2.	Financial Instruments:

Fair Value of Financial Instruments

The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (ASC 820), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

Level 1 Inputs-

Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;

Level 2 Inputs-

Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 Inputs-

Unobservable inputs for the asset or liability, including significant assumptions of the Company and other market participants.

The Company determines fair values for the following assets and liabilities:

Mortgage-backed securities (MBS), at fair value-

Agency-backed MBS - The Company's agency-backed MBS, the principal and interest payments on which are guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), are generally classified within Level 2 of the fair value hierarchy as they are valued after considering quoted market prices provided by a broker or dealer, or alternative pricing sources with reasonable levels of price transparency. The Company reviews broker or pricing service quotes to determine whether the quotes are relevant, for example, whether an active market exists to provide price transparency or whether the quote is an indicative price or a binding offer. The independent brokers and dealers providing market prices are those who make markets in these financial instruments.

Private-label MBS - The Company classifies private-label MBS within Level 3 of the fair value hierarchy because they trade infrequently and, therefore, have little or no price transparency. The Company utilizes present value techniques based on estimated cash flows of the instrument taking into consideration various assumptions derived by management and other assumptions used by other market participants. These assumptions are corroborated by evidence such as historical data, risk characteristics, transactions in similar instruments, and completed or pending transactions, when available. The significant inputs in the Company's valuation process include default rate, loss severity, prepayment rate and discount rate. In general, significant increases (decreases) in default rate, loss severity or discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. However, significant increases (decreases) in prepayment rate may result in a significantly higher (lower) fair value measurement. It is difficult to generalize the interrelationships between these significant inputs as the actual results could differ considerably on an individual security basis. For example, an increase in the default rate may not increase the loss severity rate if actual losses are lower than the average. Also, changes in discount rates may be greatly influenced by market expectation at any given point based upon many variables not directly related to the MBS market. Therefore, each significant input is closely analyzed to ascertain the reasonableness for the Company's valuation purposes.

Establishing fair value is inherently subjective given the volatile and sometimes illiquid markets for these private-label MBS and requires management to make a number of assumptions, including assumptions about the future of interest rates, prepayment rates, discount rates, credit loss rates, and the timing of cash flows and credit losses. The assumptions the Company applies are specific to each security. Although the Company relies on the internal calculations to compute the fair value of these private-label MBS, the Company requests and considers indications of value (mark) from third-party dealers to assist in the valuation process.

Other investments-The Company's other investments consist of investments in equity securities, investment funds, interest-only MBS, and other MBS-related securities. Interest-only MBS and residual interest in a securitization of which the Company is not considered the primary beneficiary are classified within Level 3 of the fair value hierarchy.

Derivative instruments-In the normal course of the Company's operations, the Company is a party to various financial instruments that are accounted for as derivatives in accordance with ASC 815, Derivatives and Hedging (ASC 815). The derivative instruments that trade in active markets or exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Other derivative instruments are generally classified within Level 2 of the fair value hierarchy because they are valued using broker or dealer quotations, which are model-based calculations based on market-based inputs, including, but not limited to, contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs.

Other-Cash and cash equivalents, interest receivable, deposits, repurchase agreements, accounts payable, accrued expenses and other liabilities are reflected in the consolidated balance sheets at their amortized cost, which approximates fair value because of the short term nature of these instruments.

The estimated fair values of the Company's financial instruments are as follows:

	March 31, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	25,388	$	25,388	$	20,018	$	20,018
Interest receivable		2,535		2,535		2,366		2,366
Sold securities receivable		21,609		21,609		41,321		41,321
Non-interest bearing receivables		15		15		11		11
MBS
Agency-backed MBS		774,959		774,959		637,011		637,011
Private-label MBS
Senior securities		8,647		8,647		9,311		9,311
Re-REMIC securities		166,892		166,892		170,116		170,116
Derivative assets		299		299		504		504
Other investments		2,882		2,882		2,946		2,946
Deposits		69,337		69,337		71,079		71,079

Financial liabilities
Repurchase agreements		668,618		668,618		647,977		647,977
Purchased securities payable		77,431		77,431		15,820		15,820
Interest payable		342		342		504		504
Long-term debt		15,000		15,000		15,000		15,000
Derivative liabilities		63,592		63,592		63,024		63,024

Fair Value Hierarchy

The following tables set forth financial instruments accounted for under ASC 820 by level within the fair value hierarchy as of March 31, 2012 and December 31, 2011. As required by ASC 820, assets and liabilities that are measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Financial Instruments Measured at Fair Value on a Recurring Basis

	March 31, 2012
	Total			Level 1			Level 2		Level 3
MBS, at fair value
Trading
Agency-backed MBS	$	774,843		$	-		$	774,843	$	-
Available-for-sale
Agency-backed MBS		116			-			116		-
Private-label MBS
Senior securities		8,647			-			-		8,647
Re-REMIC securities		166,892			-			-		166,892
Total available-for-sale		175,655			-			116		175,539
Total MBS		950,498			-			774,959		175,539
Derivative assets, at fair value		299			-			299		-
Derivative liabilities, at fair value		(63,592	)		(63,592	)		-		-
Interest-only MBS, at fair value		1,011			-			-		1,011
Total	$	888,216		$	(63,592	)	$	775,258	$	176,550

	December 31, 2011
	Total			Level 1			Level 2		Level 3
MBS, at fair value
Trading
Agency-backed MBS	$	636,872		$	-		$	636,872	$	-
Available-for-sale
Agency-backed MBS		139			-			139		-
Private-label MBS
Senior securities		9,311			-			-		9,311
Re-REMIC securities		170,116			-			-		170,116
Total available-for-sale		179,566			-			139		179,427
Total MBS		816,438			-			637,011		179,427
Derivative assets, at fair value		504			-			504		-
Derivative liabilities, at fair value		(63,024	)		(63,024	)		-		-
Interest-only MBS, at fair value		1,060			-			-		1,060
Total	$	754,978		$	(63,024	)	$	637,515	$	180,487

The total financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $176,550, or 16.46%, and $180,487, or 18.90%, of the Company's total assets as of March 31, 2012 and December 31, 2011, respectively.

There were no significant transfers of securities in or out of Levels 1, 2 or 3 during the quarter ended March 31, 2012 or the year ended December 31, 2011.

Level 3 Financial Assets and Liabilities

Financial Instruments Measured at Fair Value on a Recurring Basis

As of March 31, 2012, the fair value of the Company's Level 3, available-for-sale, private-label MBS was $176,550. These securities are primarily senior and re-REMIC tranches in securitization trusts issued between 2005 and 2010. The senior securities represent interests in securitizations that have the first right to cash flows and absorb losses last. The re-REMIC securities represent interests in re-securitizations of senior MBS and pro-rata mezzanine securities. For re-REMIC securities, the cash flows from, and any credit losses absorbed by, the underlying MBS are allocated among the re-REMIC securities issued in the re-securitization transactions based on the re-REMIC structure. For example, prime and non-prime residential senior securities have been resecuritized to create a two-tranche structure with a re-REMIC senior security and a re-REMIC subordinated security. In these re-REMIC securities, all principal payments from the underlying securities are directed to the re-REMIC senior security until the face value is fully paid off. Thereafter, all principal payments are directed to the re-REMIC subordinated security. For pro-rata mezzanine securities, principal payments from the underlying MBS are typically allocated concurrently and proportionally to the mezzanine securities along with senior securities. The re-REMIC subordinated and mezzanine securities absorb credit losses, if any, first; however, these credit losses occur only when credit losses exceed the credit protection provided to the underlying securities. Senior, re-REMIC and mezzanine securities receive interest while any face value is outstanding.

As of March 31, 2012, the Company's senior securities and re-REMIC securities were collateralized by residential Prime and Alt-A mortgage loans and had a weighted-average original loan-to-value of 71%, weighted-average original FICO score of 729, weighted-average three-month prepayment rate of 15% and weighted-average three-month loss severities of 50%. These underlying collateral loans had a weighted-average coupon rate of 5.28%. These securities are currently rated below investment grade. The significant inputs for the valuation model include the following weighted-averages:

	March 31, 2012						December 31, 2011
	Senior Securities			Re-REMIC Securities			Senior Securities			Re-REMIC Securities
Discount rate		6.90	%		8.67	%		7.00	%		8.75	%
Default rate		10.45	%		5.60	%		10.30	%		5.55	%
Loss severity rate		60.00	%		43.60	%		60.00	%		43.06	%
Prepayment rate		17.45	%		15.28	%		17.30	%		15.20	%

The ranges of the significant inputs for the valuation model were as follows as of the dates indicated:

March 31, 2012

December 31, 2011

Senior

Securities

Re-REMIC

Securities

Senior

Securities

Re-REMIC

Securities

Discount rate

6.90 – 6.90

7.15 – 13.73

7.00 – 7.00

7.45 – 13.73

Default rate

10.45 – 10.45

2.05 – 13.10

10.30 – 10.30

2.10 – 13.00

Loss severity rate

60.00 – 60.00

27.79 – 57.50

60.00 – 60.00

28.18 – 57.50

Prepayment rate

17.45 – 17.45

9.60 – 21.05

17.30 – 17.30

9.60 – 21.00

The tables below set forth a summary of changes in the fair value and gains and losses of the Company's Level 3 financial assets and liabilities that are measured at fair value on a recurring basis for the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31, 2012
	Senior Securities			Re-REMIC Securities			Total
Beginning balance, January 1, 2012	$	9,311		$	170,116		$	179,427
Total net gains (losses)
Included in earnings		-			-			-
Included in other comprehensive income		(607	)		(4,276	)		(4,883	)
Purchases		-			-			-
Sales		-			-			-
Principal payoffs		(256	)		(3,260	)		(3,516	)
Net accretion of discount		199			4,312			4,511
Ending balance, March 31, 2012	$	8,647		$	166,892		$	175,539

The amount of net gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	-		$	-		$	-

	Three Months Ended March 31, 2011
	Senior Securities			Re-REMIC Securities			Total
Beginning balance, January 1, 2011	$	51,038		$	201,697		$	252,735
Total net gains (losses)
Included in earnings		3,472			7,209			10,681
Included in other comprehensive income		(5,226	)		(4,144	)		(9,370	)
Purchases		330			10,648			10,978
Sales		(32,935	)		(29,095	)		(62,030	)
Principal payoffs		(1,452	)		(4,281	)		(5,733	)
Net accretion of discount		638			3,423			4,061
Ending balance, March 31, 2011	$	15,865		$	185,457		$	201,322

The amount of net gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	-		$	-		$	-

Gains and losses included in earnings for the three months ended March 31, 2012 and 2011 are reported in the following statement of comprehensive income line descriptions:

	Other Income, Investment Gain, net
	Three Months Ended March 31,
	2012		2011
Total gains included in earnings for the period	$	-	$	10,681

Change in unrealized gains relating to assets still held at reporting date	$	-	$	-

Level 3 Financial Instruments Measured at Fair Value on a Non-Recurring Basis

The Company also measures certain financial assets at fair value on a non-recurring basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairments. Due to the nature of these financial assets, enterprise values are primarily used to value these financial assets. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate fair value, including where applicable, market trading activity. As a result, these financial assets are classified within Level 3 of the fair value hierarchy. As of March 31, 2012, these financial assets are classified within the other investments category and represent the Company's interest in non-public equity securities and investment funds. For the three months ended March 31, 2011, the Company recorded a loss of $85 in the carrying value of these financial assets. For the three months ended March 31, 2012, there were no changes to the carrying value of these financial assets.

MBS, at Fair Value

MBS, at fair value(1) (2), consisted of the following as of the dates indicated:

	March 31, 2012												December 31, 2011
	Fair Value		Net Unamortized Premium (Discount)			Percent of Total Fair Value			Weighted Average Life		Weighted Average Rating(3)		Fair Value		Net Unamortized Premium (Discount)			Percent of Total Fair Value			Weighted Average Life		Weighted Average Rating(3)
Trading
Fannie Mae	$	519,120	$	-			54.62	%		7.2	AAA		$	432,039	$	-			52.92	%		5.7	AAA
Freddie Mac		255,723		-			26.90	%		7.7	AAA			204,833		-			25.09	%		6.0	AAA
Available-for-sale:
Agency-backed
Fannie Mae		116		-			0.01	%		5.0	AAA			139		-			0.01	%		5.2	AAA
Private-label
Senior securities		8,647		(4,997	)		0.91	%		6.1		C		9,311		(5,196	)		1.14	%		5.0	CC+
Re-REMIC securities		166,892		(127,228	)		17.56	%		9.4	NR			170,116		(131,541	)		20.84	%		9.1	NR
	$	950,498	$	(132,225	)		100.00	%					$	816,438	$	(136,737	)		100.00	%

________________________

(1)	The Company's MBS portfolio was primarily comprised of fixed-rate MBS at March 31, 2012 and December 31, 2011. The weighted-average coupon of the MBS portfolio at March 31, 2012 and December 31, 2011 was 4.72% and 4.85%, respectively.

(2)	As of March 31, 2012 and December 31, 2011, the Company's MBS investments with a fair value of $750,932 and $731,432, respectively, were pledged as collateral for repurchase agreements.

(3)

The securities issued by Fannie Mae and Freddie Mac are not rated by any rating agency; however, they are commonly thought of as having an implied rating of “AAA.” There is no assurance, particularly given the downgrade of the U.S.'s credit rating to “AA” by Standard & Poors during the quarter ended September 30, 2011, that these securities would receive such a rating if they were ever rated by a rating agency. The weighted-average rating of the Company's private-label senior securities is calculated based on face value of the securities.

The Company has generally purchased private-label MBS at a discount. The Company, at least on a quarterly basis, estimates the future expected cash flows based on the Company's observation of current information and events and applying a number of assumptions related to prepayment rates, interest rates, default rates, and the timing and amount of cash flows and credit losses. These assumptions are difficult to predict as they are subject to uncertainties and contingencies related to future events that may impact the Company's estimates and its interest income.

Interest income on the private-label MBS that were purchased at a discount to face value is recognized based on the security's expected effective interest rate. At acquisition, the accretable yield is calculated as the difference between the undiscounted expected cash flows and the purchase price which is expected to be accreted into interest income over the remaining life of the security on a level-yield basis. The difference between the contractually required payments and the undiscounted expected cash flows represents the non-accretable difference. Based on actual payment activities and changes in estimates of undiscounted expected future cash flows, the accretable yield and the non-accretable difference can change over time. Significant increases in the amount or timing of undiscounted expected future cash flows are recognized prospectively as an adjustment to the accretable yield.

The following table presents the changes in the accretable yield on available-for-sale, private-label MBS for the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012			2011
Beginning balance	$	194,619		$	316,029
Accretion of discount		(6,292	)		(8,027	)
Reclassifications, net		(5,460	)		(12,097	)
Acquisitions		-			15,106
Sales		-			(52,994	)
Ending balance	$	182,867		$	258,017

The Company purchased no available for sale, private-label MBS during the three months ended March 31, 2012. For the available-for-sale, private-label MBS acquired during the three months ended March 31, 2011, the contractually required payments receivable, the cash flow expected to be collected, and the fair value at the acquisition date were as follows:

Contractually required payments receivable	$	31,958
Cash flows expected to be collected		28,639
Basis in acquired securities		13,533

The Company's available-for-sale MBS are carried at fair value in accordance with ASC 320, Debt and Equity Securities (ASC 320), the securities with resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities were the following as of the dates indicated:

	March 31, 2012
	Amortized
	Cost/		Unrealized
	Cost Basis(1)		Gains		Losses		Fair Value
Agency-backed MBS	$	107	$	9	$	-	$	116
Private-label MBS
Senior securities		8,340		307		-		8,647
Re-REMIC securities		133,712		33,180		-		166,892
Total	$	142,159	$	33,496	$	-	$	175,655

________________________

(1)	The amortized cost of MBS includes unamortized net discounts of $132,225 at March 31, 2012.

	December 31, 2011
	Amortized
	Cost/		Unrealized
	Cost Basis(1)		Gains		Losses		Fair Value
Agency-backed MBS	$	128	$	11	$	-	$	139
Private-label MBS
Senior securities		8,397		914		-		9,311
Re-REMIC securities		132,661		37,455		-		170,116
Total	$	141,186	$	38,380	$	-	$	179,566

________________________

(1)	The amortized cost of MBS includes unamortized net discounts of $136,737 at December 31, 2011.

The Company recorded no other-than-temporary impairment charges on MBS during the three months ended March 31, 2012 and 2011.

The following table presents the results of sales of MBS for the periods indicated:

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
	Agency- Backed MBS		Private-Label MBS		Agency- Backed MBS		Private-Label MBS
Proceeds from sales	$	21,609	$	-	$	105,603	$	62,029
Gross gains		-		-		320		10,681
Gross losses		120		-		128		-

Other Investments

The Company's other investments consisted of the following as of the dates indicated:

	March 31, 2012		December 31, 2011
Interest-only MBS	$	1,011	$	1,060
Non-public equity securities		975		975
Investment funds		896		911
Total other investments	$	2,882	$	2,946