgage investments should be purchased from affiliated or unaffiliated third parties.

We face competition for the time and services of our officers and the officers and employees of our Advisor.

We rely on our Advisor and its affiliates, including our President, who is a partner of the parent of our Advisor, for management of our operations. Because our Advisor and its affiliates engage in other business activities, conflicts of interest may arise in operating more than one entity with respect to allocating time between those entities.

We have a high geographic concentration of mortgage investments in Texas.

A large percentage of the properties securing our mortgage investments are located in Texas, with approximately 48% in the Dallas/Fort Worth area. As a result, we have a greater susceptibility to the effects of an economic downturn in that area or from slowdowns in certain business segments that represent a significant part of that area’s overall economic activity such as energy, financial services and tourism.

We face the risk of loss on non-insured, non-guaranteed mortgage loans.

We generally do not obtain credit enhancements for our mortgage investments, because the majority of those mortgage loans are "non-conforming" in that they do not meet all of the underwriting criteria required for the sale of the mortgage loan to a federally owned or guaranteed mortgage agency.  Accordingly, during the time we hold mortgage investments for which third party insurance is not obtained, we are subject to the general risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods).  In the event of a default on any mortgage investment held by us, including, without limitation, defaults resulting from declining property values and worsening economic conditions, we would bear the risk of loss of principal to the extent of any deficiency between the value of the related mortgage property and the amount owing on the mortgage loan.  Defaulted mortgage loans would also cease to be eligible collateral for borrowings and would have to be held or financed by us out of other funds until those loans are ultimately liquidated, which could cause increased financing costs and reduced net income or a net loss.

Bankruptcy of borrowers may delay or prevent recovery on our loans.

The recovery of money owed to us may be delayed or impaired by the operation of the federal bankruptcy laws.  Any borrower has the ability to delay a foreclosure sale for a period ranging from a few months to several months or more by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan.  The length of this delay and the associated costs will generally have an adverse impact on the return we realize on our investments.

We face risks under the representations, warranties and guarantees that we gave in connection with our securitization activities.

We have engaged in two off balance sheet securitizations of our mortgage investments as a means of providing funding. In these transactions, we receive the proceeds from third party investors for securities issued from our securitization vehicles which are collateralized by transferred mortgage investments from our portfolio. As part of those securitizations we made certain representations and warranties concerning the portfolio of mortgage investments conveyed and we also guaranteed certain obligations. If, because of irregularities in the underlying loans, our representations and warranties are inaccurate, we may be obligated to repurchase the loans from the purchasing securitization entities at principal value, which may exceed market value.

11

We are exposed to potential environmental liabilities.

In the event that we are forced to foreclose on a defaulted mortgage investment to recover our investment, we may be subject to environmental liabilities in connection with that real property which may cause its value to be diminished.  Hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be discovered on properties during our ownership or after a sale of that property to a third party.  If those hazardous substances are discovered on a property, we may be required to remove those substances or sources and clean up the property.  We could incur full recourse liability for the entire cost of any removal and clean up and the cost of such removal and clean up could exceed the value of the property or any amount that we could recover from any third party.  We may also be liable to tenants and other users of neighboring properties for environmental liabilities.  In addition, we may find it difficult or impossible to sell the property prior to or following any such clean up.

We face risks from borrowed money.

We are allowed to borrow an aggregate amount not to exceed 50% of our net assets to acquire mortgage investments.  An effect of leveraging is to increase the risk of loss.  The higher the rate of interest on the financing, the more difficult it would be for us to meet our obligations and the greater the chance of default.  These borrowings may be secured by liens on our mortgage investments.  Accordingly, we could lose our mortgage investments if we default on the indebtedness.

We rely on appraisals that may not be accurate or may be affected by subsequent events.

Because our investment decisions are based in major part upon the value of the real estate underlying our mortgage investments and less upon the creditworthiness of the borrowers, we rely primarily on the real property securing the mortgage investments to protect our investment.  We rely on appraisals and on Broker Price Opinions ("BPO's"), both of which are paid for and most of which are provided by note sellers, to determine the fair market value of real property used to secure the mortgage investments we purchase. BPO’s are determinations of the value of a property based on a study of the comparable values of similar properties prepared by a licensed real estate broker.  We cannot be sure that those appraisals or BPO's are accurate.  Moreover, since an appraisal or BPO is given with respect to the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include changes in general or local economic conditions, neighborhood values, interest rates and new construction.  Moreover, subsequent changes in applicable governmental laws and regulations may have the effect of severely limiting the permitted uses of the property, thereby drastically reducing its value.  Accordingly, if an appraisal is not accurate or subsequent events adversely affect the value of the property, the mortgage investment would not be as secure as anticipated, and, in the event of foreclosure, we may not be able to recover our entire investment.

Our mortgages may be considered usurious.

Usury laws impose limits on the maximum interest that may be charged on loans and impose penalties for violations that may include restitution of the usurious interest received, damages for up to three times the amount of interest paid and rendering the loan unenforceable. Most, if not all, of the mortgage investments we purchase are subject to state usury laws and therefore we face the risk that the interest rate for our loans could be held usurious in states with restrictive usury laws.

We face the risk of an inability to maintain our qualification as a REIT.

We are organized and conduct our operations in a manner that we believe enables us to be taxed as a REIT under the Internal Revenue Code (the "Code"). To qualify as a REIT and avoid the imposition of federal income tax on any income we distribute to our shareholders, we must continually satisfy two income tests, two asset tests and one distribution test.

If, in any taxable year, we fail to distribute at least 90% of our taxable income, we will be taxed as a corporation and distributions to our shareholders will not be deductible in computing our taxable income for federal income tax purposes.  Because of the possible receipt of income without corresponding cash receipts due to timing differences that may arise between the realization of taxable income and net cash flow (e.g. by reason of the original issue discount rules) or our payment of amounts that do not give rise to a current deduction (such as principal payments on indebtedness), it is possible that we may not have sufficient cash or liquid assets at a particular time to distribute 90% of our taxable income.  In that event, we could declare a consent dividend or we could be required to borrow funds or liquidate a portion of our investments in order to pay our expenses, make the required distributions to shareholders, or satisfy our tax liabilities, including the possible imposition of a four percent excise tax. We may not have access to funds to the extent, and at the time, required to make such payments.

If we were taxed as a corporation, our payment of tax will substantially reduce the funds available for distribution to shareholders or for reinvestment and, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate certain of our investments in order to pay the applicable tax.  Moreover, should our election to be taxed as a REIT terminate or be voluntarily revoked, we may not be able to elect to be treated as a REIT for the following four-year period.

12

We did not have an audit committee in 2006.

During 2006 our Board of Directors did not appoint an audit committee.  The Company did have an audit committee in 2007 and 2005.  Typically, an audit committee is responsible for reviewing and discussing with management a company's financial controls and accounting, audit and reporting activities.  A typical audit committee will also review the qualifications of the Company's independent registered public accounting firm, select the independent registered public accounting firm and recommend the ratification of the accounting firm to the board, review the scope, fees and results of any audit and review the non-audit services provided by the accounting firm.   An audit committee will also be responsible for approving any transactions between the Company and its directors, officers, or significant shareholders.  Failing to have a properly constituted audit committee could expose the Company to a greater risk of error or fraud in the compilation, analysis and reporting of the Company's financial results. In addition, having an audit committee is a requirement for a listing of the Company’s securities on a stock exchange.


ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

We do not maintain any physical properties.

ITEM 3. LEGAL PROCEEDINGS.

We are unaware of any threatened or pending legal action or litigation that individually or in the aggregate could have a material effect on us.

ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS.

None.



 
 
13

 
 



PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

SHARE REDEMPTION PLAN

There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan, (“SRP”).  Under our plan, shareholders who have held the shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price is based on the value of our properties or a fixed pricing schedule, as determined by the trustees' business judgment based on our book value, operations to date and general market and economic conditions and may not, in any event, exceed any current public offering price. We have also purchased a limited number of shares outside of our SRP from shareholders with special hardship considerations.

Share repurchases have been at prices of $16.34 to $20.00 through our SRP. Shares repurchased for less than $20 per share were 1) shares held by shareholders for less than 12 months or 2) shares purchased outside of our Share Repurchase Program.

The repurchase price of $20 was determined by our Board of Trustees based on their business judgment regarding the value of the shares with reference to our book value, our operations to date and general market and economic conditions.

The following table summarizes the share repurchases made by us in 2007:

Month
Total number of shares repurchased
Average Purchase Price
Total number of shares purchased as part of a publicly announced plan
Total number of shares purchased outside of plan
January
17,803
$18.41
10,073
7,730
February
20,551
$18.22
10,534
10,017
March
12,223
$19.08
9,139
3,084
April
15,409
$19.01
11,250
4,158
May
13,793
$19.37
11,323
2,470
June
52,095
$17.21
10,747
41,347
July
40,859
$19.71
37,472
3,387
August
55,218
$19.67
50,006
5,211
September
61,244
$19.35
49,999
11,245
October
36,666
$19.12
27,503
9,163
November
40,441
$19.08
29,890
10,551
December
26,488
$19.81
25,033
1,455
Totals
392,790
$19.01
282,969
109,818


On December 31, 2007, we had 6,649,916 shares outstanding compared to 6,917,443 and 7,055,119 shares outstanding at December 31, 2006 and 2005, respectively. The decrease in shares is the net between fewer DRP shares issued and more SRP shares repurchased. The shares were held by 2,373, 2,760 and 2,771 beneficial owners in 2007, 2006 and 2005, respectively. No single shareholder owned 5% or more of our outstanding shares.


DIVIDEND POLICY

Under our current dividend policy, we intend to retain up to 10% of our earnings to build share value, (“Retained Earnings”), and distribute to shareholders at least 90% of our taxable income each year (which does not ordinarily equal net income as calculated in accordance with accounting principles generally accepted in the United States) so as to comply with the REIT provisions of the Code.  To the extent we have available funds, we declare regular monthly dividends (unless the trustees determine that monthly dividends are not feasible, in which case dividends would be paid quarterly).  Any taxable income remaining after the distribution of the final regular monthly dividend each year, excluding our Retained Earnings, is distributed together with the first regular monthly dividend payment of the following taxable year or in a special dividend distributed prior thereto.  The dividend policy is subject to revision at the discretion of the Board of Trustees.  All distributions are made by us at the discretion of the Board of Trustees and depend on our taxable earnings, our Retained Earnings, our financial condition, maintenance of our REIT status and such other factors as the Board of Trustees deems relevant.

14

Distributions to shareholders are generally subject to taxation as ordinary income, although a portion of those distributions may be designated by us as capital gain or may constitute a tax-free return of capital.  Although we do not intend to declare dividends that would result in a return of capital, we did so from 1997 through 2005. Any distribution to shareholders of income or capital assets from us is accompanied by a written statement disclosing the source of the funds distributed. If, at the time of distribution, this information is not available, a written explanation of the relevant circumstances accompanies the distribution and the written statement disclosing the source of the funds is distributed to the shareholders not later than 60 days after the close of the fiscal year in which the distribution was made. In addition, we annually furnish to each of our shareholders a statement setting forth distributions during the preceding year and their characterization as ordinary income, capital gains, or return of capital.

We began making distributions to our shareholders on September 29, 1997. Monthly distributions have continued each month thereafter. At year-end 2007 we had paid 124 consecutive monthly dividends. Distributions for the years ended December 31, 2007, 2006 and 2005 were made at a rate of 7.4% ($1.47), 7.0% ($1.40) and 7.5% ($1.50), respectively. The dividend portion of the distribution was 7.4% ($1.47), 7.0% ($1.40) and 6.6% ($1.32), per weighted share for 2007, 2006 and 2005, respectively. The portion of these distributions that did not represent a dividend represented a return of capital.

ITEM 6. SELECTED FINANCIAL DATA

We present below selected financial information. We encourage you to read the financial statements and the notes accompanying the financial statements in this Annual Report. This information is not intended to be a replacement for the financial statements.



 
Years ended December 31,
 
2007
2006
2005
2004
2003
OPERATING DATA
         
 Interest income from affiliate investments
$14,001,947
$13,180,260
$11,242,004
$9,140,931
$6,252,884
 Interest income
2,830,897
4,030,871
3,771,731
4,748,517
5,823,457
 Total revenues
16,832,844
17,211,131
15,013,735
13,889,448
12,076,341
 Total expenses
6,024,927
7,102,911
5,767,501
4,423,440
3,487,222
Net income
10,807,917
10,108,220
9,246,234
9,466,008
8,589,119
Net income per share
$1.59
$1.45
$1.32
$1.34
$1.47
Weighted average shares outstanding
6,805,072
6,993,980
7,026,311
7,051,313
5,859,639
           



 
 
15

 
 



 
Years ended December 31,
 
2007
2006
2005
2004
2003
BALANCE SHEET DATA
         
Cash
$1,597,883
$3,661,724
$5,548,421
$1,331,798
$4,199,455
Residential mortgages and contracts for deed
-
-
-
-
29,780,352
Investment in trusts receivable
5,428,453
5,473,508
5,815,712
17,749,231
 -
Foreclosed residential mortgages and contracts for deed
274,064
359,517
874,602
867,591
3,346,004
Interim mortgages, affiliates
41,641,334
64,883,388
48,411,728
45,561,688
45,924,354
Interim mortgages
12,251,098
17,825,519
24,543,944
28,185,848
25,622,838
Foreclosed interim mortgages
234,155
776,643
1,805,340
2,025,830
1,263,350
Allowance for loan losses
(2,343,163)
(1,011,975)
(698,712)
(921,500)
(350,000)
Line-of-credit receivable, affiliate
25,083,216
33,056,189
30,317,037
28,721,639
6,093,493
Recourse obligations, affiliates
16,035,790
11,975,234
9,264,233
  -
  -
Other assets
9,476,866
4,713,499
 4,021,986
5,676,136
 4,445,972
Total assets
109,679,696
141,713,246
129,904,291
129,198,261
120,325,818
           
Bank loan
-
27,976,642
13,808,080
12,030,000
    -
Other liabilities
878,485
810,718
936,583
1,012,944
1,835,145
Total liabilities
878,485
28,787,360
14,744,663
13,042,944
1,835,145
           
Total shareholders' equity
108,801,211
112,925,886
115,159,628
116,155,317
  118,490,673
Total liabilities and shareholders' equity
$109,679,696
$141,713,246
$129,904,291
$129,198,261
$120,325,818


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY.

GENERAL

We invest exclusively in:  (i) first lien secured mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single family homes, which we refer to as “interim loans”; (ii) first lien secured construction loans for the acquisition of lots and construction of single-family homes, which we refer to as “construction loans”; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “land development loans”; (iv) lines of credit and loans secured by developed single-family lots, referred to as “finished lot loans”; (v) lines of credit and loans secured by completed model homes, referred to as “model home loans”; and, formerly we invested in (vi) first lien, fixed rate mortgages secured by single-family residential property, which we refer to as “residential mortgages”. Additionally, we our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”

The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The UDF line of credit has a five year term. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months. The majority of  interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or obligate a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its bank lines of credit. In addition, as an enhancement, in October 2006, UDF III, a newly formed public limited partnership that is affiliated with UDF and with our Advisor, entered into a limited guaranty effective as of September 1, 2006, for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of up to $30 million under the Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF.  We anticipate the UDF III Guarantee will be released in 2008 as a result of UDF’s increased net worth.

We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders.  We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes.  As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).

At the end of 2007, our mortgage portfolio totaled approximately $84,404,000. Approximately 26% of our income producing assets were interim loans secured by conventionally built homes, approximately 27% were land development loans, approximately 25% were interim loans secured by modular and manufactured housing, approximately 16% were invested in the new construction interim loans, approximately 6% were invested in residential mortgages and contracts for deed, owned outright and as part of the Bayview Securitization discussed below.

16

We no longer purchase Interim Loans that are secured by modular and manufactured homes or Residential Mortgages, and we no longer purchase Construction Loans.  We are reducing our investment in Interim Loans until conventional financing options for homes secured by Interim Loans improve.  We plan to continue to invest in Land Development Loans, Finished Lot Loans, Model and Home Loans and a subordinate line of credit secured by Interim Loans  because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; 2) the subordinate line of credit secured by Interim Loans provides us with suitable collateral positions, full recourse from our borrowers and attractive yields; and, 3) Model Home Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans.  As we phase out of Interim Loans secured by modular and manufactured homes and Construction Loans, we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans and Model Home Loans, until market conditions indicate the need for an adjustment of the portfolio mix.



The following table sets forth certain information about our mortgage investments purchased during the periods set forth below.
 
Years Ended December 31,
 
2007
2006
2005
Interim Mortgages
     
Interims funded with affiliates
$ 45,147,000
$ 69,812,000
$ 47,442,000
Interims funded with others
$ 3,456,000
$ 18,596,000
$ 33,760,000
       
Number of loans funded with affiliates
557
1,055
746
Number of loans funded with others
-
137
277
Total number funded
557
1,192
1,023
       
Affiliate interims paid off
$ 66,540,000
$ 48,003,000
 $ 42,915,000
Other interims paid off
$ 7,305,000
$ 26,303,000
 $ 31,773,000
       
Number of affiliated interims paid off
1,173
909
613
Number of other interims paid off
77
206
346
Total number paid off
1,250
1,115
959
       
Average interim mortgage loan funded during year
$86,000
$ 75,000
 $ 75,000
Remaining term in months: less than
12 months
12 months
12 months
Yield on investments
12.33%
13.63%
12.98%
Investment-to-value ratio
63.19%
56.08%
52.19%
       
Line of Credit, Affiliate
     
 Draws funded
$ 1,950,000
$ 16,562,000
$ 20,483,000
 Paid down
$ 11,909,000
 $ 13,823,000
$ 18,888,000
Term remaining
2 years
 3 years
4 years
Yield on investments
14.06%
14.00%
13.91%
       
Residential Mortgages and Contracts for Deed
     
UPB of new loans acquired
$ 640,000
$ 1,721,000
 $ 517,000
Number purchased from other sources
 --
 --
13
       
Lot Banking Transactions (1)
     
Draws funded
$ 1,986,000
 --
 --
Paid down
 --
 --
 --
Term remaining
2 years
 --
 --
Yield on investments
12.50%
 --
 --
       
Number reclassified/refinanced/carried back when selling REO (2)
14
43
--
Aggregate principal balance
$ 640,000
$ 1,721,000
$ 517,000
Average principal balance
$ 46,000
 $ 40,000
$ 40,000
Remaining term in months
180
359
245
Current yield
10.14%
12.76%
11.70%
Investment-to-value
104.62%
74.74%
86.36%

 
(1) These transactions are included in Lines of Credit, Affiliate in the accompanying financial statements

(2) These loans were a result of the reclassification of interim mortgages, refinancing of contracts for deed or a note carried back from the sale of REO.  In the case of interim mortgages, we took direct assignment of three notes and one contract for deed that were in place on the underlying collateral of four interim mortgages. Two contracts for deed were refinanced and are now notes and deeds of trust. The balance of the activity represents secured 2nd liens notes secured by properties that were security for construction loans. Management encouraged one of the Company’s unaffiliated borrowers to refinance their maturing construction loans. In doing so, management agreed to subordinate the Company’s 1st lien to other institutions. In addition, borrower was required to execute a 2nd lien note on the portion of UMT’s 1st lien that the other institution did not finance. Principal and interest payments are required monthly under the terms of the 2nd lien notes.

17

MATERIAL TRENDS

Housing Industry

The U.S. housing market has suffered declines in recent months, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation.  Although the Company believes that the housing markets in the geographic areas in which we have invested will not be significantly impacted by the general decline in the U.S. housing market, the Company does believe that the publicly traded national homebuilders with which it does business are reducing and will continue to reduce supply and inventory overhang of new single family residences and, as a result, will likely reduce the number of new homes they construct in 2008 as compared to the number of new homes constructed in 2007. 

Material Trends Affecting Our Business

Nationally, the number of new single-family residential homes sold has been declining, and average and median sales prices have been falling.  The sales of new single-family residential homes in December 2007 were at a seasonally adjusted annual rate of 605,000 units, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development.  This is approximately 41% below the December 2006 estimate of 1,019,000 units.  According to the same sources, the average sales price of new houses sold in December 2007 was $267,300; the median sales price was $219,200. This is approximately 14.2% below the December 2006 average sales price of $311,600 and approximately 11% below the December 2006 median sales price of $246,900.  The seasonally adjusted estimate of new houses for sale at the end of December was 493,000, which represents a supply of 9.5 months at the December sales rate.  The seasonally adjusted estimate of new houses for sale at the end of December 2006 was 535,000, which represents a supply of 6.2 months at the December 2006 sales rate.

According to the same sources, new single-family residential home permits and starts have also declined nationally, as a result and in anticipation of a rising supply of new single-family residential homes and a declining demand for new single-family residential homes.  Single-family homes authorized by building permits in December 2007 were at a seasonally adjusted annual rate of 702,000 units.  This is 26.5% below the December 2006 estimate of 1,181,000 units.   Single-family home starts were at a seasonally adjusted annual rate of 784,000 units.  This is 36.8% below the December 2006 estimate of 1,241,000 units.

Housing markets generally remain difficult and generally are declining on a national basis with those declines and difficulties most pronounced in those markets that had experienced rapid growth, steep increases in property values and speculation, such as in California, Florida, Arizona and Nevada.  However, a few markets, such as Texas, are continuing to remain fairly healthy, compared to what has been occurring nationally.  The table below illustrates the recent declines in home price appreciation nationally, as well as in California and Florida, while showing that Texas has not experienced such declines.

10 Year Home Price Appreciation
10 Year
Source: Office of Federal Housing Enterprise Oversight and Real Estate Center at Texas A&M University

 
18

As of December 31, 2007, the great majority of our loans are secured by assets located in Texas.  While housing woes beleaguer the national economy, Texas housing markets have held up as some of the best in the country.  We believe the Texas markets have remained fairly healthy due to strong demographics, economies and housing affordability ratios.  The National Association of Homebuilders estimates that the median new home prices for 2007 in the metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock are $188,025, $204,895, $207,076, $160,764 and $97,199, respectively.  These amounts are below the December 2007 national median sales price of new homes sold of $219,500.  Using the Department of Housing and Urban Development’s estimated 2007 median family income for the respective metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock, the median income earner in those areas has 1.32 times, 1.00 times, 1.08 times, 1.20 times and 1.80 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area.  Using the U.S. Census Bureau’s income data to project estimated median income for the United States for 2007 of $59,000 and the December 2007 national median sales prices of new homes sold of $219,500, we conclude that the national median income earner has 0.97 times the income required to qualify for a mortgage loan to purchase the median priced new home in the United States.  We further conclude that the aforementioned Texas metropolitan areas have new home housing affordability ratios that are 1.03 to 1.86 times the national new home housing affordability ratio.  The above housing affordability is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, assuming an annual mortgage insurance premium of 50 basis points for private mortgage insurance and a cost that includes estimated property taxes and insurance for the home.

The United States Department of Labor reports that as of December 2007, Texas led the nation with the largest job gains over the past twelve months with 218,600 new jobs created.  This is over 2.5 times greater than the number of jobs created during this period in the nation’s second largest state for job growth, Florida, and more than 2.75 times the jobs created during this period in the nation’s third largest state for job growth, California.  The United States Department of Labor reports that the largest over-the-year percentage increases in employment in the country’s large metropolitan areas were recorded in the four top metropolitan areas of Texas: Austin-Round Rock (+4.2%), Houston-Sugar Land-Baytown, (+3.9%), San Antonio (+3.0%), and Dallas-Fort Worth-Arlington, (+2.9%), The Texas metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock experienced, during the last twelve months, the creation of 22,700, 94,200, 66,500, 18,800 and 3,800 new jobs, respectively.

The United States Census Bureau reported in its 2007 Estimate of Population Change July 1, 2006 to July 1, 2007 that Texas led the country in population growth during that period.  The estimate concluded that Texas grew by 496,751 people, or 2.12%, a number which was 1.6 times greater than the next closest state in terms of raw population growth, California, and more than 2.5 times the second closest state in terms of raw population growth, Georgia.  The United States Census Bureau also reported that among the 10 counties that added the largest number of residents between July 1, 2006 and July 1, 2007, half were in Texas (Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas) and Travis (Austin).  On June 28, 2007, the United States Census Bureau reported that Texas’ five major cities – Austin, Houston, San Antonio, Dallas and Fort Worth – were among the top ten in the nation for population growth from 2005 to 2006.  San Antonio was second in the nation with a population change of 33,084 from July 1, 2005 to July 1, 2006, Fort Worth was third in the nation with a population change of 30,201 during that period, Houston was fourth in the nation with a population change of 26,554 during that period, Austin was sixth in the nation with population change of 18,630 during that period, and Dallas was eighth in the nation with a population change of 16,676 during that period.

The Winter 2008 U.S. Market Risk Index, a study prepared by PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc., which ranks the nation’s 50 largest metropolitan areas according to the likelihood that home prices will be lower in two years, reported that Texas cities lead the nation in home price stability.  The San Francisco-based company recently analyzed housing price trends in 50 U.S. metropolitan areas for its quarterly report, released January 15, 2008.  The index also considers the impact of foreclosure rates and excess housing supply and the consequential impact on home prices.  The study predicts there is less than a 1% chance that the Dallas/Fort Worth-area, Houston area, San Antonio, and Austin area home prices will fall during the next two years.  All Texas metropolitan areas included in the report are in the Top 10 least likely areas to experience a decline in home prices in two years of the nation’s 50 largest metropolitan areas.  Fort Worth-Arlington, Texas is the nation’s least likely metropolitan area included in the study to see a price decline in the next two years, Dallas-Plano-Irving, Texas is second-least likely, Houston-Sugar Land-Baytown, Texas is fourth-least likely, San Antonio, Texas is fifth-least likely and Austin, Texas is ninth-least likely.

In Texas markets, home builders and developers remain disciplined on new home construction and project development.  New home starts have been declining year-on-year and are outpaced by new home sales in all of our Texas markets where such data is readily available.  Inventories of finished new homes and finished lot supplies are healthy, with the exception of Dallas-Fort Worth, where homebuilders have slowed housing starts as the market had become slightly oversupplied with finished new homes and finished lot supplies.  Management anticipates the annual new home start pace will decline another 10% to 20% from 2007 levels in Texas markets as the Texas economy reverts to more moderate economic growth.  The Federal Reserve Bank Dallas has stated that although the Texas economy has weakened in the fourth quarter of 2007, the Texas economy “is still quite healthy and stronger than the national economy.”

19

Austin continues to be one of the strongest homebuilding markets in the country. Annual new home sales outpace starts 14,810 versus 13,896.  Finished housing inventory and finished lot supplies remain at healthy levels of 2.5 months and 22 months, respectively.  San Antonio is also a strong homebuilding market, with annual new home sales outpacing starts 15,564 versus 12,625.  Finished housing inventory and finished lot supplies remain at healthy levels of 2.3 months and 26.1 months, respectively.  Houston is also a healthy homebuilding market with annual new home sales outpacing starts 42,960 versus 38,117.  Finished housing inventory has been increasing to a 2.8 month supply, slightly above the considered equilibrium of 2 to 2.5 months supply.  Finished lot supplies remain at very healthy levels of 22.3 months.  All numbers are as publicly released by Metrostudy, a leading provider of primary and secondary market information.

The Real Estate Center at Texas A&M University has reported that the sales of existing homes remain healthy in our Texas markets, as well.  The number of months of home inventory for sale in Austin, San Antonio, Houston, Dallas, Fort Worth and Lubbock is 4.2 months, 6.0 months, 6.0 months, 5.8 months, 5.8 months, and 5.4 months, respectively.  A 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 months of inventory generally being considered a seller’s market. As of December, the number of existing homes sold year-to-date in (a) Austin is 27,974, down 7.6% year-on-year; (b) San Antonio is 23,820, down 9% year-on-year; (c) Houston is 77,581, down 4.2% year-on-year, (d) Dallas is 57,332, down 7.5% year-on-year, (e) Fort Worth is 11,415, down 4.6% year-on-year, and (f) Lubbock is 3,485, up 4.5% year-on-year. 

The Office of Federal Housing Enterprise Oversight (“OFHEO”) reports that Texas had healthy existing home price appreciation between the fourth quarter of 2006 and the fourth quarter of 2007 of 5.21%.  That same report provides that existing home price appreciation between the fourth quarter of 2006 and the fourth quarter of 2007 for (a) Austin is 7.95%, (b) San Antonio is 8.25%, (c) Houston is 4.79%, (d) Dallas is 2.95%, (e) Fort Worth is 2.89%, and (f) Lubbock is 0.34%.  The OFHEO tracks average house price changes in repeat sales or refinancings of the same single-family properties utilizing conventional, conforming mortgage transactions.

In managing and understanding the markets and submarkets in which we purchase, we monitor the fundamentals of supply and demand.  We monitor the economic fundamentals in each of the markets in which we purchase loans, analyzing demographics, household formation, population growth, job growth, migration, immigration and housing affordability.  We also monitor movements in home prices and the presence of market disruption activity, such as investor or speculator activity that can create false demand and an oversupply of homes in a market.  Further, we study new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, existing home prices, foreclosures, absorption, prices with respect to new and existing home sales, finished lots and land, and the presence of sales incentives, discounts, or both, in a market.

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing.  Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes.  Housing demand is, in general, adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing.


Outlook

We expect the difficulties and challenges to the housing and mortgage lending marketplace to continue over the next few years. Those conditions could increase delinquencies and credit losses for us above those we have experienced on a historical basis.  However, we believe we have established appropriate reserves for such potential increased losses, and we anticipate that our assets will overall produce positive returns. We believe that United Mortgage Trust has been active in monitoring the current crisis and in implementing various measures to manage our risk and protect our return on our investments by shifting our portfolio to investments that are less directly sensitive to the adverse market conditions and that produce higher yields and by aggressively liquidating non-performing loans.  Based on that assessment, we do not anticipate a significant disruption to our normal business operations nor on our ability to continue making distributions to our shareholders consistent with our historical dividend policy and record.  Nevertheless, our assessments inherently involve predicting future events and we cannot be sure of the length or extent of the current sub-prime crisis and if it continues over an extended period of time, or if its severity increases, its impact on the economy as a whole and on the housing and mortgage lending market could cause us to suffer a higher level of delinquencies and losses than we are currently predicting and result in a material adverse impact on our business.

 
20

 
 




MERGER AGREEMENT

On June 13, 2006, the Board of Trustees voted to take no action to prevent the Agreement and Plan of Merger dated September 1, 2005 ("Merger Agreement") between the Company and UMTH pursuant to which the Company would have merged with and into UMTH ("Merger") from terminating for failure to satisfy the condition that the Merger would terminate if the Merger was not consummated by June 30, 2006. On June 13, 2006, the Company received a letter from UMTH in which UMTH also expressed the view that the Merger would terminate on June 30, 2006. On June 30, 2006 the merger terminated and as a result the Company wrote-off approximately $1,040,000 in capitalized merger costs as reflected in the statements of income. The Company did not incur any termination penalties as a result of the termination of the merger.

RECOURSE OBLIGATIONS

    Prior to July 1, 2003, we made loans with recourse to (1) Capital Reserve Group, Inc. (“CRG”), which is owned by Todd Etter and William Lowe, (2) Ready America Funding Corp. (“RAFC”), which is owned by South Central Mortgage Inc. (“SCMI”), which is owned by Todd Etter and by Eastern Intercorp, Inc., a company owned by Craig Pettit, and (3) SCMI, (we refer to these three companies as the "originating companies"), each of which has used the funds to originate underlying loans that are pledged to us as security for such originating company's obligations to us under the recourse obligations of affiliates.  In addition to the originating companies discussed above, the Company made loans with recourse to Wonder Funding, LP (“Wonder”), a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”).  RMC is beneficially owned by Craig Pettit.

When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to us is also due in full.

In addition, some of the originating companies have sold loans to us, which we refer to as the "purchased loans," and have entered into recourse agreements under which the originating company agreed to reimburse us for certain losses that we incur with respect to those purchased loans.

Before year end 2005, our arrangement was if the originating company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to us an unsecured deficiency note in the amount of the deficiency.

The owners of the originating companies are among the founders of UMT Holdings. Since July 1, 2003 they have originated interim mortgage loans through UMT Holdings, rather than through the originating companies.  As a result, the originating companies do not intend to borrow additional funds from or to sell additional loans to us.

On March 30, 2006, but effective December 31, 2005, each originating company agreed to give us secured promissory notes to consolidate (1) all outstanding amounts owed by such originating company to us under the recourse obligations of such originating company and the deficiency notes described above and (2) the estimated maximum future liability to us under the recourse arrangements described above.  Each originating company issued to us a secured variable amount promissory note dated December 31, 2005 (we refer to each of those notes as a “Secured Note”) in the initial principal amounts shown below. The initial amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to possible increases up to the maximum amounts shown below, if losses are incurred upon the foreclosure of purchased loans covered by recourse arrangements.  The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on Class C units, Class D units and Class EIA units of limited partnership interest of UMTH held by the originating companies as detailed in the following table and the paragraphs following the table.


 
21

 

Name
Initial principal amount
Balance at December 31, 2007
Promissory Note principal amount (2)
 
Units pledged as security
Units distributed during 2007
C Units remaining
Nominal Collateral Value (3)
CRG
$2,725,442
$4,572,436
$4,300,000
 
 4,984 Class C
616
3,957 Class C
$3,957,000
RAFC
$3,243,369
$6,393,327
$7,100,000
 
 6,739  Class C  & All EIA
444
5,394 Class C & all EIA
$5,394,000
SCMI
$3,295,422
$3,485,326
$3,448,643
 
 4,000 Class C
907
2,690 Class C
$2,690,000
RAF / Wonder(1)
$1,348,464
$1,584,701
$1,400,000
 
 3,870 Class C
-
3,870 Class C
$3,870,000
Wonder
Indemnification (1)
n/a
n/a
n/a
 
 $1,134,000
$115,000
n/a
$1,019,000
EIA Units
n/a
n/a
n/a
 
  n/a
n/a
n/a
$1,066,000
Totals
$10,612,697
$16,035,790
$16,248,643
       
$17,996,000

(1)    Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units.
(2)    The CRG, Wonder, and SCMI balances at December 31, 2007 exceeded the stated principal amount per their variable Secured Notes by approximately $272,000, $185,000, and $37,000, respectively.  Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default.  The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) that we originally anticipated and out paced the minimum principal reductions scheduled for the loans.
(3)   Nominal collateral value does not reflect pledge of D units of limited partnership interest of UMTH held by WLL, Ltd. and RAFC.

Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG and RAFC Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or 2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units.  Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspend the principal component of the amortized loans for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%.

The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:

·        UMT Holdings. This guaranty is limited to a maximum of $10,582,336 of all amounts due under the Secured Notes.
·        WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG, is non-recourse and is secured by an assignment of 2,492 Class C Units and 732 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd.
·        RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings.
·        Wonder.  Wonder Funding obligations are evidenced by a note from RAFC (RAFC Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above.

In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made by UMT Holdings to William Lowe. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to us to secure its guaranty of CRG’s obligations under its Secured Note, we and UMT Holdings entered into an Intercreditor and Subordination Agreement dated as of December 31, 2005 under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to our lien on such units.


 
22

 


RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005

Residential Mortgages, Contracts for Deed, and Interim Mortgages.

As of December 31, 2007, our mortgage portfolio consisted of 338 residential mortgages (including loans in a securitization), 4 contracts for deed, 1 rental property, 11vacant properties and 402 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $57,486,000. The average loan in the portfolio had a current annual yield of 12.48%, an investment-to-value ratio of 66.50%, an average UPB of $76,000, and a remaining term of 243months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.

As of December 31, 2006, our mortgage portfolio consisted of 362 residential mortgages (including loans in a securitization), four contracts for deed, one rental property, 34 vacant properties and 1,090 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $88,307,000. The average loan in the portfolio had a current annual yield of 13.57%, an investment-to-value ratio of 59.43%, an average UPB of $59,000, and a remaining term of 245 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.

As of December 31, 2005, our mortgage portfolio consisted of 417 residential mortgages, six contracts for deed (including loans in a securitization), two rental properties, 33 vacant properties and 1,013 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $80,753,000. The average loan in the portfolio had a current annual yield of 12.98%, an investment-to-value ratio of 67.98%, an average UPB of $55,000, and a remaining term of 321 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.


MORTGAGE PORTFOLIO TABLE
 
   
at 12-31-2007
   
at 12-31-2006
   
at 12-31-2005
 
Residential mortgages owned outright (1)
   
59
     
53
     
30
 
Contracts for deed owned outright
   
4
     
4
     
6
 
Rental properties
   
1
     
1
     
2
 
Loans remaining in first securitization (2)
   
150
     
169
     
201
 
Loans remaining in second securitization (2)
   
129
     
140
     
186
 
Vacant properties
   
11
     
34
     
33
 
Interim mortgages
   
402
     
1,090
     
1,013
 
Unpaid principal balance
 
$
57,486,000
   
$
88,307,000
   
$
80,753,000
 
Annual yield
   
12.48
%
   
13.57
%
   
12.98
%
Investment-to-value ratio
   
66.50
%
   
59.43
%
   
67.98
%
Average Loan UPB
 
$
76,000
   
$
59,000
   
$
55,000
 

(1) The number of loans owned outright increased during 2006 primarily as a result of reclassifying certain REO and interim loans that were refinanced by us.
(2) The 2006 decrease is from Real Estate Owned (“REO”) selling and loans prepaying.

Line of Credit, Affiliate – Land Development Loans.

On June 20, 2006, we entered into a Second Amended and Restated Secured Line of Credit Promissory Note (the "Amendment") with United Development Funding ("UDF"), a Nevada limited partnership that is affiliated with our Advisor, UMTHGS.  The Amendment increases to $45 million an existing revolving line of credit facility ("Loan"). The Loan matures on December 31, 2009.  The purpose of the Loan is to finance UDF's loans to, and investments in, real estate development projects.

The Loan is secured by the pledge of all of UDF's land development loans and equity investments and is subordinated to certain UDF bank loans and line of credit.  Those UDF loans may be first lien loans or subordinate loans.

The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%.

23

 UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF. In addition, as an enhancement, in October 2006, UDF III entered into a limited guaranty effective as of September 1, 2006 for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of an amount up to $30 million with respect to that certain Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF I.  We anticipate the UDF III Guarantee will be released in 2008 as a result of UDF’s increased net worth.

The Loan is subordinate to UDF Senior Debt, which is defined as all indebtedness due and owing by UDF pursuant to (i) that certain loan guaranty to Colonial Bank in the amount of $8,750,000, (ii) that certain loan to OU Land Acquisition, L.P. in the principal amount of $25,000,000, (iii) a line of credit provided by Textron Financial Corporation in the amount of $30,000,000, and (iv) all other indebtedness of UDF to any national or state chartered banking association or other institutional lender that is approved by Lender in writing.

The lending facility to UDF represents the continuing evolution of the Company's investment policy away from its original investment objective of long term residential mortgages to a portfolio which consists primarily of the increase in the Loan to UDF, an affiliate of our Advisor, lot banking and model home loans.  The Company's Trustees believe that the interest rate environment, increasing default rates, which have resulted in lower yields from traditional residential mortgage investments and the recent broader deterioration of the sub-prime mortgage market, requires that we seek other investments that are capable of providing superior returns, credit and collateral for our shareholders.  Our Trustees were also influenced by the results of our existing loan arrangement with UDF.  From June 2003 through December 2007, UDF has funded approximately $326 million in first lien, subordinate loans and equity investments and received approximately $215 million in loan and equity repayments.

We anticipate the increasing concentration of our investments in the Loan, lot banking and model home loans and that residential mortgages and interim loans will continue to diminish as a significant component of our total investment portfolio.

On June 14, 2006, in connection with the above-described Amendment of our loan to UDF, we entered into a Subordination Agreement with Textron Financial Corporation ("Textron") pursuant to which we agreed to subordinate our existing loan to UDF to the all indebtedness owed to Textron by UDF, including the $45 million credit facility extended to UDF pursuant to the Second Amended and Restated Secured Line of Credit Promissory Note.

The Amendment represents the continuing shift in our investments away from our original investment strategy of investing in residential mortgages and contracts for deed. In late 2007, we began to reduce our investments in loans of 12 months or less in term, made to investors, including affiliates of our Advisor, for the purchase, renovation, and sale of single-family homes (we refer to those investments as "interim mortgages") We continue to increase our investment in our line of credit loan to UDF and lot loans. In addition, we intend to invest in model home loans.  Based upon the expected loan activity under our above-described amendment of the UDF Loan, we believe that our investments to be made under the Loan will represent approximately 37.5% of the Company's entire portfolio.

The Company monitors the line of credit for collectability on a continuing basis based on the affiliate’s payment history. No valuation allowance or charge to earnings was recorded for the years ended December 31, 2007, 2006 and 2005 based on the Company’s evaluation. Outstanding balances were approximately $25,083,000, $33,056,000 and $30,317,000 at year end 2007, 2006 and 2005, respectively.

Properties Pledged as Collateral.

At year end 2007, approximately 58% of the properties securing our interim loan Mortgage Investments were located in Texas, 22% in California, 6% in Tennessee, 3% in each of Missouri, and Georgia, 2% in each of Illinois, and Ohio, and 1% or less in 18 other states.

At year end 2006, approximately 59% of the properties securing our interim loan Mortgage Investments were located in Texas, 10% in Tennessee, 8% in California, 4% in Missouri, 3% in each of Colorado and Georgia, 2% in each of Illinois, Indiana and Ohio, and 1% or less in 17 other states.

At year end 2005, approximately 68% of the properties securing our Mortgage Investments were located in Texas, 10% in California, 3% each in Georgia, Missouri, North Carolina and Tennessee, 1% each in Colorado, Illinois, Indiana, Michigan, Ohio and South Carolina and Virginia, and less than 1% each in Alabama, Florida, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Oklahoma and Pennsylvania.

24

We expect to continue making loans in most of the 27 states in which our borrowers, principally UMTHLC and UDF are licensed to do business.

Each of the properties serving as security for our Mortgage Investments is covered by a mortgagee’s title insurance policy and hazard insurance in an amount sufficient to cover the outstanding balance. Some of our mortgage investments are covered by full or limited recourse agreements with note sellers. In making the decision to invest in loans secured by property located in other states, we consider the availability of non-judicial foreclosure, as is available in Texas, to be the primary legal consideration. While Texas does not provide a statutory right of redemption and permits deficiency judgments, we do not rely upon those provisions in the enforcement of our liens and therefore we believe that the risks in mortgage investments in most other states will not be significantly different than those we face in Texas.

Loan Servicing.

We neither buy nor sell servicing rights to the loans we purchase, nor do we retain servicing rights. Residential mortgages and contracts for deed are serviced by PSC, an affiliate of our Advisor. We pay monthly a loan servicing fees to Prospect Service Corp., (“PSC”), which is owned by UMTH, of 1/12th of 1/2 of 1% of the UPB of each loan. In addition, we paid a monthly loan servicing fee of 0.8% of the UPB to REOPC, an affiliate of our Advisor, for maintaining our foreclosed properties. This arrangement with respect to interim loans ended in the last quarter 2006; however, PSC continues to service our long term residential loans.  Interim loans are serviced by us or by the entity to which we loaned funds, the majority of which are affiliates of our Advisor, including UMTHLC and RAFC.  We do not pay monthly servicing fees other than as listed above.


Comparative Income and Expenses.

During the years ended December 31, 2007, 2006 and 2005, revenues were approximately $16,833,000, $17,211,000, and $15,014,000 respectively, representing increase (decrease) over the prior of (2%), 15% and 8%, respectively. The 2007 decrease was primarily attributable to the decline in our outstanding interim mortgage investments.  This decline resulted from UMTHLC obtaining third party financing from another lender and reduced leverage on our entire portfolio with the expiration of the Company’s existing credit facility.  See Liquidity and Capital Resources section for further discussion.  The increases in 2006 and 2005 were primarily due to use of leverage, which allowed us to grow our interim loan portfolio by approximately 13% and 12% and our UDF investment by 9% and 6%, respectively.  Revenue derived from affiliates grew 6%, 17% and 23% and revenues from non-affiliates decreased 30%, increased 7% and decreased 21% between comparable years.

Total expenses during 2007, 2006, and 2005 were approximately $6,025,000, $7,103,000, and $5,768,000, respectively, representing an increase (decrease) over the prior year of (15%), 23% and 30%, respectively.  The decrease in 2007 and the increase in 2006 were primarily attributable to the non-recurring merger expenses recognized in 2006 of approximately $1,040,000.  Listed below are the significant expense accounts and explanations of change:

        MERGER EXPENSES: One time charge during 2006.

Upon termination of the merger agreement between UMT and UMTH, we wrote-off capitalized merger costs of approximately $1,040,000.

 
PROVISION FOR LOAN LOSSES: decreased 13% in 2007, decreased 31% and increased 34% in 2006 and 2005, respectively.

The increase or decrease in provisions for loan losses between years depending on how many loans are foreclosed since we create the allowance for loan losses on default rates and foreclosure trends.  The tables below illustrate loss rates as a percentage of nonrecourse portfolio for 1) interim loans and 2) residential mortgages and contracts for deed:

Interim Mortgages:
Year
Unpaid principal balance at year ends of unaffiliated loans
Loan losses charged-off
Loss rate as a percentage of unaffiliated loans
2007
$12,251,000
$1,039,000
8.48%
2006
$17,826,000
$690,000
3.87%
2005
$24,544,000
$937,000
3.82%

Residential Mortgages and Contracts for Deed:
Year
Unpaid principal balance including securitized loans
Loan losses charged-off
Loss rate as a percentage of loans
2007
$10,808,000
$390,000
3.61%
2006
$15,678,000
$1,774,000
11.32%
2005
$19,346,000
$1,787,000
9.24%

25

Loan loss reserves are established when a trend becomes clear that indicates the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. During 2007 we calculated loan loss reserve at a rate of 47.5% of the unpaid principal balance of foreclosed residential mortgages, contracts for deed and interim loans. We projected the default rate for residential mortgages and contracts for deed at 10.35% of the remaining outstanding unpaid principal balance of the loans we own outright and the loans in the securitized pools and reserved 47.5% of that figure. We projected the default rate for interim mortgages at 4.5% of the remaining outstanding unpaid principal balance of unaffiliated loans and reserved 47.5% of that figure.

 
INTEREST EXPENSE:  decreased 17% in 2007, increased 248% and 163% in 2006 and 2005, respectively.

We use our credit facility to provide additional funds for investment. The use of our credit facility depends on the number of suitable investments available at any given time and the amount of cash we have on hand. Interest expense fluctuates based on 1) how heavily we rely on our credit facility and 2) the increase or decrease in the interest rate we pay under the credit facility. Interest expense was approximately $1,934,000 $1,647,000, and $473,000, respectively, in 2007, 2006 and 2005.  See Liquidity and Capital Resources section for further discussion.

LOAN SERVICING FEES: decreased 75%, 15% and 59% in 2007, 2006, and 2005, respectively

Loan servicing fees paid to PSC and REOPC for servicing some of our Mortgage Investments decreased as a result of the two Bayview Securitizations. The amount we had invested in residential mortgages and contracts for deed decreased 1%, 6% and 67% in 2007, 2006 and 2005, respectively.  Further decreases in the loan servicing fee are expected as the remaining loans in the portfolio prepay and as principal amortizes. Loan servicing fees were approximately $ 10,000, $38,000 and $45,000 in 2007, 2006 and 2005, respectively.

 
TRUST ADMINISTRATION FEES:  increased 3% in 2007 and decreased 5% and 6% in 2006 and 2005, respectively.

The trust administration fee was paid to our Advisor. We engaged a new Advisor in August 2006 when UMT Advisors, Inc. (“UMTA”) was replaced by UMTHGS. The current monthly fee is calculated as 1/12th of 1% of our average invested assets. The trust administration fee increases and decreases as our invested assets increase or decrease as we draw on or pay down the credit facility that we use to acquire mortgage investments. As consideration for granting the Advisory Agreement to UMTHGS, the Advisor agreed to (i) pay a $500,000 fee to us and (ii) assume responsibility for payment of $377,300 owed us by our former Advisor.  Monthly payments of (i) and (ii) above began in August 2006 and will be made in twelve equal installments.  The $500,000 fee was netted against the trust administration fee and paid in full. Net trust administration fees paid in 2007, 2006 and 2005 were approximately $872,000, $843,000 and $887,000, respectively.

 
GENERAL AND ADMINISTRATIVE EXPENSES: increased 1%, 52% and 55% in 2007, 2006 and 2005, respectively.

The major categories of general and administrative expenses include transfer agent fees, legal fees, printing and reproduction costs, accounting and audit fees, recording fees, trustee fees and insurance. 2007 expenses were consistent with those of 2006.  The increase in 2006 expense was primarily due to legal fees relating to merger and general corporate activities. In 2005 the increase was related to increased communications with shareholders and Bayview securitization fees and costs for the resulting amortization. General and administrative expenses were approximately $955,000, $943,000 and $621,000, respectively, in 2007, 2006 and 2005.

    Operating expense as a percentage of income, net of interest expense, merger expense and provision for loan losses was 10.91%, 10.60% and 10.34%, for 2007, 2006 and 2005, respectively. Operating expense as a percentage of average invested assets was 1.62%, 1.55% and 1.36%, for the years, respectively.

    Net income was approximately $10,808,000, $10,108,000 and $9,246,000 for 2007, 2006 and 2005, respectively, representing an increase of 7%, 9%, a decrease of 2%, respectively. The increase in 2007 was primarily attributable to the lack of non-recurring merger expenses that were recognized in 2006.  The improvement in 2006, despite the one time charge of merger costs, was attributable to the decrease in provision for loan losses, use of leverage to increase our investment in interim loans, less uninvested cash and higher portfolio yield. Earnings per share in 2007, 2006 and 2005 were $1.59, $1.45 and $1.32, for the respective years. Use of leverage was approximately $22.0 million in 2007, compared to $18.9 million in 2006 and $7.2 million in 2005, positively impacting earnings. Mortgage Investment yields of approximately 12.48%, 13.63% and 12.98% in 2007, 2006 and 2005, respectively, further positively impacted earnings. Average daily cash balances of $1,145,000 in 2007, compared to $1,369,000 in 2006 and $2,996,000 in 2005, again positively impacted earnings in successive years.  In 2005 earnings were negatively impacted by an increase in loan losses coupled with more modest use of leverage, higher cash balances and more modest yields.

26

Foreclosed Properties.
Affiliated Foreclosed Properties. We do not reclassify foreclosed loans that have been pledged to us as collateral (an “underlying loan”) for recourse loans we have made to affiliates of our Advisor, because our affiliates are obligated to perform under the term of those recourse loans with us (“affiliate loans”). If the borrower on an underlying loan defaults, the affiliate has the option to accrue interest payable to us while they bring the underlying loan current in its payments. We, in turn, accrue an interest receivable on the recourse loan. When the underlying loan becomes a paying loan again, the affiliate resumes paying us interest on the recourse loan. If the underlying loan is foreclosed and the real estate sells, our affiliate pays us all accrued interest from the proceeds from the sale of the property. Any deficiency is reclassified to Recourse Obligations, affiliates.

Unaffiliated Foreclosed Properties. We began 2007, 2006 and 2005 with 15, 34 and 24 foreclosed residential mortgage and contracts for deed, respectively, and foreclosed an additional 15, 46 and 59 loans during the respective years.  We sold 18, 65 and 49, foreclosed properties in 2007, 2006 and 2005, respectively, leaving 12, 15, and 34 foreclosed properties at the end of each of the three years, respectively. Non-affiliate foreclosed properties as a percentage of total unaffiliated residential mortgages and contracts for deed at year end were 3.64%, 5.61% and 6.67%, respectively.

We began 2007, 2006 and 2005 with 19, 32 and 23 foreclosed interim loans, respectively, and foreclosed an additional 4, 3, 23 properties during the respective years. We sold 17, 16 and 14 foreclosed properties, during 2007, 2006 and 2005, respectively, leaving 6, 19, and 32 foreclosed interim loans at the respective year ends. Unaffiliated foreclosed properties as a percentage of total unaffiliated interim loans at year end were 3.67%, 8.07% and 9.89%, respectively.

The following tables detail major categories of foreclosed loans for each of the last three fiscal years:

RESIDENTIAL MORTGAGES & CFDs
2007
2006
2005
Number of loans defaulted at beginning of year
15
34
24
Aggregate gross value
$666,000
$1,494,000
$868,000
       
Additional defaults during year
15
46
59
Aggregate gross value
$668,000
$2,125,000
$2,830,000
       
Defaulted properties disposed of during year
18
65
49
Aggregate gross value
$812,000
$2,953,000
$2,204,000
       
Number of loans defaulted at end of year
12
15
34
Aggregate gross value
$522,000
$666,000
$1,494,000
       
 


INTERIM LOANS
2007
2006
2005
Number of loans defaulted at beginning of year
19
32
23
Aggregate gross value
$1,438,000
$2,427,000
$2,026,000
       
Additional defaults during year
4
3
23
Aggregate gross value
$360,000
$463,000
$1,659,000
       
Defaulted properties disposed of during year
17
16
14
Aggregate gross value
$1,352,000
$1,450,000
$1,258,000
       
Number of loans defaulted at end of year
6
19
32
Aggregate gross value
$446,000
$1,438,000
$2,427,000


27

Changes in Our Mortgage Portfolio.

 The Company no longer purchases interim loans that are secured by modular and manufactured homes or construction loans or residential mortgages or contracts for deed, and we are reducing our investments in interim loans secured by conventionally built homes.  Such balances will decrease over time as the existing portfolios liquidate.  We plan to continue to invest in land development loans, finished lot loans, model home loans and, to a lesser percentage,  interim loans secured by conventionally built houses because, 1) land development loans and finished lot loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; 2) interim loans, while offering  full recourse from our borrowers and attractive yields are dependent on sub-prime mortgage products to facilitate the sale of the properties securing our loans; and, 3) model home loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. In addition, blended yields for land development loans and finished lot loans have produced higher returns than those of residential mortgages and contracts for deed. Model home loans are expected to produce higher yields commensurate with land development loans, finished lot loans and interim loans. As we phase out of interim loans secured by modular and manufactured homes and construction loans and reduce out investments in interim loans secured by conventionally built homes, we will increase the percentage of our portfolio invested in land development loans, finished lot loans, and model home loans, until market conditions indicate the need for an adjustment of the portfolio mix.

The table below summarizes our mortgage portfolio by asset type as of December 31, 2007, 2006, and 2005:
Category
2007
2006
2005
Interim loans secured by conventionally built homes (1)
$21,424,000
$42,396,000
$29,459,000
Land development loans (2)
23,097,000
33,056,000
30,317,000
Interim loans secured by modular and manufactured homes
20,636,000
23,844,000
21,124,000
Construction loans
13,819,000
16,469,000
22,344,000
Residential mortgages and contracts for deed
$  5,429,000
$  5,474,000
$  5,816,000

(1)
Interim loans are primarily comprised of advances made to UMTHLC to fund their loan originations.  Through October, 2007, the Company was UMTHLC’s primary source of capital.  The increase in outstanding loans between 2006 and 2005 was directly attributable to their underlying loan originations and related activity.  Effective October, 2007, UMTHLC obtained a line of credit with a third party lender, proceeds from which were used to pay down approximately $18,920,000 of outstanding borrowings from the Company.  The remaining decrease between years represents the net payment activity on the outstanding loan portfolio as a whole.  Management anticipates these types of loans will become a smaller percentage of our mortgage portfolio as originations funded continue to decline and existing loans pay off.

(2)
Land development loans represent one of the primary investment focuses of management going forward as they provide the Company suitable collateral positions, well capitalized borrowers and attractive yields.  The December 2007 balance declined compared to December 2006 due to approximately $7,800,000 of pay-offs received within 45 days prior to year-end.

Deficiency Notes – Affiliate and Non-Affiliate

The Company has made loans in the normal course of business to affiliates and non-affiliates, the proceeds from which have been used to originate underlying loans that are pledged to us as security for such obligations.  When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.  If the borrower or the Company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.

As of December 31, 2007, the Company had one deficiency note with a non-affiliate in the amount of approximately $1,726,000.  The note bears interest at a rate of 14% per annum, requires monthly principal and interest payments, and has a one-year term.

As of December 31, 2007, UMTHLC issued to the Company executed a variable amount promissory note in the amount of $5,100,000 to evidence its deficiency obligations to the Company.  The initial principal amount of the note was approximately $1,848,000. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate.  The note bears interest at a rate of 10%, and requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance.  The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Company.  No affiliate deficiency notes existed as of December 31, 2006.

Dividends and Distributions to Shareholders.

Distributions per share of beneficial interest were $1.47, $1.40 and $1.50 per weighted share for 2007, 2006 and 2005, respectively, on earnings of $1.59, $1.45 and $1.32, respectively. In 2007 and 2006 we distributed approximately 92% and 97% of our net income. In 2005 we distributed in excess of earnings. The portion of the distributions that does not represent earnings represents return of capital.  (See the table below.) Distributions declared by our trustees during 2007, 2006 and 2005 were at an annualized rate of return of 7.4%, 7.0% and 7.5%, respectively. We are under no obligation to pay dividends at that same rate and from time to time the rate at which we pay dividends may be adjusted by our trustees.


 
28

 


 
For the Years Ended December 31,
 
2007
2006
2005
Monthly Dividend Rate
$0.12
$0.12
$0.13
Dividend paid per Share
$1.47
$1.40
$1.50
Amount paid in excess of earnings per Share
--
--
$0.18


LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED
DECEMBER 31, 2007, 2006 and 2005

We use funds made available from our DRP, funds made available under bank lines of credit and the proceeds from repayments of principal and interest on loans we have made to purchase mortgage investments. We do not have commitments to purchase any mortgage investments but rather purchase them, as funds are available. (Dollars are approximate.)

 
December 31,
 
2007
2006
2005
Shares issued
125,261
131,386
170,987
Dividend reinvestment proceeds
$2,505,000
$2,655,000
$3,381,000
Number of shares returned to treasury
(392,788)
(269,062)
(158,228)
Value of shares repurchased
($7,466,000)
($5,203,000)
($3,083,000)
Principal receipts:
     
Residential mortgages and contracts for deed
$673,000
$840,000
$2,557,000
Proceeds from securitizations
--
--
$7,262,000
Interim loans
$73,845,000
$74,306,000
$74,688,000
Net borrowings - credit line
($27,977,000)
$14,169,000
$1,778,000
Net borrowings - line of credit, affiliate
$7,973,000
($2,739,000)
($1,595,000)

As of December 31, 2007, we had issued an aggregate of 8,110,684 shares, with 1,460,768 shares repurchased and retired to treasury, leaving 6,649,916 shares outstanding.  Total capital raised from share issuances was approximately $162,014,000. Shares are offered under our dividend reinvestment plan. No commissions are paid with respect to shares sold under the plan.

As of December 31, 2006, we had issued an aggregate of 7,985,423 shares, with 1,067,980 shares repurchased and retired to treasury, leaving 6,917,443 shares outstanding.  Total capital raised from share issuances was approximately $159,508,000. Shares are offered under our dividend reinvestment plan. No commissions are paid with respect to shares sold under the plan.

As of December 31, 2005, we had issued an aggregate of 7,854,037 shares, with 798,918 shares repurchased and retired to treasury, leaving 7,055,119 shares outstanding.  Total capital raised from share issuances was approximately $156,881,000. Shares sold subsequent October, 2003 have been offered under our DRP. No commissions are paid with respect to shares sold under this plan.

During 2006 we increased our then existing line of credit with a bank from $17 million to $30 million. The line-of-credit payable was collateralized by certain interim loans. Interest on the outstanding balance accrued at the higher of the Prime Rate or the sum of the Federal Funds Rate plus 1/2% per annum. The rate of interest at December 31, 2006 and 2005 was 8.75% and 6.52%, respectively. The note expired November 8, 2007.  Management is currently negotiating with lenders to replace this credit facility on similar or more favorable terms than the expiring credit facility. Under the terms of its Declaration of Trust, the Company may borrow an amount up to 50% of our Net Assets (total assets less liabilities). The amount outstanding under the line of credit at December 31, 2007, 2006 and 2005 was approximately 0%, 25%, and 12% of Net Assets, respectively.  The outstanding balances on the credit facility were approximately $0, $27,977,000 and $13,808,000, respectively.

Since inception and as of December 31, 2007, we have invested an aggregate of approximately $522 million in interim loans from various sources, and UDF had drawn down an aggregate of $113 million from us on its line of credit. In 2007, we funded approximately $49 million in interim loans and $2 million in draws to UDF, compared to approximately $88 million in interim loans and $17 million funded to UDF in 2006 and approximately $81 million in interim loans and $20 million funded to UDF in 2005. The following table sets forth, as a percentage of total funds invested with all sources, the percentage of mortgage investments made to affiliates during 2007, 2006, and 2005.


 
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Affiliated Company
2007
2006
2005
CRG
--
--
--
RAFC
12%
11%
11%
REOPC
 
--
--
RMC
 
--
1%
UMTHLC
74%
56%
27%
UDF
7%
16%
35%
       
Total of affiliate mortgage investments
93%
83%
74%

The following table shows the dollar amounts of investments funded with affiliates of our Advisor in the three comparable years:

Affiliated Company
2007
2006
2005
CRG
$40,000
$152,000
--
RAFC
$6,316,000
$11,804,000
$14,145,000
REOPC
--
--
$218,000
RMC
--
--
$1,129,000
UMTHLC
$38,790,000
$59,023,000
$33,058,000
UDF
$3,936,000
$16,562,000
$43,966,000

In 2006 we took direct assignment, with full recourse, of all remaining CRG properties. The funds cited in the table above are expenses that we incurred against properties formerly owned by CRG, and are fully recoursed. In addition, we no longer fund draws directly to RAFC, but we do fund draws directly to vendors for projects that are active and serviced by RAFC.

Outstanding balances for interim loans purchased from affiliates of our Advisor and the UDF line of credit at December 31, 2007, 2006 and 2005 purchased from affiliates were:

Affiliated Company
2007
2006
2005
CRG
--
$1,249,000
$2,030,000
RAFC
$21,866,000
$23,844,000
$21,087,000
REOPC
--
--
$788,000
RMC
--
--
$192,000
SCMI
--
--
$150,000
UMTHLC
$19,776,000
$39,468,000
$24,164,000
UDF
$25,083,000
$33,056,000
$30,317,000

We no longer purchase residential mortgages or contracts for deed other than to carry back a note on the sale of a foreclosed property or to reclassify an interim loan.

Transactions With Related Parties.

We do not have employees. All administrative services and facilities are provided to us by our Advisor under the terms of an Advisory Agreement effective August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2008). The services of  our Advisor, UMTHGS,  include all day-to-day administrative services including managing our development of investment guidelines, overseeing servicing, negotiating purchases of loans and overseeing the acquisition or disposition of investments and managing our assets.  We pay UMTHGS a monthly trust administration fee, depending on our annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. UMTHGS paid us a consideration of $500,000 over a 12 month period, ending July 31, 2007, for entering into the Advisory Agreement with them. In addition they paid the $377,000 receivable from our former Advisor, UMTA over the same 12 month period.  The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which our net income for a year exceeds a 10% per annum non-compounded cumulative return on our adjusted contributions. No incentive fee was paid during 2007 or 2006. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2007 and 2006, the Advisor has not received options to purchase shares under this arrangement.

The Advisor and its affiliates are also entitled to reimbursement of costs of goods, materials and services obtained from unaffiliated third parties for our benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for us or to dispose of any of our investments. During 2007, the Company paid the Advisor $76,000 as reimbursement for costs associated with providing shareholder relations activities.  No such costs were reimbursed in 2006 and 2005.

30

The Advisory Agreement provides for the Advisor to pay all of our expenses and for us to reimburse the Advisor for any third-party expenses that should have been paid by us but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by us) and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from us.

The Advisor Agreement also provides for us to pay to the Advisor as debt placement fee.  We may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company.  UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit

Loan servicing fees are paid to PSC and were paid to REOPC. The fees are paid monthly and calculated as 1/12th of 1/2% and 0.8% of the outstanding principal balance of each loan or value of each property, respectively. In addition, each received real estate sales commissions on a scale of 1% to 4% of the sales price of a foreclosed property when the property is liquidated.

Below is a chart listing fees paid to PSC, REOPC and the Advisor in the past three years:

Type of Fee
Payee
2007
2006
2005
Trust management fee
UMTA
$529,000
$549,000
$877,000
Trust management fee, net
UMTHGS
$1,394,000
$294,000
--
Bayview Securitization fee
UMTA
--
--
$146,000
Investor relations service fee
UMTHGS
$76,000
--
--
Loan servicing fees
PSC
$10,000
$20,000
$45,000
Commissions
PSC
--
$6,400
--
Loan servicing fees
REO PC
--
$18,000
$24,000
Commissions
REO PC
--
$22,000
$75,000

Critical Accounting Policies.

We have prepared our financial statements in accordance with accounting principles generally accepted in the United States (GAAP). GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application of which requires management judgments and estimates. In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified the most critical accounting policies upon which our financial statements are based on as follows:

Interest Income Accrual.

The Company’s portfolio of residential mortgages, contracts for deed, interim loans and UDF line of credit produce monthly interest income however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.

The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.

 
A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are residential mortgages and contracts for deed.
 
 
A recourse loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults.  The majority of the Company’s recourse loans are interim loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to affiliates of its Advisor are recourse loans.
 

With respect to nonrecourse loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 60 days past due. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed.

31

With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off.

There is no assurance that the interest income accrued by the Company will be paid by a borrower.  When income is accrued with respect to a foreclosed loan, the Company sells the mortgage property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves. If the loan was a recourse loan, the Company’s borrower or a guarantor is obligated to pay the remaining balance with interest and the borrower or guarantor, as applicable, would deliver a deficiency note (“deficiency note”) to the Company for the remaining balance.

On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s affiliates under (1) loans made by the Company to such affiliates, (2) deficiency notes from such affiliates to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such affiliates to the Company, and reflected as recourse obligations in the accompanying balance sheets.

Loan Loss Reserves.

Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. During 2007 the company calculated its loan loss reserve at a rate of 47.5% of the unpaid principal balance of foreclosed residential mortgages, contracts for deed and interim loans. It projected its residential mortgages and contracts for deed default rate at 10.35% of the remaining outstanding unpaid principal balance of the loans it owns outright and the securitized loans and reserved 47.5% of that figure. It projected its interim mortgage default rate at 4.5% of the remaining outstanding unpaid principal balance of unaffiliated loans and reserved 47.5% of that figure.

The changes in the reserve for loan losses during the years ended December 31, 2007, 2006, and 2005 are summarized as follows:

 
2007
2006
2005
Balance, beginning of year
$1,012,000
$699,000
$368,000
Provision for loan losses
2,254,000
2,592,000
3,742,000
Reduction of values of foreclosed mortgages and loans charged off
(923,000)
(2,279,000)
(3,411,000)
Balance, end of year
$2,343,000
$1,012,000
$699,000

In December of 2006 we ceased funding interim loans for the construction of single family homes (“Construction Loans”).  Prior to December of 2006 we funded Construction Loans through an unaffiliated lender, Residential Development Corp. (“RDC”).  In 2007 we experienced increased delinquency on loans funded to RDC.  Throughout 2007, we implemented the following actions with regard to RDC:

·        Ceased funding loans to RDC
·        Began aggressive liquidation of properties securing non-performing loans
·        Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets
·        Began detailed examination of RDC lending practices and collateral positions
·        Re-evaluated market values of properties securing the RDC loans
·        Began review of all recourse afforded us by RDC and its principal owner

We intend to continue these efforts throughout 2008 and until the RDC portfolio is fully liquidated.  As of December 2007 we had reduced the RDC outstanding balance from a high of over $23 million to approximately $12 million.  Throughout 2007 reserved $1,347,000 for losses associated with the RDC portfolio.  We will further reserve in the event that aggressive liquidation of the portfolio would result in additional losses.


32

Changes In Accounting Policies And Procedures.

Subsequent to receipt of the 2004 Report of our Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, in 2005 we instituted certain new policies and procedures to address some of the material weaknesses cited in the report and described below.  We believe these changes are reasonably likely to materially affect our internal control over financial reporting. The report’s findings are in italics below and our responses follow each finding:

 
The Company lacked segregation of duties, primarily a result of the Advisor having one individual serving the Company which could result in misappropriation of assets.

 
Our new Advisor, UMTHGS, has an accounting staff which includes three CPAs, two of whom have significant public company experience. In addition, the Advisor has a loan servicing staff of 18 people, some of whom are responsible for UMT’s properties.

 
The Company did not have documented policies and procedures for aspects of financial reporting, which could result in a lack of internal control over financial reporting.

 
UMTHGS has documented policies and procedures.

 
The Company does not have personnel with significant accounting and financial reporting knowledge and experience, which could result in inappropriate accounting and financial reporting.

 
The primary person involved in UMT’s day-to-day accounting and operations is also the chief operating officer and chief account officer for UMTH and has extensive experience with public company accounting and financial reporting.

 
The Company did not properly analyze and record loan loss reserves, which could result in understated reserves throughout the year.

 
We have adjusted our reserve methodology to adequately reserve for loan losses.

Off Balance Sheet Transactions.

Beginning in 2004, we started using off balance sheet securitization of our mortgage investments as a means of providing funding. In these transactions, we receive the proceeds from third party investors for securities issued from our securitization vehicles which are collateralized by transferred mortgage investments from our portfolio.

In April 2004, but effective January 1, 2004, we transferred our residential mortgages and contracts for deed to a wholly-owned special purpose entity called UMT LT Trust (‘UMTLT’), a Maryland real estate investment trust.

On April 13, 2004, through UMTLT (‘Seller’) and another newly created, wholly-owned subsidiary, UMT Funding Trust, a Maryland real estate investment trust, as the 'Depositor', we completed a securitization of $12,593,587 principal amount of mortgage loans through the private issuance of $9,455,520 in 9.25% Class A Notes ('Notes'). The Notes, together with  $3,138,067 in Class B Certificates (the 'Certificates'), collectively referred to as the 'Securities' were issued by Wachovia Bank as Trustee pursuant to a Trust Agreement dated as of April 1, 2004 between the Bank and the Depositor. The Class A Notes were then sold by the Depositor to Bayview Financial Trading Group, L.P. ('Bayview'), pursuant to a Purchase Agreement dated as April 13, 2004 (the 'Note Purchase Agreement') between Bayview, the Depositor and us.  The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.

The Securities evidence the entire beneficial ownership interest in a Trust Fund created under the Trust Agreement, which consists of a pool of performing first lien residential mortgage loans (the 'Mortgage Loans') with an aggregate principal balance of $12,593,587 as of April 13, 2004. We transferred the Mortgage Loans to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of April 1, 2004. The Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller's breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans.  We have agreed to guarantee the obligations of the Seller under the Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Class B Certificates give the Depositor the right to receive all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The Class B certificates were retained by the Depositor.

Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of April 1, 2004 we, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to Bayview; and, pursuant to a Sub Servicing Agreement dated as of April 1, 2004 PSC agreed to act as sub-servicer of the Mortgage Loans.

The purpose for the securitization was to 1) increase the yield on the residential mortgages and 2) realize cash to invest in interim loans and UDF.

33

On January 28, 2005, UMTLT and UMT Funding Trust simultaneously entered into agreements described below for the securitization of $9,700,797 principal amount of our mortgage loans through the private issuance of $7,275,598 in 9.25% Notes.  The purpose for the securitization was to 1) increase the yield on the residential mortgages and 2) realize cash to invest in interim loans and UDF.  The Notes, together with $2,425,199 in Class B Certificates, collectively referred to as the “Securities” were issued by Wachovia Bank as Trustee pursuant to a Trust Agreement dated as of January 1, 2005 between the Bank and the Depositor. The Class A Notes were then sold by the Depositor to Bayview Financial, L.P. (“Investor”), pursuant to a Purchase Agreement dated as of January 26, 2005 (the “Note Purchase Agreement”) between the Investor, the Depositor and us. The Notes were sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.

The Securities evidence the entire beneficial ownership interest in a Trust Fund created under the Trust Agreement, which consists of a pool of Mortgage Loans with an aggregate principal balance of $9,700,797 as of January 1, 2005. We transferred the Mortgage Loans (excluding the servicing rights) to the Seller as a capital contribution and the Seller sold the Mortgage Loans to the Depositor pursuant to a Mortgage Loan Sale Agreement dated as of January 1, 2005. The Mortgage Loan Sale Agreement includes a right on the part of the Depositor to require the Seller to repurchase certain Mortgage Loans upon the Seller’s breach of a representation or warranty with respect to certain characteristics of the Mortgage Loans. We agreed to guarantee the obligations of the Seller under the Mortgage Loan Sale Agreement, including the obligation of the Seller to repurchase Mortgage Loans as to which the Seller has breached a representation or warranty. The Class B Certificates give the Depositor the right to receipt all remaining monthly interest after all payments due on the Class A Notes and all principal and interest on the Mortgage Loans after retirement of the Class A Notes. The Class B Certificates will be retained by the Depositor.

Simultaneously with the Depositor’s conveyance of the Mortgage Loans to the Trustee and pursuant to the terms of a Servicing Rights Transfer Agreement dated as of January 1, 2005 we, as owner of the servicing rights to the Mortgage Loans, transferred the servicing rights to the Mortgage Loans to the Investor and, pursuant to a Sub Servicing Agreement dated as of January 1, 2005 Prospect Service Corp agreed with the Investor to act as sub-servicer of the Mortgage Loans.


DISCLOSURE OF CONTRACTUAL OBLIGATIONS

As of December 31, 2007, the Company does not have any contractual obligations to make future payments under any debt obligations or long-term lease agreements.

DIVIDENDS DECLARED AND DISTRIBUTIONS MADE

During the year ended December 31, 2007, we declared dividends and made distributions on a monthly basis as shown below. We maintained a 7.4% annualized dividend rate during the year and distributed approximately 92% of our net income.  In 2005 the Company distributed dividends in excess of earnings.  We are under no obligation to make distributions at any particular rate, although we are obligated to distribute 90% of our REIT Taxable Income in order to continue to qualify as a REIT for federal income tax purposes. The amount distributed in excess of earnings per share represents return of capital.

 
For the Years Ended December 31,
 
2007
2006
2005
Monthly Dividend Rate
$0.12
$0.12
$0.13
Dividend paid per Share
$1.47
$1.40
$1.50
Amount paid in excess of earnings per Share
--
--
$0.18


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We may be exposed to interest rate changes primarily as a result of annual renewals of our bank line of credit. During the negotiations for our $30 million credit facility, a floating interest rate was negotiated. A higher interest rate may have a negative impact on earnings, but we do not anticipate a significant increase during 2008.

As of December 31, 2007, 2006 and 2005, the Company had no long-term borrowings.




 
 
34

 
 



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


UNITED MORTGAGE TRUST

INDEX TO FINANCIAL STATEMENTS


 
Page No.
Report of Independent Registered Public Accounting Firm
36
 
     
Consolidated Balance Sheets as of December 31, 2007 and 2006
37
 
     
Consolidated Statements of Income for the for the Years Ended December 31, 2007, 2006 and 2005
38
 
     
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
39
 
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
40
 
     
Notes to Consolidated Financial Statements
41
 


 
 
35

 
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
United Mortgage Trust


We have audited the accompanying consolidated balance sheets of United Mortgage Trust as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the three years ended December 31, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Mortgage Trust as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the three years ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/ Whitley Penn LLP

Dallas, Texas
March 28, 2008



 
 
36

 
 


UNITED MORTGAGE TRUST CONSOLIDATED BALANCE SHEETS

   
December 31,
   
2007
   
2006
   
Assets
             
Cash and cash equivalents
 
$
1,597,883
   
$
3,661,724
   
                   
  Mortgage investments:
                 
  Investment in trust receivable
   
5,428,453
     
5,473,508
   
  Interim mortgages, affiliates
   
41,641,334
     
64,883,388
   
  Interim mortgages
   
12,251,098
     
17,825,519
   
  Allowance for loan losses
   
(2,343,163)
 
   
(1,011,975)
 
 
Total mortgage investments
   
56,977,722
     
87,170,440
   
                   
Line of credit receivable, affiliate
   
25,083,216
     
33,056,189
   
Accrued interest receivable
   
715,806
     
390,315
   
Accrued interest receivable, affiliate
   
4,822,377
     
3,331,204
   
Receivable from affiliate
   
-
     
230,861
   
Recourse obligations, affiliates
   
16,035,790
     
11,975,234
   
Residential mortgages and contracts for deed foreclosed
   
274,064
     
359,517
   
Interim mortgages foreclosed
   
234,155
     
776,643
   
Deficiency note
   
1,725,754
     
-
   
Deficiency note, affiliate
   
1,848,355
     
-
   
Equipment, less accumulated depreciation of $25,856 and $22,120, respectively
   
-
     
3,737
   
Other assets
   
364,574
     
757,382
   
Total assets
 
$
109,679,696
   
$
141,713,246
   
                   
Liabilities and Shareholders’ Equity
                 
Liabilities:
                 
Line of credit payable
 
$
-
   
$
27,976,642
   
Dividend payable
   
827,670
     
806,000
   
Accounts payable and accrued liabilities
   
50,815
     
4,718
   
Total liabilities
   
878,485
     
28,787,360
   
                   
Commitments and contingencies
   
--
     
--
   
                   
Shareholders' equity:
                 
Shares of beneficial interest; $.01 par value; 100,000,000 shares authorized; 8,110,684 and 7,985,423 shares issued, respectively; and 6,649,916 and 6,917,443 outstanding, respectively
   
81,107
     
79,854
   
Additional paid-in capital
   
143,287,664
     
140,783,690
   
Advisor's reimbursement
   
397,588
     
397,588
   
Cumulative distributions in excess of earnings
   
(6,530,813)
 
   
(7,366,618)
 
 
     
137,235,546
     
133,894,514
   
Less treasury stock of 1,460,768 and 1,067,980 shares, respectively, at cost
   
(28,434,335)
 
   
(20,968,628)
 
 
Total shareholders' equity
   
108,801,211
     
112,925,886
   
Total liabilities and shareholders' equity
 
$
109,679,696
   
$
141,713,246
   

See accompanying notes to consolidated financial statements.


 
 
37

 
 




UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF INCOME

   
Year Ended December 31,
 
   
2007
   
2006
   
2005
 
Revenues:
                 
Interest income derived from affiliates
 
$
14,001,947
   
$
13,180,260
   
$
11,242,004
 
Interest income
   
2,830,897
     
4,030,871
     
3,771,731
 
     
16,832,844
     
17,211,131
     
15,013,735
 
Expenses:
                       
Trust administration fee
   
871,913
     
842,825
     
887,464
 
Loan servicing fee
   
9,604
     
38,220
     
45,020
 
General and administrative
   
955,450
     
943,462
     
620,618
 
Provision for loan losses
   
2,253,749
     
2,591,579
     
3,741,579
 
Interest expense
   
1,934,211
     
1,647,219
     
472,820
 
Merger costs
   
-
     
1,039,606
     
--
 
     
6,024,927
     
7,102,911
     
5,767,501
 
                         
Net income
 
$
10,807,917
   
$
10,108,220
   
$
9,246,234
 
                         
Net income per share of beneficial interest
 
$
1.59
   
$
1.45
   
$
1.32
 
                         
Weighted average shares outstanding
   
6,805,072
     
6,993,980
     
7,026,311
 
                         
Distributions per weighted share outstanding
 
$
1.47
   
$
1.40
   
$
1.50
 

See accompanying notes to consolidated financial statements.




 
 
38

 
 


UNITED MORTGAGE TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2007, 2006 and 2005


         
Cumulative Distributions
in Excess of
Earnings
     
 
Shares of
Beneficial Interest
Additional
Paid-in
Capital
       
 
Advisor's
Treasury
Shares
Treasury
Stock
 
 
Shares
Par Value
Reimburse-ment
Total
Balance at December 31, 2004
7,683,050
$76,831
$134,750,434
$397,588
$(6,386,352)
640,690
$(12,683,184)
$116,155,317
                 
Proceeds from shares issued
170,987
1,710
3,379,661
    -
    -
    -
    -
3,381,371
Purchase of treasury stock
    -
    -
    -
    -
    -
158,228
 (3,082,736)
(3,082,736)
Dividends ($1.50 per share)
    -
    -
    -
    -
(10,540,559)
    -
    -
(10,540,559)
Net income
    -
    -
    -
    -
  9,246,234
    -
    -
9,246,234
Balance at December 31, 2005
7,854,037
78,541
138,130,095
397,588
(7,680,677)
798,918
(15,765,920)
115,159,627
                 
Proceeds from shares issued
131,386
1,313
2,653,595
    -
    -
    -
    -
2,654,908
Purchase of treasury stock
    -
    -
    -
    -
      -
269,062
(5,202,708)
(5,202,708)
Dividends ($1.40 per share)
    -
    -
    -
    -
(9,794,161)
    -
    -
(9,794,161)
Net income
    -
    -
    -
    -
10,108,220
    -
    -
 10,108,220
Balance at December 31, 2006
7,985,423
 79,854
140,783,690
397,588
(7,366,618)
1,067,980
(20,968,628)
112,925,886
                 
Proceeds from shares issued
125,261
1,253
2,503,974
    -
    -
    -
    -
2,505,227
 
Purchase of treasury stock
    -
    -
    -
    -
    -
392,788
(7,465,707)
(7,465,707)
Dividends ($1.47 per share)
    -
    -
    -
    -
(9,972,112)
    -
    -
(9,972,112)
 
Net income
    -
    -
    -
    -
10,807,917
    -
    -
10,807,917
Balance at December 31, 2007
8,110,684
$81,107
$143,287,664
$397,588
$(6,530,813)
1,460,768
$(28,434,335)
$108,801,211
                   



See accompanying notes to consolidated financial statements.




 
 
39

 
 



UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS


   
Year Ended December 31,
 
   
2007
   
2006
 
2005
 
Operating Activities
               
Net income
 
$
10,807,917
   
$
10,108,220
 
$
9,246,234
 
Adjustments to reconcile net income
                     
  to net cash provided by operating activities:
                     
Provision for loan losses
   
2,253,749
     
2,591,579
   
3,741,579
 
Depreciation and amortization
   
264,975
     
185,772
   
85,696
 
Net amortization of discount on mortgage notes
                     
and loan acquisition costs
   
-
     
57,532
   
14,307
 
Changes in assets and liabilities:
                     
Accrued interest receivable
   
(1,816,663
)
   
(2,175,096
)
 
2,460,078
 
Other assets
   
131,570
     
1,063,489
   
(893,237
)
Accounts payable and accrued liabilities
   
67,767
     
(125,865
)
 
39,485
 
Net cash provided by operating activities
   
11,709,315
     
11,705,631
   
14,694,142
 
                       
Investing Activities
                     
Investment in first lien mortgage notes
   
-
     
(1,720,972
)
 
(3,608,766
)
Principal receipts on first lien mortgage notes
   
672,995
     
839,734
   
2,557,088
 
Proceeds from the sale of mortgage loans, securitization
   
-
     
-
   
7,262,009
 
Investment in interim mortgages
   
(48,602,610
)
   
(88,408,104
)
 
(81,202,207
)
Principal receipts on interim mortgages
   
73,844,977
     
74,306,328
   
74,687,831
 
Proceeds from (Investments in) recourse obligations, affiliates
   
(4,060,556
)
   
2,156,414
   
-
 
Line-of-credit receivable, affiliate
   
7,972,973
     
(2,739,152
)
 
(1,595,398
)
Receivable from affiliate
   
230,861
     
146,824
   
1,613
 
Investments in residential mortgages and contracts for deed
   
(922,561
)
   
-
   
-
 
Net cash provided by (used in) investing activities
   
29,136,079
     
(15,418,928
)
 
(1,897,830
)
                       
Financing Activities
                     
Proceeds from issuance of shares of beneficial interest
   
2,505,227
     
2,654,908