Recent Developments

Initial Funding of Midway Residential Mortgage Portfolio Managed by The Midway Group

On February 11, 2011, we entered into an investment management agreement (the “Midway Management Agreement”) with The Midway Group, L.P. (“Midway”), pursuant to which Midway will serve as investment manager of a separate account established and owned by us. As such, we will own all of the assets and liabilities in the separate account. We refer to this separate account as the Midway Residential Mortgage Portfolio.

Midway is a private investment management group with an approximately 11-year history of investing in a broad spectrum of RMBS and derivatives. On February 28, 2011, we provided $24.0 million of initial funding to the Midway Residential Mortgage Portfolio and we expect to contribute additional capital to the Midway Residential Mortgage Portfolio in the future, subject to various conditions. See “The Midway Residential Mortgage Portfolio Strategy” and “The Midway Management Agreement” below for more information.

Redemption of Series A Preferred Stock

Pursuant to the terms of the Articles Supplementary for our Series A Cumulative Convertible Redeemable Preferred Stock (“Series A Preferred Stock”), on December 31, 2010, we redeemed all 1,000,000 outstanding shares of Series A Preferred Stock, which were held by JMP Group Inc. and certain of its affiliates, at the $20.00 per share liquidation preference plus any accrued and unpaid dividends at that time.

~~Table~~Our Investment Strategy

We intend to achieve our principal business objective of ~~Contents~~generating net income for distribution to our stockholders by building and managing a diversified investment portfolio comprised of a broad class of mortgage-related and financial assets that in the aggregate, will generate attractive risk-adjusted total returns for our stockholders. We have invested in the past and intend to invest in the future in assets that collectively allow us to maintain our REIT status and our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

Since 2009, we have repositioned our investment portfolio away from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, to a more diversified portfolio that includes elements of credit risk with reduced leverage, as evidenced by our investments in residential mortgage loans in 2010 and our establishment and initial funding of the Midway Residential Mortgage Portfolio in February 2011. In-line with our diversification strategy and focus on asset performance, we have in the recent past pursued and anticipate continuing to pursue in the future investment opportunities in the commercial mortgage market. We intend that our investment strategy will enable us to capitalize on current investment opportunities in both the residential and commercial mortgage markets that we believe will provide attractive risk adjusted returns to our stockholders over the long term. We anticipate contributing capital to both our residential mortgage strategy, particularly the Midway Residential Mortgage Portfolio, and a commercial mortgage strategy, in the future, such that these investments will become significant contributors to our revenues and earnings and will represent a significant portion of our total assets in the future.

While we intend to assemble a diversified portfolio, our investment strategy does not, subject to our continued compliance with applicable REIT tax requirements and the maintenance of our exemption from the Investment Company Act, limit the amount of our capital that may be invested in any of these investments or in any particular class or type of our targeted assets. The investment and capital allocation decisions of our company and our external managers depend on prevailing market conditions and may change over time in response to opportunities available in different economic and capital market environments. As a result, we cannot predict the percentage of our capital that will be invested in any particular investment at any given time. We believe that our diversified investment approach, when combined with our external managers’ expertise within these targeted asset classes, will enable us to exploit changes in the capital markets and provide attractive risk-adjusted returns. In addition we may enter into joint ventures or other externally managed businesses with third parties that have special expertise or investment sourcing capabilities to the extent we believe such relationships will contribute to our achievement of our investment objectives.

Our ~~Investment Strategy~~

~~The following discusses the investments we have made and that we expect to make in the future:~~

~~Our Principal Investment Strategy~~

~~Our principal~~overall investment strategy has focused on the acquisition of high-credit quality ARM loans and RMBS that we believe are likely to generate attractive long-term risk-adjusted returns on capital invested. In managing our principal investment portfolio, we:is designed, among other things, to:

·●

~~invest in high-credit quality Agency~~build a diversified investment portfolio of mortgage-related and ~~non-Agency RMBS, including ARM securities, CMO Floaters,~~financial assets that will provide attractive risk-adjusted returns to our stockholders across a variety of market conditions and ~~high-credit quality mortgage loans;~~economic cycles;

	·●	~~finance our portfolio~~take advantage of pricing dislocations created by ~~entering into repurchase agreements,~~distressed sellers or ~~issuing collateral debt obligations relating~~distressed capital structures and other market inefficiencies;

	●	identify investment opportunities that may permit us to ~~our securitizations;~~utilize all or a portion of the net operating loss carry-forward held by HC;

	·●	~~generally operate as~~capitalize on opportunities in niche markets that other investors may overlook or undervalue;

	●	establish a ~~long-term portfolio investor;~~more diversified risk profile that is not focused solely on interest rate or credit risk and properly manage financing, prepayment and other market risks;

	·●	~~generate earnings~~manage cash flow so as to provide for regular quarterly distributions to stockholders;

	●	allow us to maintain our qualification as a REIT; and

	●	allow us to remain exempt from the ~~return on our RMBS and spread income from our securitized mortgage loan portfolio.~~registration requirements of the Investment Company Act.

~~Under this~~If necessary, we will modify our investment strategy from time to time in the future as market conditions change in an effort to maximize the returns from our portfolio of investment assets. As a result, our targeted assets and allocation strategy may vary over time from those described herein.

The Midway Residential Mortgage Portfolio Strategy

Investment Strategy

The Midway Residential Mortgage Portfolio, which is externally managed by Midway, will focus on achieving long-term capital appreciation on our investments across various market cycles, including, various interest rate, yield curve, prepayment and credit market cycles, primarily through investments in a hedged portfolio of mortgage-related securities, contract rights and derivatives. In building this hedged portfolio, we ~~recently~~expect the Midway Residential Mortgage Portfolio to invest in securities that are backed by prime or lesser credit quality first lien residential mortgage loans and to diversify loan characteristics across securities in the portfolio. Midway presently does not intend to invest in subprime securities. As part of its investment process for the Midway Residential Mortgage Portfolio, we expect that Midway will analyze significant amounts of data regarding the historical performance of mortgage-related securities transactions and collateral over various market cycles and granular level loan data to identify trends and attractive risk-adjusted investment and trading opportunities.

The Midway Residential Mortgage Portfolio’s targeted assets include Agency RMBS, non-Agency RMBS, and other derivative instruments. The Agency RMBS invested in under this portfolio may include whole pool pass-through certificates, collateralized mortgage obligations (“CMOs”), real estate mortgage investment conduits (“REMICs”) and interest only (“IOs”) and principal only (“POs”) securities issued or guaranteed by a GSE. The non-Agency RMBS invested in under this portfolio may also include IOs and POs. The Midway Residential Mortgage Portfolio may also invest a portion of its assets in other types of debt instruments, including investment-grade debt instruments and their related currencies as well as lower-grade securities. In the event Midway is unable to immediately invest any capital we contribute to the Midway Residential Mortgage Portfolio, Midway may invest the capital in an interest-bearing account or otherwise invest it in highly liquid cash equivalents.

Midway has agreed to not materially change the investment strategy and objectives described above without our written consent. As part of our internal risk management processes, our management team will monitor investment activity in and the performance of the Midway Residential Mortgage Portfolio. To the extent necessary, the investment strategy of the Midway Residential Mortgage Portfolio may be modified at our direction to ensure our continued qualification as a REIT and exemption from regulation as an investment company under the Investment Company Act.

Financing Strategy

We expect that the Midway Residential Mortgage Portfolio will borrow money from banks and other financing counterparties and may trade on margin to leverage its investments, and in so doing, may pledge its assets as security for such borrowings. We generally anticipate targeting a leverage ratio of 3 to 1 for the Midway Residential Mortgage Portfolio; however, there may be occasional short-term increases or decreases in the amount of leverage used due to significant market events, and we may change our leverage strategy at any time.

We expect most of the Midway Residential Mortgage Portfolio’s borrowings will be through reverse repurchase agreements with terms typically not exceeding six months at commercial rates of interest. A reverse repurchase agreement arises when the Midway Residential Mortgage Portfolio sells a security to a bank or brokerage firm and simultaneously agrees to repurchase it on an agreed-upon future date. The repurchase price is greater than the sale price, reflecting an agreed upon market rate which is effective for the period of time the buyer’s money is invested in the security and which is not related to the coupon rate on the purchased security.

Hedging Strategy

We will use hedging instruments to reduce our risk associated with changes in interest rates, mortgage spreads, swap spreads, yield curve shapes, and market volatility. We expect that Midway will use multi-dimensional scenario analysis and stress testing that will simulate a wide spectrum of interest rate, volatility and refinancing environments, as well as macro and micro market dislocation events or shocks, to quantify and hedge the risks of the Midway Residential Mortgage Portfolio.

We expect to use mortgage derivatives and forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced,” or TBAs, Euro-dollar futures, interest rate options, swaps and U.S. treasuries to protect long-term returns. For example, we may utilize interest rate swaps to effectively extend the maturity of our short term borrowings to better match the interest rate sensitivity to the underlying assets being financed. Similarly, we may utilize TBAs to hedge the interest rate or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. In a TBA transaction, we would agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid and have quoted market prices and represent the most actively traded class of RMBS.

About Midway

The Midway Residential Mortgage Portfolio is externally managed and advised by Midway pursuant to the Midway Management Agreement. Midway was founded in 2000 by Mr. Robert Sherak, a mortgage industry veteran with more than 25 years experience, to serve as investment manager to the Midway Market Neutral Fund LLC, a private investment fund, and has an 11-year history of managing a hedged portfolio of mortgage-related securities.

Midway is responsible for administering the business activities and day-to-day operations of the Midway Residential Mortgage Portfolio. Midway has established portfolio management resources for each of the targeted assets described above and an established infrastructure supporting those resources. We expect that we will benefit from Midway’s highly analytical investment processes, broad-based deal flow, extensive relationships in the financial community and operational expertise. Moreover, during its 11-year history of investing in this space, we believe Midway has developed strong relationships with a wide range of dealers and other market participants that provide Midway access to a broad range of trading opportunities and market information.

For additional information regarding the Midway Management Agreement, see “The Midway Management Agreement” below.

Strategy for Legacy Portfolio and Other Assets

Investment Strategy

While we expect to focus and direct our future capital allocations to the Midway Residential Mortgage Portfolio and commercial mortgage opportunities, we will continue to manage our legacy portfolio of investment securities, mortgage loans and other financial assets, and will continue to ~~focus on~~pursue assets outside of the ~~acquisition~~targeted assets that we believe are a productive use of our capital and compensate us appropriately for the risks associated with them. These investments may include, among other things, certain non-rated residential mortgage assets or interests in a pool of such assets, CLOs, high yield corporate bonds, other debt and equity securities and similar assets. Pursuant to our investment guidelines, investments in certain of these assets require the approval of our board of directors. In addition, we expect to continue to engage in portfolio management transactions designed to help us satisfy applicable legal or regulatory requirements, which we sometimes refer to as “regulatory trades,” including the REIT qualification requirements and the requirements for exemption under the Investment Company Act. We expect that our regulatory trades will most commonly involve the purchase and sale of Agency RMBS.

For more information regarding our portfolio as of December 31, 2010, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Financing Strategy

We strive to maintain and achieve a balanced and diverse funding mix to finance our legacy investment portfolio. We rely primarily on repurchase agreements collateralized by Agency RMBS ~~taking into consideration~~and CDOs in order to finance the ~~amount and nature of the anticipated returns from the investment,~~Agency RMBS in our ability to pledge the investment for secured, collateralized borrowings and the costs associated with obtaining, financing and managing these investments. As noted above, following a review of our principal investment portfolio ~~we determined in March 2009 that the Agency CMO Floaters~~and prime ARM loans held in our ~~portfolio were no longer producing acceptable returns~~securitization trusts. Repurchase agreements provide us with short-term borrowings that bear interest rates that are linked to the London Interbank Offered Rate (“LIBOR”), a short term market interest rate used to determine short term loan rates. Pursuant to these repurchase agreements, the financial institution that serves as a counterparty will generally agree to provide us with financing based on the market value of the securities that we pledge as collateral, less a “haircut.” Our repurchase agreements may require us to deposit additional collateral pursuant to a margin call if the market value of our pledged collateral declines or if unscheduled principal payments on the mortgages underlying our pledged securities increase at a higher than anticipated rate.

We have in the past leveraged, and ~~initiated a program to dispose of these securities on an opportunistic basis; however, we may invest in Agency CMO Floaters~~expect in the future ~~should~~to leverage, borrowings collateralized by Agency RMBS. The extent that we finance our legacy Agency RMBS depends upon the ~~returns on such securities become attractive.~~particular characteristics of our portfolio at any given time. At December 31, 2010 our leverage ratio for our Agency RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements collateralized by Agency RMBS divided by total stockholders’ equity, was less than one to one.

~~Targeted Assets Under Our Principal Investment~~With respect to the assets in our portfolio at December 31, 2010, excluding Agency RMBS and prime ARM loans held in our securitization trusts, due to market conditions, we have primarily financed, and expect for the foreseeable future to continue to finance, those investments with available cash from our balance sheet. However, should the prospects for stable, reliable and favorable financing for these assets develop in the future, we would expect to increase our borrowings against these assets.

For more information regarding our outstanding borrowings and debt instruments at December 31, 2010, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Hedging Strategy

A significant risk relating to the management of our legacy and regulatory trade portfolio is the risk that interest rates on our assets will not adjust at the same times or amounts that rates on our liabilities adjust. Many of the underlying hybrid ARM loans held in, or that back the RMBS in, our legacy and regulatory trade portfolio have initial fixed rates of interest for a period of time ranging from two to five years. However, our funding costs are variable and the maturities typically have shorter terms than those of our assets. We use hedging instruments to reduce the risk associated with changes in interest rates that could affect these assets. Typically, we utilize interest rate swaps to effectively extend the maturity of our short term borrowings to better match the interest rate sensitivity to the underlying assets being financed. By extending the maturities on our short term borrowings, we attempt to lock in a spread between the interest income generated by the RMBS and loans in our legacy and regulatory trade portfolio and the interest expense related to the financing of such assets in order to maintain a net duration gap of less than one year. We also seek to hedge interest rate risk in order to stabilize net asset values and earnings during periods of rising interest rates. To do so, we use hedging instruments in conjunction with our borrowings to approximate the re-pricing characteristics of such assets. We utilize a model based risk analysis system to assist in projecting portfolio performances over a variety of different interest rates and market stresses. The model incorporates shifts in interest rates, changes in prepayments and other factors impacting the valuations of our assets. However, given the uncertainties related to prepayment rates, it is not possible to definitively lock-in a spread between the earnings yield on this portfolio or the related cost of borrowings. Nonetheless, through active management and the use of evaluative stress scenarios, we believe that we can mitigate a significant amount of both value and earnings volatility.

About Harvest Capital Strategies

Harvest Capital Strategies LLC (“HCS”) provides investment advisory services to us and manages on our behalf “new program assets.” New program assets generally refers to those assets of our company that were sourced or acquired by HCS on our behalf after the effective date of the Amended and Restated Advisory Agreement between HCS, HC, NYMF and us, dated July 26, 2010 (the “HCS Advisory Agreement”) and whose acquisition was approved by HCS and us. New program assets will generally exclude all cash, RMBS, our legacy assets at July 26, 2010, and any assets acquired for the Midway Residential Mortgage Portfolio.

HCS has served as an external advisor to us and certain of our subsidiaries since January 2008 when we concurrently entered into the original advisory agreement with HCS (the “Prior Advisory Agreement”) and sold $20 million of our Series A Preferred Stock to JMP Group Inc. and certain of its affiliates in a private placement. On July 26, 2010, we entered into the HCS Advisory Agreement, which supersedes the Prior Advisory Agreement. During our transition to a diversified investment portfolio, HCS has been instrumental in identifying potential investment opportunities and providing financial and capital structuring expertise and thought leadership to our company. The chairman of our board of directors since January 2008, James J. Fowler, is a portfolio manager at HCS and a managing director of JMP Group Inc. Pursuant to the terms of the HCS Advisory Agreement, Mr. Fowler is also the chief investment officer of HC and NYMF. Mr. Fowler receives no direct compensation from us for his appointment to these positions.

HCS is a wholly-owned subsidiary of JMP Group Inc., that manages a family of single-strategy and multi-manager hedge fund products. HCS also sponsors and partners with other investment firms. As of December 31, 2010, JMP Group Inc. had $1.8 billion in client assets under management. As discussed above, we redeemed all outstanding shares of our Series A Preferred Stock on December 31, 2010. As of February 14, 2011, JMP Group Inc. and certain of its affiliates owned approximately 15.3% of our outstanding shares of common stock. For more information regarding our relationship with HCS and the HCS Advisory Agreement, see “The HCS Advisory Agreement” and “Conflicts of Interest with Our External Managers; Equitable Allocation of Opportunities” below.

Our Targeted Asset Classes

Set forth below is a list of the principal assets that our management and our external managers currently target by investment strategy, followed by a brief description of these assets.

Investment Strategy	Principal Assets
Midway Residential Mortgage Portfolio	Agency RMBS consisting of whole pool pass-through certificates, CMOs, REMICs, IOs and POs; non-Agency RMBS backed by prime jumbo and Alt-A paper and may include IOs and POs; and other derivative instruments.

Commercial Mortgage Portfolio	CMBS, commercial mortgage loans and other commercial real estate-related debt investments.

Legacy Portfolio and Other Assets	Agency RMBS, primarily whole pool pass-through certificates or CMOs issued by Fannie Mae or Freddie Mac and backed by hybrid ARM loans; non-Agency RMBS backed by prime jumbo and Alt-A; prime ARM loans held in securitization trusts; residential whole mortgage loans (including non-rated loans) or equity interests therein; CLOs and other corporate debt or corporate equity securities and other similar investments.

~~Hybrid ARM~~Agency RMBS ~~Issued by Fannie Mae or Freddie Mac~~. Agency RMBS ~~consist~~refers to residential mortgage-backed securities that are issued or guaranteed by a GSE, and includes pass-through certificates, CMOs, IOs, POs and REMICs. Most of ~~Agency~~the pass-through certificates and CMOs we have invested in historically are backed by ARM loans and hybrid ARM loans issued or guaranteed by an Agency. Pass-through certificates provide for a pass-through of the monthly interest and principal payments made by the borrowers on the underlying mortgage ~~loans. CMOs divide~~loans to the holders of the pass-through certificate. A CMO is a debt security that is backed by a pool of ~~mortgage loans into multiple tranches~~residential mortgages or RMBS with different principal and interest payment characteristics.

~~Since March 31, 2007, we~~ ARMs have ~~exclusively focused our resources~~interest rates that reset monthly, quarterly and ~~efforts~~annually, based on the ~~purchase and management~~12-month moving average of ~~hybrid ARM RMBS issued by either Fannie Mae~~the one-year constant maturity U.S. Treasury rate or ~~Freddie Mac (which has included both pass-through certificates and CMO Floaters).~~LIBOR. Hybrid ~~ARM RMBS~~ARMs have interest rates that are ~~adjustable rate mortgage assets that have a rate that is~~ fixed for a longer initial period of(typically three, five, seven or 10 years) and, thereafter, generally adjust annually to ~~ten years initially, before becoming annual or semi-annual adjustable rate mortgages. Because the coupons earned on ARM RMBS adjust~~an increment over time as interest rates change (typically after an initial fixed-rate period), the market values of these assets are generally less sensitive to changes in interest rates than are fixed-rate RMBS. In addition, the ARMs collateralizing our RMBS typically have interim and lifetime caps ona pre-determined interest rate ~~adjustments.~~index. For additional information regarding IOs, POs and REMICs, see “— Real Estate Mortgage Investment Conduits” and “— Stripped RMBS” below.

Fannie Mae guarantees to the holder of Fannie ~~Mae~~Mae-issued RMBS that it will distribute amounts representing scheduled principal and interest on the mortgage loans in the pool underlying the Fannie Mae certificate, whether or not received, and the full principal amount of any such mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. Freddie Mac guarantees to each holder of certain Freddie ~~Mac~~Mac-issued certificates the timely payment of interest at the applicable pass-through rate and principal on the holder’s pro rata share of the unpaid principal balance of the related mortgage loans. ~~We prefer~~

Non-Agency RMBS. Non-Agency RMBS refers to RMBS that are backed by residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, ~~hybrid ARM RMBS~~Freddie Mac or Ginnie Mae due to ~~their shorter remittance cycle;~~certain factors, including a mortgage balance in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and insufficient documentation. Consequently, the ~~time between when a borrower makes a payment~~principal and ~~the investor receives the net payment. There can be no assurance that the guarantee structure of~~interest on non-Agency RMBS are not guaranteed by GSEs, such as Fannie Mae and Freddie Mac, ~~issued securities will continue~~or in the ~~future.~~case of Ginnie Mae, the U.S. Government. Non-Agency RMBS may include IOs and POs.

~~Typically, we seek~~Real Estate Mortgage Investment Conduits. A REMIC is a trust, partnership, corporation, association or segregated pool of mortgages which has elected and qualified to ~~acquire hybrid ARM~~be treated as a REMIC under applicable U.S. tax rules. A REMIC must consist of one or more classes of “regular interests,” some of which may be adjustable rate, and a single class of “residual interests.” The different classes may have different payment terms and rankings in terms of priority. To qualify as a REMIC, substantially all the assets of the entity must be assets principally secured, directly or indirectly, by interests in real property.

Stripped RMBS. Stripped RMBS are securities representing interests in a pool of mortgages the cash flow of which has been separated into its interest and principal components. IOs receive the interest portion of the cash flow while POs receive the principal portion. Stripped RMBS may be issued by U.S. government agencies or by non-Agency issuers similar to those described with ~~fixed periods~~respect to REMICs.

CMO Residuals. The cash flow generated by the mortgage loans underlying a series of ~~five years or less. In most cases we are~~CMOs is applied first to make required payments of principal of and interest on the CMOs and second, if applicable, to pay ~~a premium, a price above~~ the ~~par value, for these assets, which generally is between 101% and 103%~~related administrative expenses of the ~~par value, depending~~issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments, including mortgage servicing contracts. Some CMO residuals are subject to certain restrictions on transferability. Ownership of certain CMO residuals imposes liability on the ~~pass-through rates~~purchaser for certain of the ~~security,~~expenses of the ~~months remaining before it converts to an ARM, and other considerations.~~related CMO issuer.

~~Table of Contents~~Prime ARM Loans Held in Securitization Trusts.

Our ~~investment~~ portfolio also includes prime ARM loans held in securitization trusts. The loans held in securitization trusts are loans that primarily were originated by our discontinued mortgage lending business, and to a lesser extent purchased from third parties, that we securitized in ~~2005 and early 2006.~~2005. These loans are substantially prime full documentation interest only hybrid ARMs on residential ~~homes~~properties and are all are first lien mortgages. The Company ~~maintains~~maintained the ownership trust certificates, or equity, of these securitizations which includes rights to excess interest, if any.

As of December 31, 2008, our principal investment portfolio was comprised of approximately $477.4 million in RMBS, of which approximately $455.9 million was Agency RMBS and $21.5 million was non-Agency RMBS, and approximately $348.3 million of prime ARM Subject to market conditions, we may acquire mortgage loans ~~held in securitization trusts. Of the non-Agency RMBS held in our portfolio at December 31, 2008, approximately $21.4 million was rated~~ in the ~~highest category by Moody’s Investor Service~~future and ~~Standard & Poor’s (collectively, the “Rating Agencies”).~~

~~Our Alternative Investment Strategy~~

During 2008, our alternative investment strategy was primarily focused on equity investments in unaffiliated third party entities that acquire or manage a portfolio of non-Agency RMBS. As of December 31, 2008, we had yet to make any investments under our alternative investment strategy. Beginning in 2009, our alternative investment strategy will expand the types of assets under investment consideration. The alternative investment strategy will focus on opportunistic investments in certain alternative financial assets, or equity interests therein, including, without limitation, certain non-agency RMBS, commercial mortgage-backed securities, commercial real estate loans, collateralized loan obligations and other investments, that are distressed or can be purchased at a discount and that we believe are likely to generate attractive risk-adjusted returns. Investments in alternative assets will generally expose us to greater credit risk and less interest rate risk than investments in Agency RMBS.

Pursuant to investment guidelines adopted by our Board of Directors in March 2009, each alternative investment must be approved by our Board of Directors. Our alternative investment strategy will vary from our principal investment strategy and we can provide no assurance that we will be successful at implementing this alternative investment strategy or that it will produce positive returns.

~~Potential Assets Under Our Alternative Investment Strategy~~

~~Non-Agency RMBS.~~ The Company may invest in residential non-Agency RMBS, including investment-grade (AAA through BBB rated) and non-investment grade (BB and B rated and unrated) classes. The mortgage loan collateral for residential non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie Mae due to certain factors, including a mortgage balance in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and insufficient documentation.subsequently securitize these loans.

Commercial Mortgage-Backed Securities. We may invest in commercial mortgage-backed securities, or CMBS, through the purchase of mortgage pass-through notes. CMBS are secured by, or evidence ownership interests in, a single commercial mortgage loan or a pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We expect that most of our CMBS investments will be part of a capital structure or securitization where the rights of the class in which we invest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted ~~return is~~returns are attractive. We generally intend to invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely. We may acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, finance companies, investment banks and other entities.

~~The yields~~

Whole Commercial Mortgage Loans. We may acquire mortgage loans, or portfolios of mortgage loans, secured by first or second liens on ~~CMBS depend on the timely payment of~~commercial properties or a preferred equity interest ~~and principal due on~~in an entity that owns the underlying mortgage loans, including office buildings, industrial or warehouse properties, hotels, retail properties, apartments and ~~defaults~~properties within other commercial real estate sectors, which may include performing, sub-performing and non-performing loans. In addition, we may originate whole mortgage loans that provide long-term mortgage financing to commercial property owners and developers. In some cases, we may originate and fund a first mortgage loan with the intention of structuring and selling a senior tranche, or A-Note, and retaining the subordinated tranche, or B-Note.

Mezzanine Loans. The origination or acquisition of loans made to property owners that are subordinate to mortgage debt and are secured by ~~the borrowers on such loans may ultimately result in defaults on the CMBS. In the event of a default, the trustee for the benefit~~pledges of the ~~holders of CMBS has recourse only to~~borrower’s ownership interests in the ~~underlying pool of mortgage loans and, if a loan is in default, to~~property and/or the ~~mortgaged property securing such mortgage loan. After~~entity that owns the trustee has exercised all of the rights of a lender under a defaulted mortgage loan and the related mortgaged property has been liquidated, no further remedy will be available. However, holders of relatively senior classes of CMBS will be protected to a certain degree by the structural features of the securitization transaction within which such CMBS were issued, such as the subordination of the more junior classes of the CMBS.property.

High Yield Corporate ~~Bonds~~Bonds.. We may invest in high yield corporate bonds, which are below investment grade debt obligations of corporations and other nongovernmental entities. We expect that a significant portion of such bonds we may invest in will not be secured by mortgages or liens on assets, and may have an interest-only payment schedule, with the principal amount staying outstanding and at risk until the bond’s maturity. High yield bonds are typically issued by companies with significant financial leverage.

~~Table of Contents~~

Collateralized Loan ~~Obligations~~Obligations.. We may invest in debentures, subordinated debentures or equity interests in a ~~collateralized loan obligation, or~~ CLO. A CLO is secured by, or evidences ownership interests in, a pool of assets that may include RMBS, non-agency RMBS, CMBS, commercial real estate loans or corporate loans. Typically a CLO is collateralized by a diversified group of assets either within a particular asset class or across many asset categories. These securities may be senior, subordinated, investment grade or non-investment grade. We expect the majority of our CLO investments to be part of a capital structure or securitization where the rights of the class in which we will invest to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities, although we may invest in the lower rated classes of securities if we believe the risk adjusted return is attractive. ~~The Company would generally make CLO investments on a non-levered basis to reduce liquidity risks as these investments are generally less liquid in nature.~~

Equity Securities.To a lesser extent, subject to maintaining our qualification as a REIT, we also may invest in common and preferred equity, which may or may not be related to real estate. These investments may include direct purchases of common or preferred equity ~~as well as purchases of interests in LLCs~~ or other equity type investments. We will follow a value-oriented investment approach and focus on the anticipated cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the capital to be invested. We will also consider other factors such as the strength of management, the liquidity of the investment, the underlying value of the assets owned by the issuer and prices of similar or comparable securities.

~~Our Financing Strategy~~

~~To finance the RMBS in our principal investment portfolio, we generally seek~~Other Assets. We also may from time to ~~borrow between seven~~time opportunistically acquire other mortgage-related and nine times the amount of our equity. At December 31, 2008 our leverage ratio for our RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements divided by sum of total stockholders’ equity and our Series A Preferred Stock, was 6.8 to 1. This definition of the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreements calculate our leverage. The Company also has $44.6 million of subordinated trust preferred securities outstanding and $335.6 million of collateralized debt obligations outstanding, both of which are not dependent on market values of pledgedfinancial assets ~~or changing credit conditions by our lenders.~~

We strive to maintain and achieve a balanced and diverse funding mix to finance our principal investment portfolio. We rely primarily on repurchase agreements and collateralized debt obligations (“CDOs”) in order to finance our principal investment portfolio. Repurchase agreements provide us with short-term borrowings that are secured by the securities in our principal investment portfolio, primarily RMBS. These short-term borrowings bear interest rates that are linked to LIBOR, a short term market interest rate used to determine short term loan rates. Pursuant to these repurchase agreements, the financial institution that serves as a counterparty will generally agree to provide us with financing based on the market value of the securities that we ~~pledge as collateral, less a “haircut.” Our repurchase agreements may require us to deposit additional collateral pursuant to a margin call if the market value of~~believe will meet our pledged collateral declines or if unscheduled principal payments on the mortgages underlying our pledged securities increase at a higher than anticipated rate. To reduce the risk that we would be required to sell portions of our portfolio at a loss to meet margin calls, we intend to maintain a balance of cash or cash equivalent reserves and a balance of unpledged mortgage securities to use as collateral for additional borrowings. As of December 31, 2008, we had repurchase agreements outstanding with six different counterparties totaling $402.3 million. As of December 31, 2008, we financed approximately $348.3 million of loans we hold in securitization trusts permanently with approximately $12.7 million of our own equity investment ~~in the securitization trusts and the issuance of approximately $335.6 million of CDOs.~~ objectives.

The Midway Management Agreement

We ~~expect~~entered into an investment management agreement with Midway on February 11 2011. The Midway Management Agreement has a current term that expires on February 11, 2013, and will be automatically renewed for successive one-year terms thereafter unless a termination notice is delivered by either party to ~~finance~~the other party at least six months prior to the end of the then current term. Pursuant to the Midway Management Agreement, Midway implements the Midway Residential Mortgage Portfolio strategy and has complete discretion and authority to manage the assets of the Midway Residential Mortgage Portfolio and its day-to-day business, subject to compliance with the written investment guidelines governing the Midway Residential Mortgage Portfolio and the other terms and conditions of the Midway Management Agreement, including our ~~alternative assets~~authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. During the initial term of the Midway Management Agreement, Midway has agreed not to establish a separate account with any other publicly-listed residential or commercial mortgage REIT. Midway will provide performance reports to us on a ~~non-levered~~monthly basis with ~~available capital from operations. See “Management’s Discussion and Analysis~~respect to the performance of ~~Results of Operations and Financial Condition― Liquidity and Capital Resources” for further discussion on our financing activities.~~the Midway Residential Mortgage Portfolio.

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~~Our Hedging and Interest Rate Risk Management Strategies~~

A significant risk to our operations, relating to our portfolio management, is the risk that interest rates on our assets will not adjust at the same times or amounts that rates on our liabilities adjust. Even though we retain and invest in ARM securities, many of the underlying hybrid ARM loans in our principal investment portfolio have initial fixed rates of interest for a period of time ranging from two to five years. Our funding costs are variable and the maturities are short term in nature. We use hedging instruments to reduce our risk associated with changes in interest rates that could affect our principal investment portfolio of prime ARM loans and RMBS. Typically, we utilize interest rate swaps to effectively extend the maturity of our short term borrowings to better match the interest rate sensitivity to the underlying assets being financed. By extending the maturities on our short term borrowings, we attempt to lock in a spread between the interest income generated by the interest earning assets in our principal investment portfolio and the interest expense related to the financing of such assets in order to maintain a net duration gap of less than one year. As we acquire RMBS, we seek to hedge interest rate risk in order to stabilize net asset values and earnings during periods of rising interest rates. To do so, we use hedging instruments in conjunction with our borrowings to approximate the re-pricing characteristics of such assets. We utilize a model based risk analysis system to assist in projecting portfolio performances over a variety of different interest rates and market stresses. The model incorporates shifts in interest rates, changes in prepayments and other factors impacting the valuations of our financial securities, including mortgage-backed securities, repurchase agreements, interest rate swaps and interest rate caps. However, given the prepayment uncertainties on our RMBS, it is not possible to definitively lock-in a spread between the earnings yield on our principal investment portfolio and the related cost of borrowings. Nonetheless, through active management and the use of evaluative stress scenarios of the portfolio, we believe that we can mitigate a significant amount of both value and earnings volatility.

~~Our Investment Guidelines~~

In acquiring assets for our portfolio and subsequently managing those assets, management is required to adhere to the following investment guidelines, unless such guidelines are amended, repealed, modified or waived by our Board of Directors. Pursuant to our investment guidelines, we will focus on investments in securities in the following categories:

Category I investments are mortgage-backed securities that are either rated within one of the two highest rating categories by either Moody’s Investor Services or Standard and Poor’s, or have their repayment guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae;

~~Category II investments are all residential mortgage-related securities that do not fall within Category I; and~~

Category III investments are all commercial mortgage-backed securities and non-mortgage-related securities, including, without limitation, subordinated debentures or equity interests in a collateralized loan obligation, high yield corporate bonds and equity securities.

The ~~investment guidelines provide~~following table summarizes the ~~following investment limitations:~~

~~no investment shall be made which would cause us to fail to qualify as a REIT;~~

~~no investment shall be made which would cause us or our subsidiaries to register as an investment company under the Investment Company Act of 1940;~~

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~~Certain of our officers have the authority~~fees that we pay to ~~approve, without the need of further authorization of our Board of Directors, the following transactions from time to time, any of which may be entered into by us or any of our subsidiaries:~~

~~the purchase and sale of Category I investments, subject to the limitations described above;~~

~~the purchase and sale of agency debt;~~

~~the purchase and sale of U.S. Treasury securities;~~

~~the purchase and sale of overnight investments;~~

~~the purchase and sale of money market funds;~~

~~hedging arrangements using:~~

· ~~interest rate swaps and Eurodollar contracts;~~

· ~~caps, floors and collars;~~

· ~~financial futures; and~~

· ~~options on any of the above; and~~

~~the incurrence of indebtedness using:~~

· ~~repurchase agreements; and~~

· ~~term repurchase agreements.~~

Until further modified by our Board of Directors, all Category II and Category III investments (regardless of the size of the investment) under our alternative investment strategy requires the prior approval of our Board of Directors.

~~Our Relationship with HCS and the Advisory Agreement~~

~~HCS, an external advisor~~Midway pursuant to the ~~managed subsidiaries, is a wholly-owned subsidiary of JMP Group Inc. that manages a family of single-strategy~~Midway Management Agreement. We will reimburse Midway for all transaction costs and multi-manager hedge fund products. HCS also sponsors and partners with other alternative investment firms. HCS was founded by Joseph Jolson in 1999. As of December 31, 2008, HCS had $443.0 million in client assets under management.

~~Concurrent and~~expenses incurred in connection with the ~~issuance of our Series A Preferred Stock on January 18, 2008, we entered into an advisory agreement with HCS pursuant to which HCS advises the Managed Subsidiaries~~management and ~~manages our alternative investment strategy. Currently, any investment in Category II and III investments on behalf~~administration of the Managed Subsidiaries by HCS will require board approval and must adhere to investment guidelines adopted by our Board of Directors. HCS earns a base advisory fee of 1.5% of the “equity capital” (as defined in the advisory agreement) of the Managed Subsidiaries and is also eligible to earn incentive compensation if the Managed Subsidiaries achieve certain performance thresholds. As of December 31, 2008, HCS was not managing any assets in the Managed Subsidiaries, but was earning a base advisory fee on the net proceeds to our Company from our private offerings in each of January 2008 and February 2008.

In addition, pursuant to the stock purchase agreement providing for the sale of the Series A Preferred Stock to the JMP Group, James J. Fowler and Steven M. Abreu were appointed to our Board of Directors, with Mr. Fowler being appointed the Non-Executive Chairman of our Board of Directors. Mr. Fowler, who also serves as the non-compensated Chief Investment Officer of HC and New YorkMidway Residential Mortgage ~~Funding, LLC, is a managing director of HCS, a subsidiary of JMP Group Inc.~~

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On February 21, 2008, we completed the issuance of 7.5 million shares of our common stock in a private placement to certain accredited investors, resulting in $56.5 million in net proceeds to our company. JMP Securities LLC, an affiliate of HCS and the JMP Group, served as the sole placement agent for the transaction and was paid a $3.0 million placement fee from the gross proceeds.

As of December 31, 2008, each of HCS, JMP Group Inc. and Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group Inc., beneficially owned approximately 16.8%, 12.2% and 9.5%, respectively, of our outstanding common stock. In addition, in November 2008 our Board of Directors approved an exemption from the ownership limitations contained in our charter to permit Mr. Jolson to beneficially own up to 25% of the aggregate value of our outstanding capital stock. As a result these stockholders exert significant influence over us.

~~Advisory Agreement~~

~~As described above, on January 18, 2008, we entered into an advisory agreement with HCS. The following is a summary of the key economic terms of the advisory agreement:~~Portfolio.

Type		Description
Base ~~Advisory Fee~~ management fee		AWe pay a base ~~advisory~~management fee monthly in arrears in a cash amount equal to the product of (i) 1.50% per annum of our invested capital in the ~~“equity capital”~~Midway Residential Mortgage Portfolio as of the last business day of the previous month, multiplied by (ii) 1/12th.

Incentive fee		In addition to the base management fee, Midway will be entitled to a quarterly incentive fee (the “Midway Incentive Fee”) that is calculated monthly and paid in cash in arrears. The Midway Incentive Fee is based upon the total market value of the net invested capital in the Midway Residential Mortgage Portfolio on the last business day of the quarter, subject to a high water mark equal to a 10% return on invested capital (the “High Water Mark”), and shall be payable in an amount equal to 40% of the dollar amount by which adjusted net income (as defined below) attributable to the Midway Residential Mortgage Portfolio, on a calendar 12-month basis and before accounting for the Midway Incentive Fee, exceeds an annual 15% rate of return on invested capital (the “Hurdle Rate”). The return rate for each calendar 12-month period (the “Calculation Period”) is determined by dividing (i) the adjusted net income for the Calculation Period by (ii) the weighted average of the invested capital paid into the Midway Residential Mortgage Portfolio during the Calculation Period. For the initial 12 months, adjusted net income will be calculated on the basis of each of the previously completed months on an annualized basis. Adjusted net income, for purposes of the Midway Incentive Fee, is defined as net income (loss) calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), excluding any unrealized gains and losses, after giving effect to certain expenses. All securities held in the Midway Residential Mortgage Portfolio will be valued in accordance with GAAP. Like the Hurdle Rate, which is calculated on a calendar 12 month basis, the High Water Mark is calculated on a calendar 12 month basis, and will reset every 24 months. The High Water Mark will be a static dollar figure that Midway will be required to recoup, to the extent there was a deficit in the prior High Water Mark calculation period before it can receive a Midway Incentive Fee.

Although the Midway Residential Mortgage Portfolio is wholly owned by our company, we may only redeem invested capital in an amount equal to the lesser of 10% of the invested capital in the Midway Residential Mortgage Portfolio or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. Pursuant to the terms of the Midway Management Agreement, we are only permitted to make one such redemption request in any 75-day period.

The HCS Advisory Agreement

The HCS Amended and Restated Advisory Agreement became effective on July 26, 2010 and has an initial term that expires on June 30, 2012, subject to automatic annual one-year renewals thereafter. Pursuant to the terms of the HCS Advisory Agreement, HCS will provide investment advisory services to us and will manage on our behalf “new program assets” acquired after the effective date of the agreement. The terms and conditions for new program assets, including the compensation payable thereunder to HCS by us, will be negotiated on a transaction-by-transaction basis. New program assets will be identified by HCS and us as either “Managed Assets” or “Scheduled Assets”. For those new program assets identified as Scheduled Assets, HCS will receive the compensation, which may include base advisory and incentive compensation, agreed upon by HCS and us and set forth in a term sheet or other documentation. The following table summarizes the fees to be paid to HCS for Managed Assets, “legacy assets”, which refers to certain assets owned by us at July 26, 2010 that were deemed to be managed assets under the Prior Advisory Agreement, such as our CLOs, and certain other services:

Type		Description
Managed Assets:

Base management fee		HCS is entitled to receive a quarterly base advisory fee (payable in arrears) in an amount equal to the product of (i) 1/4 of the amortized cost of the Managed ~~Subsidiaries is payable by us to HCS in cash, quarterly in arrears.~~ ~~Equity capital of the Managed Subsidiaries is defined as, for any fiscal quarter, the greater of (i) the net asset value of the investments of the Managed Subsidiaries~~Assets as of the end of the ~~fiscal~~ quarter, ~~excluding any investments made prior~~and (ii) 2%.

Incentive fee		HCS is also eligible to ~~the date of the advisory agreement and any assets contributed by us to~~earn incentive compensation on the Managed ~~Subsidiaries~~Assets for the purpose of facilitating compliance with our exclusion from regulation under the Investment Company Act, or (ii) the sum of $20,000,000 plus 50% of the net proceeds to us or our subsidiaries of any offering of common or preferred stock completed by useach fiscal year during the term of the HCS Advisory Agreement in an amount equal to 35% of the GAAP net income attributable to the Managed Assets for the full fiscal year (including paid interest and realized gains), after giving effect to all direct expenses related to the Managed Assets, including but not limited to, base advisory ~~agreement.~~fees and the annual consulting fee, that exceeds a hurdle rate of 13% based on the average equity of our investment in Managed Assets during that particular year.
Legacy Assets:
Incentive ~~Compensation~~ fee		~~The advisory agreement calls for~~HCS is eligible to earn incentive compensation on “legacy assets” equal to ~~be paid by us to HCS under certain circumstances. If earned, incentive compensation is paid quarterly in arrears in cash; provided, however,~~ ~~that a portion of the incentive compensation may be paid in shares of our common stock.~~ ~~For the first three fiscal quarters of each fiscal year,~~ 25% of the ~~core earnings~~GAAP net income of ~~the Managed Subsidiaries~~HC and NYMF attributable to the investments that are deemed managed ~~by HCS~~assets (as defined under the Prior Advisory Agreement) that exceed ~~a hurdle rate equal to the greater of (i) 2.00% or (ii) 0.50% plus one-fourth of the ten year treasury rate for such quarter.~~ For the fourth fiscal quarter of each fiscal year, the difference between (i) 25% of the GAAP (as defined in Item 7 below) net income of the Managed Subsidiaries attributable to the investments that are managed by HCS that exceeds a hurdle rate equal to the greater of (a) 8.00% and (b) 2.00% plus the ten year treasury rate for such fiscal ~~year,~~year. The incentive fee is payable in cash, quarterly in arrears.
Consulting and ~~(ii) the amount of incentive compensation paid for the first three fiscal quarters of such fiscal year.~~Support Services:
~~Termination Fee~~ Consulting fee		~~If we terminate~~During the ~~advisory agreement for cause, no termination fee is payable. Otherwise, if we terminate~~term of the ~~advisory agreement or elect not to renew it,~~HCS Advisory Agreement, we will pay ~~a cash termination~~HCS an annual consulting fee equal to $1 million, subject to reduction in the ~~sum of (i) the average annual base advisory fee~~event JMP Group’s equity investment in our company falls below certain thresholds, payable on a quarterly basis in arrears, for consulting and ~~(ii) the average annual incentive compensation earned during the 24-month period immediately preceding the date of termination.~~ support services related to finance, capital markets, investment and other strategic activities.

~~Pursuant~~We may terminate the HCS Advisory Agreement or elect not to renew the agreement, subject to certain conditions and subject to paying a termination fee equal to the product of (A) 1.5 and (B) the sum of (i) the average annual base advisory ~~agreement,~~fee earned by HCS ~~was paid $0.7 million in management fees for~~during the ~~twelve months ended December 31, 2008.~~24-month period preceding the effective termination date, and (ii) the annual consulting fee.

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Conflicts of Interest with ~~HCS;~~Our External Managers; Equitable Allocation of ~~Investment Opportunities; Other Information Regarding the Advisory Agreement~~Opportunities

Each of Midway and HCS manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies. In connection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our external management agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of our external managers may have an economic interest in the accounts they manage or the investments they propose and, in the case of HCS, may raise, advise or sponsor other REITs or other investment funds that invest in assets similar to our targeted assets. In addition, we have in the recent past engaged in certain co-investment opportunities with an external manager or one of its affiliates and we may participate in future co-investment opportunities with our external managers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not always be aligned and this could result in decisions that are not in the best interests of our company.

Each of Midway and HCS has agreed ~~to make available~~that, when making investment allocation decisions between us and its other client accounts, it will, in the case of HCS, adhere to the ~~Managed Subsidiaries all~~investment allocation policy for such assets and, in the case of Midway, seek to allocate investment opportunities ~~that~~on an equitable basis and in a manner it ~~determines,~~believes is in the best interests of its ~~reasonable and good faith judgment, based on their investment objectives, policies and strategies, and other~~ relevant ~~factors, are appropriate for them in accordance with HCS’s written allocation procedures and policies.~~

accounts. Since ~~many~~certain of ~~the Managed Subsidiaries’~~our targeted ~~investments~~assets are typically available only in specified quantities and since ~~many~~certain of ~~their~~these targeted ~~investments may~~assets will also be targeted ~~investments~~assets for other ~~HCS~~ accounts ~~HCS~~managed by or associated with our external managers, our external managers may not be able to buy as much of ~~any given investment~~certain assets as required to satisfy the needs of all of its clients’ or associated accounts. In these cases, ~~HCS’s~~we understand that the allocation procedures and policies of our external managers would typically allocate such ~~investments~~assets to multiple accounts in proportion to, among other things, the objectives and needs of each account. ~~The~~Moreover, the investment allocation policies or our external managers may permit departure from proportional allocation when the total ~~HCS~~ allocation would result in an inefficiently small amount of the security being purchased for an account. InAlthough we believe that ~~case,~~each of our external managers will seek to allocate investment opportunities in a manner which it believes to be in the ~~policy allows for a “rotational” protocol~~best interests of ~~allocating subsequent investments so that,~~all accounts involved and will seek to allocate, on an ~~overall~~equitable basis, ~~each account~~investment opportunities believed to be appropriate for us and the other accounts it manages or is ~~treated equitably.~~associated with, there can be no assurance that a particular investment opportunity will be allocated in any particular manner.

~~We expect that HCS will source substantially all of our investments in alternative assets as advisor to the Managed Subsidiaries. Pursuant to the advisory agreement, HCS~~Midway is authorized to follow broad investment guidelines in determining which ~~alternative~~ assets ~~the Managed Subsidiaries~~it will invest in. Although our board of directors will ultimately determine when and how much capital to allocate to the Midway Residential Mortgage Portfolio, we generally will not approve transactions in advance of their execution. Currently, our investment ~~guidelines require~~in any new program asset under the ~~Board~~HCS Advisory Agreement requires the approval of ~~Directors to approve each investment in alternative assets pursuant to~~ our ~~investment guidelines.~~board of directors. However, as our ~~alternative investment portfolio expands in the future, our Board~~board of ~~Directors~~directors may elect to not review individual investments ~~or grant HCS greater investment discretion.~~in new program assets in the future. In addition to conducting ~~their review of the investments held by our Managed Subsidiaries, our directors~~periodic reviews, we will rely primarily on information provided to ~~them~~us by ~~HCS and~~ our ~~management. Furthermore, the Managed Subsidiaries~~external managers. Complicating matters further, our external managers may use complex investment strategies and transactions, which may be difficult or impossible to unwind. ~~Although~~As a result, because our ~~Board of Directors must first approve an alternative investment opportunity, HCS has~~external managers have great latitude ~~within our Managed Subsidiaries’ broad investment guidelines~~ to determine the types of assets it ~~will recommend to our Board of Directors as~~may decide are proper investments for the ~~Managed Subsidiaries. Some~~Midway Residential Mortgage Portfolio or us, there can be no assurance that we would otherwise approve of these ~~investment opportunities~~investments individually or that they will be successful.

Pursuant to the terms of the Midway Management Agreement, we may ~~present a conflict~~only redeem invested capital in an amount equal to the lesser of ~~interest for HCS and Mr. Fowler, particularly~~10% of the invested capital in the ~~case of certain co-investment opportunities where affiliates~~Midway Residential Mortgage Portfolio or $10 million as of the ~~JMP Group~~last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act, and we are only permitted to make one such redemption request in any 75-day period. In the event a significant market event or shock, we may be unable to effect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Because a reduction of invested capital would reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions.

Other than HCS, none of our external managers is obligated to dedicate any specific personnel exclusively to us, nor are they or their personnel obligated to dedicate any specific portion of their time to the management of our business. As a result, we cannot provide any assurances regarding the amount of time our external managers will dedicate to the management of our business. Moreover, each of our external managers has significant responsibilities for other investment vehicles and may not always be ~~co-investment partners. The investment guidelines do~~able to devote sufficient time to the management of our business. Consequently, we may not ~~permit HCS to invest in Agency RMBS, since these investments are made~~receive the level of support and assistance that we otherwise might receive if such services were provided internally by us.

~~The advisory agreement does not restrict the ability of~~To our knowledge, HCS or its affiliates from engaging in other business ventures of any nature (including other REITs), whether or not such ventures are competitive with the Managed Subsidiaries’ business so long as HCS’s management of other REITs or funds does not disadvantage us or the Managed Subsidiaries.

HCS may engage other parties, including its affiliates, to provide services to us or our subsidiaries; provided that any such agreements with affiliates of HCS shall be on terms no more favorable to such affiliate than would be obtained from a third party on an arm’s-length basis and, in certain circumstances, approved by a majority of our independent directors. With respect to portfolio management services, any agreements with affiliates shall be subject to our prior written approval and HCS shall remain liable for the performance of such services. With respect to monitoring services, any agreements with affiliates shall be subject to our prior written approval and the base advisory fee payable to HCS shall be reduced by the amount of any fees payable to such other parties, although we will reimburse any out-of-pocket expenses incurred by such other parties that are reimbursable by us.

~~Pursuant to a Schedule 13D filed with the SEC on February 17, 2009, HCS and JMP Group, Inc.,~~ beneficially owned approximately ~~16.8% and 12.2%, respectively,~~15.3% of our outstanding common stock as of December 31, ~~2008.~~2010. In addition, ~~pursuant to~~our chairman, Mr. Fowler, is also a ~~Schedule 13G/A filed with the SEC on December 4, 2008, Joseph A. Jolson, the Chairman and Chief Executive Officer~~managing director of JMP Group Inc. and a portfolio manager at HCS ~~beneficially owned approximately 9.5% of our outstanding common stock. HCS is an investment adviser that manages investments~~ and, trading accounts of other persons, including certain accounts affiliated with JMP Group, Inc., and is deemed the beneficial owner of shares of our common stock held by these accounts. As noted above, Mr. Fowler is a managing director of HCS, which is a wholly-owned subsidiary of JMP Group, Inc. Asas a result, of the combined voting power of HCS, JMP Group, Inc. and Joseph A. Jolson, these stockholders exert significant influence over matters submitted to a vote of stockholders, including the election of directors and approval of a change in control or business combination of our company, and strategic direction of our Company. This concentration of ownership may result in decisions affecting us that are not in the best interests of all our stockholders. In addition, Mr. Fowler may have a conflict of interest in situations where the best interests of our company and our stockholders do not align with the interests of HCS ~~JMP Group, Inc.~~ or its ~~affiliates, which may~~affiliates. This could result in decisions that are not in the best interests of ~~all~~our company or our stockholders.

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Company History

We were formed as a Maryland corporation in September 2003. In June 2004, we completed our initial public offering, or IPO, ~~that~~which resulted in approximately $122 million in net proceeds to our company. Prior to the IPO, we did not have recurring business operations. As part of our formation transactions, concurrent with our IPO, we acquired 100% of the equity interests in HC, which at the time was a residential mortgage origination company that historically had sold or brokered all of the mortgage loans it originated to third parties. Effective withFollowing the completion of our IPO, we operated ~~two business segments: (i) our~~as a self-advised residential mortgage ~~portfolio management segment~~finance company that focused on originating, acquiring and ~~(ii) our~~investing in adjustable and variable rate mortgage ~~lending segment.~~(“ARM”) assets. Under this business model, we ~~would retain~~retained and either ~~finance~~financed in our portfolio or sold to third parties selected ~~adjustable-rate~~ARM loans and hybrid ~~mortgage~~ARM loans ~~that we~~ originated ~~or we would sell them to third parties,~~by HC, while continuing to sell all fixed-rate loans originated by HC to third parties.

~~Commencing in March 2006, we stopped retaining all loans originated by HC and began to sell these loans to third parties. With~~ In the first quarter of 2007, with the mortgage lending business facing increasingly difficult operating conditions, we ~~began considering strategic alternatives for our business in mid-2006. After an extensive review of the Company’s strategic and financial alternatives, our Board of Directors determined that~~completed the sale of substantially all of the assets ofrelated to our retail and wholesale residential mortgage lending platform ~~was in~~to IndyMac Bank, F.S.B., thereby marking our exit from the ~~best interests our stockholders and company. On February 22, 2007, we completed~~mortgage lending business. In connection with the sale of ~~our wholesale~~the mortgage lending business, HC recorded a significant net operating loss carry-forward, of which approximately $59 million remained at December 31, 2010, subject to Tribeca Lending Corp., a subsidiary of Franklin Credit Management Corporation, for an estimated purchase price of $0.5 million. Shortly thereafter, on March 31, 2007, we completed the sale of substantially alllimitation under Section 382 of the operating assets related to the retail mortgage lending platform of HC to Indymac Bank, F.S.B., (“Indymac”), for a purchase price of approximately $13.5 million in cash and the assumption of certain of our liabilities. Since this sale, which effectively markedIRC.

Following our exit from the mortgage lending business, we ~~have exclusively~~ focused our ~~resources and~~ efforts on the business of investing, on a leveraged basis, in ~~RMBS.~~

~~During 2007, due in part to continued difficult operating conditions~~Agency RMBS, prime ARM loans and non-Agency RMBS, with a primary focus on growing our ~~small market capitalization as compared to our peers, our Board~~portfolio of ~~Directors continued to consider and review our strategic and financial alternatives.~~Agency RMBS. In January 2008 we formed a strategic relationship with ~~the~~ JMP Group ~~whereby~~Inc., by concurrently entering into The Prior Advisory Agreement with HCS ~~became the contractual advisor to the Managed Subsidiaries~~ and ~~the JMP Group purchased 1.0~~selling $20 million ~~shares~~ of our Series A Preferred Stock for an aggregate purchase price of $20.0 million. We formed this relationship with the JMP Group for the purpose of improving our capitalization and diversifying our investment portfolio. The Series A Preferred Stock entitles the holders to receive a cumulative dividend of 10% per year, subject to an increase to the extent any future quarterly common stock dividends exceed $0.20 per share. The Series A Preferred Stock is convertible into shares of the Company's common stock based on a conversion price of $8.00 per share of common stock, which represents a conversion rate of two and one-half (2 ½) shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock matures on December 31, 2010, at which time any outstanding shares must be redeemed by the Company at the $20.00 per share liquidation preference. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No.150, ~~Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, because of this mandatory redemption feature, the Company classifies these securities as a liability on its balance sheet.~~

~~Upon completion of the issuance and sale of the Series A~~A. Preferred Stock to ~~the~~ JMP Group ~~on January 18, 2008~~Inc. and ~~pursuant to the stock purchase agreement providing for the sale~~certain of the shares, James J. Fowler and Steven M. Abreu were appointed to our Board of Directors, with Mr. Fowler being appointed the Non-Executive Chairman of our Board of Directors. Mr. Fowler also serves as the Chief Investment Officer of the Managed Subsidiaries.its affiliates. In ~~addition, concurrent with these actions, Steven B. Schnall, Mary Dwyer Pembroke, Jerome F. Sherman and Thomas W. White resigned as members of our Board of Directors.~~

On February ~~21,~~ 2008, we ~~completed~~received net proceeds of approximately $56.5 million from the issuance and sale of 7.5 million shares of our common stock to certain accredited investors in a private placement atfor which an affiliate of JMP Group Inc. served as placement agent. At the time, we anticipated that we would continue to grow a ~~price~~portfolio of ~~$8.00 per share. This private offering of~~Agency RMBS, while, together with HCS, opportunistically pursuing and acquiring “alternative” real estate-related and financial assets that would diversify our ~~common stock generated net proceeds~~market risks and might permit us to us of $56.5 million after payment of private placement fees and expenses. In connection with this private offering of our common stock, we entered into a registration rights agreement, pursuant to which we were required to file with the Securities and Exchange Commission,potentially utilize all or SEC, a resale shelf registration statement registering for resale the 7.5 million shares sold in the private offering. We filed a resale shelf registration statement on Form S-3 on April 4, 2008, which was declared effective by the SEC on April 18, 2008. We used substantially allpart of the significant net operating loss carry-forward held by HC. Accordingly, we used the proceeds from ~~the~~our private offerings of common and preferred stock to acquire a significant portfolio of Agency RMBS during January and February of 2008. Like other mortgage REITs and other industry participants, we were significantly affected by the market disruptions in 2008, ~~offerings~~particularly, the market disruption in March 2008, which caused us to ~~acquire approximately $712.4 million~~liquidate a significant percentage of our Agency RMBS ~~for~~portfolio in an effort to reduce leverage and improve our ~~principal investment portfolio.~~

~~On February 3, 2009, David A. Akre resigned his positions~~liquidity position as our Co-Chief Executive Officer and as a member of our Board of Directors. In connection with Mr. Akre’s resignation, Steven R. Mumma, our Co-Chief Executive Officer, President and Chief Financial Officer, was appointed as our Chief Executive Officer, effective immediately. Mr. Mumma also retained his other positions with the Company and will continue to serve as a member of our Board of Directors.credit markets tightened.

Since ~~June 5,~~the market disruptions of 2008, we have endeavored to reposition our investment portfolio from one primarily focused on leveraged Agency RMBS and prime ARM loans held in securitization trusts, which primarily involve interest rate risk, to a more diversified portfolio that includes elements of credit risk with reduced leverage. Most recently, we announced the ~~Company’s shares~~formation and initial funding of ~~common stock have been listed on~~ the ~~NASDAQ Capital Market (“NASDAQ”) under the symbol “NYMT.” The Company’s common stock was previously listed on the~~Midway Residential Mortgage Portfolio. See “Our Investment Strategy” above.

Our Structure

We conduct our business through New York ~~Stock Exchange (“NYSE”)~~Mortgage Trust, Inc., which serves as the parent company, and several of our subsidiaries, including special purpose subsidiaries established for loan securitization purposes. In addition, we conduct certain of our portfolio investment operations through our TRS, HC, in order to utilize, to the extent permitted by law, some or all of a net operating loss carry-forward held in HC that resulted from HC’s exit from the ~~time~~mortgage lending business, and through NYMF, our QRS, which currently holds certain mortgage-related assets for regulatory compliance purposes. The Company consolidates all of ~~our IPO until September 11, 2007, at which time our common stock was de-listed from~~its subsidiaries under generally accepted accounting principles in the NYSE because our average market capitalization was less than $25 million over a consecutive 30-trading day period. Between September 11, 2007 and June 5, 2008, our common stock was reported on the Over-the-Counter Bulletin BoardUnited States of America (“~~OTCBB”~~GAAP”).

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In connection with the minimum listing price requirements of NASDAQ, we have completed two separate reverse stock splits on our common stock. In October 2007, we completed a 1-for-5 reverse split of our common stock, and in May 2008, we completed a 1-for-2 reverse split of our common stock. The information in this Annual Report on Form 10-K gives effect to these reverse stock splits as if they occurred at the Company’s inception.

Certain Federal Income Tax Considerations and Our Status as a REIT

We have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code (IRC) of 1986, as amended, for federal income tax purposes, commencing with our taxable year ended December 31, 2004, and we believe that our current and proposed method of operation will enable us to continue to qualify as a REIT for our taxable year ended December 31, ~~2008~~2011 and thereafter. ~~We hold our mortgage portfolio investments directly or in a qualified REIT subsidiary, or QRS.~~ Accordingly, the net interest income we earn on these assets is generally not subject to federal income tax as long as we distribute at least 90% of our REIT taxable income in the form of a dividend to our stockholders each year and comply with various other requirements. Taxable income generated by HC, our taxable REIT subsidiary, or TRS, is subject to regular corporate income tax.

The benefit of REIT tax status is a tax treatment that avoids “double taxation,” or taxation at both the corporate and stockholder levels, that generally applies to distributions by a corporation to its stockholders. Failure to qualify as a REIT would subject our Company to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates and distributions to its stockholders in any such year would not be deductible by our Company.

Summary Requirements for Qualification

Organizational Requirements

A REIT is a corporation, trust, or association that meets each of the following requirements:

1) It is managed by one or more trustees or directors.

2) Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest.

3) It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws.

4) It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws.

5) At least 100 persons are beneficial owners of its shares or ownership certificates.

6) Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, which the federal income tax laws define to include certain entities, during the last half of any taxable year.

7) It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the IRS that must be met to elect and maintain REIT status.

8) It meets certain other qualification tests, described below, regarding the nature of its income and assets.

~~Table~~We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of ~~Contents~~

a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.

Qualified REIT Subsidiaries. A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “qualified REIT subsidiary” that we own will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit.

Taxable REIT Subsidiaries. A REIT is permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries,” or TRSs. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 25% ~~(20% for taxable years prior to 2009)~~ of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.

A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. We have elected for HC to be treated as a TRS. HC is subject to corporate income tax on its taxable income.

Qualified REIT Assets

. On the last day of each calendar quarter, at least 75% of the value of our assets (which includes any assets held through a qualified REIT subsidiary) must consist of qualified REIT assets — primarily real estate, mortgage loans secured by real estate, and certain mortgage-backed securities (“Qualified REIT Assets”), government securities, cash, and cash items. We believe that substantially all of our assets are and will continue to be Qualified REIT Assets. On the last day of each calendar quarter, of the assets not included in the foregoing 75% asset test, the value of securities that we hold issued by any one issuer may not exceed 5% in value of our total assets and we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities (with an exception for securities of a qualified REIT subsidiary or of a taxable REIT subsidiary). In addition, the aggregate value of our securities in taxable REIT subsidiaries cannot exceed 25% of our total assets. We monitor the purchase and holding of our assets for purposes of the above asset tests and seek to manage our portfolio to comply at all times with such tests.

We may from time to time hold, through one or more taxable REIT subsidiaries, assets that, if we held them directly, could generate income that would have an adverse effect on our qualification as a REIT or on certain classes of our stockholders.

Gross Income Tests

We must meet the following separate income-based tests each year:

1. The 75% Test. At least 75% of our gross income for the taxable year must be derived from Qualified REIT Assets. Such income includes interest (other than interest based in whole or in part on the income or profits of any person) on obligations secured by mortgages on real property, rents from real property, gain from the sale of Qualified REIT Assets, and qualified temporary investment income or interests in real property. The investments that we have made and intend to continue to make will give rise primarily to mortgage interest qualifying under the 75% income test.

2. The 95% Test. At least 95% of our gross income for the taxable year must be derived from the sources that are qualifying for purposes of the 75% test, and from dividends, interest or gains from the sale or disposition of stock or other assets that are not dealer property.

Distributions

We must distribute to our stockholders on a pro rata basis each year an amount equal to at least (i) 90% of our taxable income before deduction of dividends paid and excluding net capital gain, plus (ii) 90% of the excess of the net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code, less (iii) any “excess non-cash income.” We have made and intend to continue to make distributions to our stockholders in sufficient amounts to meet the distribution requirement for REIT qualification.

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~~Investment Company Act Exemption~~

We operate our business so as to be exempt from registration under the Investment Company Act. We rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. We monitor our portfolio periodically and prior to each investment to confirm that we continue to qualify for the exemption. To qualify for the exemption, we make investments so that at least 55% of the assets we own consist of qualifying mortgages and other liens on and interests in real estate, which are collectively referred to as “qualifying real estate assets,” and so that at least 80% of the assets we own consist of real estate-related assets (including our qualifying real estate assets, both as measured on an unconsolidated basis). We generally expect that our investments will be considered either qualifying real estate assets or real estate-related assets under Section 3(c)(5)(C) of the Investment Company Act. Qualification for the Section 3(c)(5)(C) exemption may limit our ability to make certain investments. In addition, we must ensure that each of our subsidiaries qualifies for the Section 3(c)(5)(C) exemption or another exemption available under the Investment Company Act.

Competition

Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. When we invest in mortgage-backed securities, mortgage loans and other investment assets, we compete with a variety of institutional investors, including other REITs, insurance companies, mutual funds, hedge funds, pension funds, investment banking firms, banks and other financial institutions that invest in the same types of assets. Many of these investors have greater financial resources and access to lower costs of capital than we do. The existence of these competitive entities, as well as the possibility of additional entities forming in the future, may increase the competition for the available supply of mortgage and other investment assets suitable for purchase, resulting in higher prices and lower yields on assets.do..

~~Personnel~~

~~As of December 31, 2008 we employed six people.~~

Corporate ~~Office~~Offices and Personnel

Our corporate headquarters are located at 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017 and our telephone number is (212) 792-0107. As of December 31, 2010 we employed three full-time employees.

Access to our Periodic SEC Reports and Other Corporate Information

Our internet website address is ~~www.nymtrust.com~~.www.nymtrust.com. We make available free of charge, through our internet website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics and the charters of our Audit, Compensation and Nominating and Corporate Governance Committees are also available on our website and are available in print to any stockholder upon request in writing to New York Mortgage Trust, Inc., c/o Secretary, 52 Vanderbilt Avenue, Suite 403, New York, New York, 10017. Information on our website is neither part of nor incorporated into this Annual Report on Form 10-K.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

~~This~~ Some of the statements included in this Annual Report on Form 10-K ~~contains certain~~constitute forward-looking statements. ~~Forward looking~~Forward-looking statements ~~are those which~~relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical ~~in nature and~~facts. In some cases, you can ~~often be identified~~identify forward-looking statements by ~~their inclusion of words~~terms such as ~~“will,~~“anticipate,” ~~“anticipate,~~“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “goal,” “objective,” “potential,” “project,” “should,” ~~“expect,” “believe,” “intend”~~“will” and ~~similar expressions. Any projection~~“would” or the negative of ~~revenues, earnings or losses, capital expenditures, distributions, capital structure~~these terms or other ~~financial terms is a forward-looking statement. Certain statements regarding the following particularly are forward-looking in nature:~~

~~our business strategy;~~

~~future performance, developments, market forecasts or projected dividends;~~

~~projected acquisitions or joint ventures; and~~

~~projected capital expenditures.~~

It is important to note that the description of our business is general and our investment in real estate-related and certain alternative assets in particular, is a statement about our operations as of a specific point in time and is not meant to be construed as an investment policy. The types of assets we hold, the amount of leverage we use or the liabilities we incur and other characteristics of our assets and liabilities disclosed in this report as of a specified period of time are subject to reevaluation and change without notice.comparable terminology.

~~Our~~The forward-looking statements are based ~~upon~~on our ~~management's~~ beliefs, assumptions and expectations of our future ~~operations and economic~~ performance, taking into account ~~the~~ information currently ~~available to us. Forward-looking statements involve risks~~in our possession. These beliefs, assumptions and ~~uncertainties, some~~expectations may change as a result of many possible events or factors, not all of which are ~~not currently~~ known to us or are within our control. If a change occurs, the performance of our portfolio and ~~many of which are beyond~~ our ~~control and that might cause our actual results, performance or~~business, financial condition, ~~to be~~liquidity and results of operations may vary materially ~~different~~ from ~~the expectations of future results, performance~~those expressed, anticipated or ~~financial condition we express or imply~~contemplated in ~~any~~our forward-looking statements. ~~Some of~~You should carefully consider these risks, along with the ~~important~~following factors that could cause ~~our~~ actual results ~~performance or financial condition~~ to ~~differ materially~~vary from ~~expectations are:~~our forward-looking statements:

our portfolio strategy and operating strategy may be changed or modified by our management without advance notice to you or stockholder approval and we may suffer losses as a result of such modifications or changes;

~~market changes in the terms and availability of repurchase agreements used to finance our investment portfolio activities;~~

~~reduced demand for our securities in the mortgage securitization and secondary markets;~~

~~interest rate mismatches between our~~ ~~interest-earning assets~~ ~~and our borrowings used to fund such purchases;~~

changes in ~~interest rates~~our business and ~~mortgage prepayment rates;~~strategies;

~~changes in the financial markets~~our ability to successfully diversify our investment portfolio and ~~economy generally, including the continued or accelerated deterioration of the U.S. economy~~;

identify suitable assets to invest in;

~~effects~~the effect of ~~interest rate caps~~the Federal Reserve’s and the U.S. Treasury’s actions and programs, including future purchases or sales of Agency RMBS by the Federal Reserve or Treasury, on the liquidity of the capital markets and the impact and timing of any further programs or regulations implemented by the U.S. Government or its agencies;

any changes in laws and regulations affecting the relationship between Fannie Mae, Freddie Mac and Ginnie Mae and the U.S. Government;

increased prepayments of the mortgages and other loans underlying our ~~adjustable-rate mortgage-backed~~investment securities;

the volatility of the markets for our targeted assets;

increased rates of default and/or decreased recovery rates on our assets;

mortgage loan modification programs and future legislative action;

the degree to which our hedging strategies may or may not protect us from, or expose us to, credit or interest rate ~~volatility;~~risk;

~~potential impacts of our leveraging policies on our net income and cash available for distribution;~~

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~~our board's ability to change our operating policies~~changes in the availability, terms and ~~strategies without notice to you or stockholder approval;~~deployment of capital;

changes in interest rates and interest rate mismatches between our ~~ability to successfully implement~~assets and ~~grow our alternative investment strategy~~ ~~and to identify suitable alternative assets~~;

related borrowings;

our ability to ~~manage, minimize or eliminate liabilities stemming from~~maintain existing financing agreements, obtain future financing arrangements and the ~~discontinued operations including, among other things, litigation, repurchase obligations on the sales~~terms of ~~mortgage loans and property leases;~~such arrangements;

~~actions taken by~~changes in economic conditions generally and the ~~U.S.~~mortgage, real estate and ~~foreign governments, central banks and other governmental and regulatory bodies for the purpose of stabilizing the financial credit and housing~~debt securities markets ~~and economy generally, including loan modification programs;~~specifically;

legislative or regulatory changes;

changes to ~~the nature of the guarantees provided by Fannie Mae and Freddie Mac;~~GAAP; and

the other important factors identified in, or incorporated by reference into, this ~~report,~~Annual Report, including, but not limited to those under the captions ~~“Management's~~“Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market ~~Risk”, and those described in Part I, Item 1A – “Risk Factors,~~Risk,” and the various other factors identified in any other documents filed by us with the SEC.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the events described by our forward-looking events might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. In addition, you should carefully review the risk factors described in other documents we file from time to time with the SEC.

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Item 1A.RISK FACTORS

Set forth below are the risks that we believe are material to stockholders. You should carefully consider the following risk factors and the various other factors identified in or incorporated by reference into any other documents filed by us with the SEC in evaluating our company and our business. The risks discussed herein can adversely affect our business, liquidity, operating results, prospects, and financial condition. This could cause the market price of our securities to decline. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects, and financial condition.

Risks Related to Our Business and Our Company

Difficult conditions in the mortgage and residential real estate markets have caused and may cause us to experience losses and these conditions may persist for the foreseeable future.

Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets and the economy generally. In addition, we expect that as we acquire commercial mortgage-related assets in the future, our business will be increasingly affected by conditions in the commercial mortgage market and the commercial real estate market. Furthermore, we believe the risks associated with our investments will be more acute during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Concerns about the residential and commercial mortgage markets and a declining real estate market generally, as well as inflation, energy costs, geopolitical issues and the availability and cost of credit have contributed to increased volatility and diminished expectations for the economy and markets going forward. The residential and commercial mortgage markets have been adversely affected by changes in the lending landscape, the severity of which was largely unanticipated by the markets. There is no assurance that these markets have stabilized or that they will not worsen.

In addition, a continued economic slowdown or delayed recovery may result in continued decreased demand for residential and commercial property, which would likely further compress homeownership rates and place additional pressure on home price performance, while forcing commercial property owners to lower rents on properties with excess supply. We believe there is a strong correlation between home price growth rates and mortgage loan delinquencies. Moreover, to the extent that a property owner has fewer tenants or receives lower rents, such property owners will generate less cash flow on their properties, which increases significantly the likelihood that such property owners will default on their debt service obligations. If the borrowers of our mortgage loans, or the loans underlying certain of our investment securities, default, we may incur losses on those loans or investment securities. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income and our ability to acquire our targeted assets in the future on favorable terms or at all. The further deterioration of the residential or commercial mortgage markets, the residential or commercial real estate markets, the financial markets and the economy generally may result in a decline in the market value of our investments or cause us to experience losses related to our assets, which may adversely affect our results of operations, the availability and cost of credit and our ability to make distributions to our stockholders.

We may change our investment strategy, hedging strategy and asset allocation and operational and management policies without stockholder consent, which may result in the purchase of riskier assets and materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We may change our investment strategy, hedging strategy and asset allocation and operational and management policies at any time without the consent of our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier than, the assets and hedging transactions described in this report. A change in our investment strategy or hedging strategy may increase our exposure to real estate values, interest rates and other factors. A change in our asset allocation could result in us purchasing assets in classes different from those described in this report. Our board of directors determines our operational policies and may amend or revise our policies, including those with respect to our acquisitions, growth, operations, indebtedness, capitalization and distributions or approve transactions that deviate from these policies without a vote of, or notice to, our shareholders. In addition, certain of our external managers have great latitude in making investment and hedging decisions on our behalf. Changes in our investment strategy, hedging strategy and asset allocation and operational and management policies could materially adversely affect our business, financial condition and results of operations and ability to make distributions to our stockholders.

Interest rate mismatches between the interest-earning assets held in our investment portfolio ~~particularly RMBS,~~ and the borrowings used to fund the purchases of those assets may reduce our net income or result in a loss during periods of changing interest rates.

Certain of the ~~RMBS~~assets held in our investment portfolio, particularly RMBS, have a fixed coupon rate, generally for a significant period, and in some cases, for the average maturity of the asset. At the same time, our repurchase agreements and other borrowings typically provide for a payment reset period of 30 days or less. In addition, the average maturity of our borrowings generally will be shorter than the average maturity of the RMBS currently in our portfolio and shorter than the RMBS and other mortgage-related securities and loans in which we seek to invest. Historically, we have used swap agreements as a means for attempting to fix the cost of certain of our liabilities over a period of time; however, these agreements will generally not be sufficient to match the cost of all our liabilities against all of our investment securities. In the event we experience unexpectedly high or low prepayment rates on ~~our~~ RMBS or other mortgage-related securities or loans, our strategy for matching our assets with our liabilities is more likely to be unsuccessful.

Interest rate fluctuations will also cause variances in the yield curve, which may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on the RMBS and other interest-earning assets in our investment portfolio. ~~Because~~For example, because the RMBS in our investment portfolio typically bear interest based on longer-term rates while our borrowings typically bear interest based on short-term rates, a flattening of the yield curve would tend to decrease our net income and the market value of these securities. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur significant operating losses. A flat or inverted yield curve may also result in an adverse environment for adjustable-rate RMBS volume, as there may be little incentive for borrowers to choose the underlying mortgage loans over a longer-term fixed-rate loan. If the supply of adjustable-rate RMBS decreases, yields may decline due to market forces.

Declines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

The market value of the interest-bearing assets in which we invest, most notably RMBS and purchased prime ARM loans and any related hedging instruments, may move inversely with changes in interest rates. We anticipate that increases in interest rates will tend to decrease our net income and the market value of our interest-bearing assets. ~~Substantially all~~A significant percentage of the ~~RMBS~~securities within our investment portfolio isare classified for accounting purposes ~~either as “trading securities” or~~ as “available for sale.” Changes in the market values of trading securities will be reflected in earnings and changes in the market values of available for sale securities will be reflected in stockholders’ equity. As a result, a decline in market values may reduce the book value of our assets. Moreover, if the decline in market value of an available for sale security is other than temporary, such decline will reduce earnings.

A decline in the market value of our ~~RMBS and other~~ interest-bearing assets ~~such as the decline we experienced during the market disruption in March 2008,~~ may adversely affect us, particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan, which would reduce our liquidity and limit our ability to leverage our assets.

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In March 2008, due in part to decreases in the market value of certain of the RMBS held in our portfolio caused by the March 2008 market disruption and the related increase in collateral requirements by our lenders, we elected to improve our liquidity position by selling an aggregate of approximately $598.9 million of Agency RMBS, resulting in a net loss in earnings during that quarter. Similar to March 2008,addition, if we are, or anticipate being, unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. In the event that we do not have sufficient liquidity to meet such requirements, lending institutions may accelerate indebtedness, increase interest rates and terminate our ability to borrow, any of which could result in a rapid deterioration of our financial condition and cash available for distribution to our stockholders. Moreover, if we liquidate the assets at prices lower than the amortized cost of such assets, we will incur losses.

~~We may change our investment strategy, operating policies and/or asset allocations without stockholder consent, any of which could result in losses.~~

We may change our investment strategy, operating policies and/or asset allocation with respect to investments, acquisitions, leverage, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which may result in riskier investments. Although we have most recently employed a portfolio strategy that focuses on investments in Agency RMBS, we expect to commence investments under our alternative investment strategy in 2009. In connection with a $20.0 million preferred equity investment in our company by JMP Group, Inc. and certain of its affiliates in January 2008, we entered into an advisory agreement with HCS, pursuant to which HCS will manage any alternative investment strategy conducted through the Managed Subsidiaries during the term of the advisory agreement. Since entering into the advisory agreement, we have explored and will continue to consider alternative investments, including those outside of our targeted asset class, that we believe will be accretive to earnings and may allow us to utilize all or a portion of an approximately $64.0 million net operating loss carry-forward. Such alternative investments may include, without limitation, lower rated non-Agency RMBS, CMBS and corporate CLO securities as well as equity participations in funds or companies that invest in similar type assets. A change in our investment strategy may increase our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from our historical investments and in which we have limited or no investment experience. These changes could result in a decline in earnings or losses which could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends.

Continued adverse developments in the residential mortgage market, and the economy generally, may adversely affect our business, particularly our ability to acquire Agency RMBS and the value of the Agency RMBS that we hold in our portfolio as well as our ability to finance or sell our Agency RMBS.

In recent years, the residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions, including declining home values, heightened defaults, credit losses and liquidity concerns. Over the past year, news of potential and actual security liquidations has increased the volatility of many financial assets, including Agency RMBS and other high-quality residential MBS assets. These recent disruptions have materially adversely affected the performance and market value of the RMBS in our portfolio and prime ARM loans held in securitization trusts, as well as other interest-earning assets that we may consider acquiring in the future. Securities backed by residential mortgage loans originated in 2006 and 2007 have had higher and earlier than expected rates of delinquencies. In addition, the U.S. economy is presently mired in a recession, with housing prices that continue to fall in many areas around the country while unemployment rates continue to rise, further increasing the risk for higher delinquency rates. Many RMBS and other interest-earning assets have been downgraded by rating agencies in recent years, and rating agencies may further downgrade these securities in the future. Lenders have imposed additional and more stringent equity requirements necessary to finance these assets and frequent impairments based on mark-to-market valuations have generated substantial collateral calls in the industry. As a result of these difficulties and changed economic conditions, many companies operating in the mortgage specialty finance sectors have failed and others, including Fannie Mae and Freddie Mac, are facing serious operating and financial challenges. While the U.S. Federal Reserve has taken certain actions in an effort to ameliorate the current market conditions, and the U.S. Treasury and the Federal Housing Finance Agency, or FHFA, which is the federal regulator now assigned to oversee Fannie Mae and Freddie Mac, are also taking actions, these efforts may be ineffective. As a result of these factors, among others, the market for these securities may be adversely affected for a significant period of time.

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During the past year, housing prices and appraisal values in many states have declined or stopped appreciating, after extended periods of significant appreciation. A continued decline or an extended flattening of those values may result in additional increases in delinquencies and losses on residential mortgage loans generally, particularly with respect to second homes and investor properties and with respect to any residential mortgage loans, the aggregate loan amounts of which (including any subordinate liens) are close to or greater than the related property values.

Fannie Mae and Freddie Mac guarantee the payments of principal and interest on the Agency RMBS in our portfolio even if the borrowers of the underlying mortgage loans default on their payments. However, rising delinquencies and market perception can still negatively affect the value of our Agency RMBS or create market uncertainty about their true value. While the market disruptions have been most pronounced in the non-Agency RMBS market, the impact has extended to Agency RMBS. During a significant portion of 2008, the value of Agency RMBS were unstable and relatively illiquid compared to prior periods.

Agency RMBS guaranteed by Fannie Mae and Freddie Mac are not supported by the full faith and credit of the United States. Fannie Mae and Freddie Mac have suffered significant losses and on September 6, 2008, FHFA placed Fannie Mae and Freddie Mac into conservatorship. Despite these steps, Fannie Mae and Freddie Mac could default on their guarantee obligations which would materially and adversely affect the value of our Agency RMBS or other Agency indebtedness in which we may invest in the future.

We generally post our Agency RMBS as collateral for our borrowings under repurchase agreements. Any decline in their value, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or to maintain our compliance with the terms of any financing arrangements. The value of Agency RMBS may decline for several reasons, including, for example, rising delinquencies and defaults, increases in interest rates, falling home prices and credit uncertainty at Fannie Mae or Freddie Mac. In addition, since early 2008, repurchase lenders have been requiring higher levels of collateral to support loans collateralized by Agency RMBS than they have in the past, making borrowings more difficult and expensive. At the same time, market uncertainty about residential mortgage loans in general could continue to depress the market for Agency RMBS, which means that it may be more difficult for us to sell Agency RMBS on favorable terms or at all. Further, a decline in the value of Agency RMBS could subject us to margin calls, for which we may have insufficient liquidity to support, resulting in forced sales of our assets at inopportune times. If market conditions result in a decline in available purchasers of Agency RMBS or the value of our Agency RMBS, our financial position and results of operations could be adversely affected.

~~The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes~~Changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government, may adversely affect our business.

~~The payments we expect to receive~~Payments on the Agency RMBS ~~we hold in our portfolio and~~ in which we invest ~~depend upon a steady stream of payments on the mortgages underlying the securities and~~ are guaranteed by ~~Ginnie Mae,~~ Fannie Mae and Freddie Mac. Ginnie Mae is part of a U.S. government agency and its guarantees are backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac are U.S. government-sponsored enterprises, but their guarantees are not backed by the full faith and credit of the United States.

~~Since 2007,~~As broadly publicized, Fannie Mae and Freddie Mac have ~~reported substantial~~experienced significant losses in recent years, causing the U.S. Government to place Fannie Mae and Freddie Mac under federal conservatorship and to inject significant capital in these businesses. Questions regarding the continued viability of Fannie Mae and Freddie Mac, as currently structured, including the guarantees that back the RMBS issued by them, and the U.S. Government’s participation in the U.S. residential mortgage market through the GSEs, continue to persist. In February 2011, the U.S. Department of the Treasury along with the U.S. Department Housing and Urban Development released a ~~need~~much-awaited report titled “Reforming America’s Housing Finance Market”, which outlines recommendations for ~~substantial amounts of additional capital. In response to~~reforming the ~~deteriorating financial condition~~U.S. housing system, specifically the roles of Fannie Mae and Freddie Mac and transforming the ~~recent credit~~government’s involvement in the housing market ~~disruption, Congress~~ and ~~the U.S. Treasury undertook a series of actions~~its relationship to stabilize these government-sponsored entities and the financial markets, generally, including placing Fannie Mae and Freddie Mac into conservatorship on September 7, 2008. The conservatorship of Fannie Mae and Freddie Mac and certain other actions taken by the U.S. Treasury and U.S. Federal Reserve were designed to boost investor confidence in Fannie Mae’s and Freddie Mac’s debt and mortgage-backed securities. The U.S. government program includes contracts between the U.S. Treasury and each government-sponsored enterprise to seek to ensure that each enterprise maintains a positive net worth. Each contract has a capacity of $100 billion and provides for the provision of cash by the U.S. Treasury to the government-sponsored enterprise if FHFA determines that its liabilities exceed its assets. Each of Fannie Mae and Freddie Mac has already requested or expects to request significant funds from these facilities. It is possible that each of Freddie Mac and Fannie Mae may seek and require amounts in excess of the $100 billion capacity and such amounts may be unavailable. In addition to these contracts between the U.S. Treasury and each of Fannie Mae and Freddie Mac that provide for an infusion of capital, the U.S. Treasury has established a secured credit facility for these entities and initiated a temporary program to purchase Agency RMBS issued by Fannie Mae and Freddie Mac. ~~Although~~It is unclear how future legislation may impact the U.S. government has described some specific steps and reforms that it intends to take as part of the conservatorship process, Fannie Mae and Freddie Mac have continued to incur losses and efforts to stabilize these entities may not be successfulhousing finance market and the ~~outcome~~investing environment for mortgage-related securities and ~~impact~~more specifically, Agency RMBS and non-Agency RMBS, as the method of ~~these events remain highly uncertain.~~

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~~Although~~reform is undecided and has not yet been defined by the ~~U.S. government has committed capital~~regulators. New regulations and programs related to Fannie Mae and Freddie Mac, ~~there can be no assurance that~~including those affecting the ~~credit facilities and other capital infusions will be adequate for their needs. If~~relationship between the financial support is inadequate, these companies could continue to suffer losses and could fail to honor their guarantees and other obligations. Since Fannie Mae and Freddie Mac were placed in conservatorship, then-current U.S. Treasury Secretary Paulson began urging Congress to re-examine the fundamental structure of Fannie Mae and Freddie Mac. Mr. Paulson later commented that allowing the two companies to return to their previous operating approach was not a viable option. The future roles of Fannie Mae and Freddie Mac could be significantly reducedGSEs and the nature of their guarantees could be considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes Agency RMBS and could have broad adverse implications for the market and for our business.

~~Recently, Federal Reserve indicated that it will purchase up to an additional $750 billion of Agency RMBS, bringing its total purchase commitments to $1.25 trillion. The~~ U.S. Treasury also implemented a temporary program to purchase RMBS. Purchases under the U.S. Treasury’s program began in September 2008 and the Federal Reserve’s program in January 2009, but there is no certainty that the U.S. Treasury or the Federal Reserve will continue to purchase additional Agency RMBS in the future. Each of the U.S. Treasury and the Federal Reserve may hold its portfolio of Agency RMBS to maturity, and, based on mortgage market conditions, may make adjustments to the portfolio. This flexibilityGovernment, may adversely affect the pricing, supply, liquidity and ~~availability for our target assets. It is also possible that the U.S. Treasury’s commitment to purchase Agency RMBS in the future could create additional demand that would increase the pricing~~value of ~~Agency RMBS held in our portfolio and in which we invest.~~

~~The U.S. Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future. The U.S. Congress granted the U.S. Treasury authority to purchase~~ RMBS and ~~to provide financial support to Fannie Mae~~otherwise materially harm our business and Freddie Mac in The Housing and Economic Recovery Act of 2008. This authority expires on December 31, 2009. The problems faced by Fannie Mae and Freddie Mac resulting in their being placed into conservatorship have stirred debate among some federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans. Following expiration of the current authorization, each of Fannie Mae and Freddie Mac could be dissolved and the U.S. government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae or Freddie Mac were eliminated, we would not be able, or if their structures were to change radically, we might not be able, to acquire Agency RMBS from these companies, which would adversely affect our current business model.operations.

Our income ~~also~~ could be negatively affected in a number of ways depending on the manner in which events related ~~events~~to Fannie Mae and Freddie Mac unfold. For example, the current credit support provided by the U.S. ~~Treasury~~ to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from ~~the~~ Agency RMBS, ~~in our portfolio and in which we invest,~~ thereby tightening the spread between the interest we earn on ~~our portfolio of targeted~~those assets and our cost of financing ~~that portfolio.~~those assets. A reduction in the supply of Agency RMBS could also negatively affect the pricing of ~~the Agency~~ RMBS ~~held in our portfolio and in which we invest~~ by reducing the spread between the interest we earn on our ~~portfolio of targeted assets~~RMBS and our cost of financing ~~that portfolio.~~

As indicated above, recent legislation has changed the relationship between Fannie Mae and Freddie Mac and the U.S. government. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. government, and could also nationalize or eliminate such entities entirely. Anythose assets. In addition, any law affecting these government-sponsored enterprises may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac Agency RMBS. It also is possible that such laws could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially adversely affect our business, operations and financial condition.

There can be no assurance that the actions taken by the U.S. and foreign governments, central banks and other governmental and regulatory bodies for the purpose of seeking to stabilize the financial markets will achieve the intended effect or benefit our business, and further government or market developments could adversely affect us.

In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, EESA was enacted by the U.S. Congress. EESA provides the Secretary of the U.S. Treasury with the authority to establish TARP to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008. In addition, under TARP, the U.S. Treasury, after consultation with the Chairman of the Board of Governors of the U.S. Federal Reserve, may purchase any other financial instrument deemed necessary to promote financial market stability, upon transmittal of such determination, in writing, to the appropriate committees of the U.S. Congress. EESA also provides for a program that would allow companies to insure their troubled assets.

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The U.S. Treasury used the first $350 billion available under TARP to make preferred equity investments in certain financial institutions rather than purchase illiquid mortgage-related assets held by these financial institutions. On February 10 ,2009, the Secretary of the U.S. Treasury announced the U.S. government’s plan for the remaining balance of funds available under TARP, which includes a capital assistance program for banking institutions, a public-private investment fund that is expected to purchase certain illiquid mortgage-related assets, a consumer and business lending initiative that will improve the flow of credit to businesses and consumers, and a commitment to the continued purchase of RMBS issued by GSEs. On February 18, 2009, the President of the United States announced a plan designed to reverse the trend of increasing home foreclosures, which will be funded under TARP. The U.S. government has indicated that the new plan will involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans, an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings, and an additional $200 billion capital infusion to Fannie Mae and Freddie Mac to improve credit availability for residential mortgages. However, the U.S. government has provided few specific details regarding this new foreclosure mitigation plan. On March 23, 2009, the U.S. Treasury announced the creation of a public-private investment program designed to attract private capital to purchase eligible legacy loans from participating banks and eligible legacy securities in the secondary market through FDIC debt guarantees, equity co-investment by the U.S. Treasury and government-supported term asset-backed loan facilities as applicable. It remains unclear whether this initiative will achieve its intended effects.

On November 25, 2008, the U.S. Federal Reserve announced that it would initiate a program to purchase $500 billion in Agency RMBS backed by Fannie Mae, Freddie Mac and Ginnie Mae. The U.S. Federal Reserve stated that its actions are intended to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally. The purchases of Agency RMBS began on January 5, 2009. In March 2009, the Federal Reserve announced that it would purchase up to an additional $750 billion of Agency RMBS, bringing its total purchase commitment for Agency RMBS to $1.25 trillion. The U.S. Federal Reserve’s program to purchase Agency RMBS could cause an increase in the price of Agency MBS, which would negatively impact the net interest margin with respect to the Agency RMBS that we may acquire in the future.

There can be no assurance that EESA or the U.S. Federal Reserve’s actions will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to TARP, or TARP does not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications. In addition, U.S. and foreign governments, central banks and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis, such as the U.S. government’s recent passage of a $787 billion economic stimulus plan. We cannot predict whether or when such actions may occur or what effect, if any, such actions could have on our business, results of operations and financial condition.

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns, on the interest-earning assets in which we ~~invest~~.invest.

~~During the six months ended December 31,~~In late 2008, the U.S. government, through the Federal Housing Authority and the Federal Deposit Insurance Corporation, or FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. ~~More recently, on February 18, 2009,~~The programs involve, among other things, modifications of mortgage loans to reduce the ~~President~~principal amount of the ~~United States announced~~loans or the Homeowner Affordability and Stability Plan, or HASP, which is intended to stabilize the housing market by providing relief to distressed homeowners in an effort to reduce or forestall home foreclosures. Among other things, the HASP is designed to (i) enable responsible homeowners to refinance in certain instances where their home value has fallen below the amount outstandingrate of interest payable on the ~~homeowner’s mortgage, (ii) address certain “at-risk”~~loans, or to extend the payment terms of the loans. In addition, members of the U.S. Congress have indicated support for additional legislative relief for homeowners, ~~by providing cash incentives to lenders to refinance the homeowner’s mortgage to a lower interest rates and subsidizing in part a reduction in the outstanding mortgage principal, (iii) provide for~~including an amendment of the bankruptcy laws to permit the modification of mortgage loans in bankruptcy proceedings and (iv) support lower mortgage interest rates by increasing the U.S. Treasury’s preferred stock investment in each of Fannie Mae and Freddie Mac to $200 billion, increasing the size of the companies’ retained mortgage portfolios to $900 billion each and reaffirming its commitment to continue purchasing Fannie Mae and Freddie Mac issued RMBS. This new U.S. government program,proceedings. These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may as well as changes in the requirements necessary to qualify for refinancing a mortgage with Fannie Mae, Freddie Mac or Ginnie Mae adversely affect the value of, and the returns on, the interest-earning assets in which we ~~invest.~~

~~Changes in prepayment rates~~invest, including through prepayments on the mortgage loans underlying our RMBS ~~may decrease~~and other mortgage-related securities and loans, including mortgage loans held in our ~~net interest income.~~securitization trusts.

~~Pools~~We have acquired and may acquire in the future non-Agency RMBS collateralized by subprime and Alt A mortgage loans, which are not guaranteed by any government-sponsored entity or agency and are subject to increased risks.

We have acquired and may acquire in the future non-Agency RMBS, which are backed by residential real estate property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by a GSE such as Fannie Mae or Freddie Mac. We may acquire non-Agency RMBS backed by collateral pools of mortgage loans ~~underlie the mortgage-backed securities~~ that ~~we hold in our investment portfolio and in which we invest. We will generally receive principal distributions from the principal payments~~have been originated using underwriting standards that are ~~made on these underlying~~less restrictive than those used in underwriting “prime mortgage loans” and “Alt A mortgage loans. ~~When~~” These lower standards include mortgage loans made to borrowers ~~repay~~having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to current economic conditions, including fluctuations in interest rates and lower home prices, as well as aggressive lending practices, many of the mortgage loans backing the non-Agency RMBS have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with these mortgage loans, the performance of non-Agency RMBS could be adversely affected, which could materially and adversely impact our results of operations, financial condition and business.

Prepayment rates can change, adversely affecting the performance of our assets.

The frequency at which prepayments (including both voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur on mortgage loans underlying RMBS is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. A significant percentage of the mortgage loans ~~faster~~underlying our existing RMBS were originated in a relatively higher interest rate environment than ~~expected, this~~currently in effect and, thus, could be prepaid if borrowers are eligible for refinancings.

In general, “premium” securities (securities whose market values exceed their principal or par amounts) are adversely affected by faster-than-anticipated prepayments because the above-market coupon that such premium securities carry will ~~result in prepayments that~~be earned for a shorter period of time. Generally, “discount” securities (securities whose principal or par amounts exceed their market values) are ~~faster than expected on the related-RMBS. Prepayment~~adversely affected by slower-than-anticipated prepayments. Since many RMBS will be discount securities when interest rates are ~~influenced~~high, and will be premium securities when interest rates are low, these RMBS may be adversely affected by changes in ~~current~~prepayments in any interest rates and a variety of economic, geographic and other factors, all of which are beyond our control. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans. Faster than expected prepayments could adversely affect our profitability, including in the following ways:rate environment.

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We have purchased RMBS, and may purchase in the future investment securities, that have a higher interest rate than the market interest rate at the time of purchase. In exchange for this higher interest rate, we are required to pay a premium over the face amount of the security to acquire the security. In accordance with accounting rules, we amortize this premium over the anticipated term of the mortgage security. If principal distributions are received faster than anticipated, we would be required to expense the premium faster. We may not be able to reinvest the principal distributions received on these investment securities in similar new mortgage-related securities and, to the extent that we can do so, the effective interest rates on the new mortgage-related securities will likely be lower than the yields on the mortgages that were prepaid.

During the first quarter of 2010, each of Fannie Mae and Freddie Mac announced that it was significantly increasing its repurchase of mortgage loans that are 120 or more days delinquent from mortgage pools backing Freddie Mac guaranteed RMBS or Fannie Mae guaranteed RMBS, as applicable. The initial effect of these repurchases was similar to a one-time or short-term increase in mortgage prepayment rates. The ongoing magnitude of the effect of these repurchases on a particular Agency RMBS depends upon the composition of the mortgage pool underlying each Agency RMBS, although for many Agency RMBS the effect has been, and we expect will continue to be, significant.

The adverse effects of prepayments may impact us in various ways. First, particular investments may experience outright losses, as in the case of IOs and in an environment of faster actual or anticipated prepayments. Second, particular investments may under-perform relative to any hedges that we may have constructed for these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss. Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run. Therefore, if actual prepayment rates differ from anticipated prepayment rates our business, financial condition and results of operations and ability to make distributions to our shareholders could be materially adversely affected.

We also may acquire RMBS or other investment securities at a discount. If the actual prepayment rates on a discount mortgage security are slower than anticipated at the time of purchase, we would be required to recognize the discount as income more slowly than anticipated. This would adversely affect our profitability. Slower than expected prepayments also may adversely affect the market value of a discount mortgage security.

A flat or inverted yield curve may adversely affect prepayment rates on and supply of our RMBS.

Our net interest income varies primarily as a result of changes in interest rates as well as changes in interest rates across the yield curve. We believe that when the yield curve is relatively flat, borrowers have an incentive to refinance into hybrid mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our RMBS, or investment securities, to experience faster prepayments. In addition, a flatter yield curve generally leads to fixed-rate mortgage rates that are closer to the interest rates available on hybrid ARMs and ARMs, possibly decreasing the supply of the RMBS we seek to acquire. At times, short-term interest rates may increase and exceed long-term interest rates, causing an inverted yield curve. When the yield curve is inverted, fixed-rate mortgage rates may approach or be lower than hybrid ARMs or ARM rates, further increasing prepayments on, and negatively impacting the supply of, our RMBS. Increases in prepayments on our portfolio will cause our premium amortization to accelerate, lowering the yield on such assets. If this happens, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders.

~~Interest rate caps~~Changes in interest rates could negatively affect the value of our assets, and increase the risk of default on our ~~adjustable-rate~~assets.

Currently, our assets primarily consist of RMBS. Most RMBS, ~~may reduce our income or cause us to suffer a loss during periods of rising interest rates.~~

~~The~~especially most fixed-rate RMBS and most RMBS backed by fixed-rate mortgage loans, ~~underlying~~decline in value when long-term interest rates increase. Even in the case of Agency RMBS, the guarantees provided by GSEs do not protect us from declines in market value caused by changes in interest rates. In the case of RMBS backed by ARMs, increases in interest rates can lead to increases in delinquencies and defaults as borrowers become less able to make their mortgage payments following interest payment resets. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our ~~adjustable-rate~~ reverse repos.

RMBS backed by ARMs are typically ~~will be~~ subject to periodic and lifetime interest rate caps. Additionally, we may invest in ARMs with an initial “teaser” rate that will provide us with a lower than market interest rate initially, which may accordingly have lower interest rate caps than ARMs without such teaser rates. Periodic interest rate caps limit the amount an interest rate can increase during aany given period. Lifetime interest rate caps limit the amount an interest rate can increase ~~through maturity~~over the life of ~~a mortgage loan. If these interest rate caps apply to~~ the ~~mortgage loans underlying our adjustable-rate RMBS, the interest distributions made on the related RMBS will be similarly impacted.~~security. Our borrowings ~~may~~typically are not be subject to similar ~~interest rate caps.~~restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest rate caps ~~would~~could limit the interest ~~distributions~~rates on our ~~adjustable-rate RMBS.~~RMBS backed by ARMs. This problem is magnified for RMBS backed by ARMs and hybrid ARMs that are not fully indexed. Further, some ~~of the mortgage loans underlying our adjustable-rate~~ RMBS backed by ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest ~~on those loans~~ being deferred and added to the principal outstanding. As a result, the payments we ~~could~~ receive ~~less interest distributions~~ on ~~adjustable-rate~~ RMBS ~~particularly those with an initial teaser rate,~~backed by ARMs and hybrid ARMs may be lower than ~~we need to pay interest on our~~the related ~~borrowings.~~debt service costs. These factors could ~~lower~~have a material adverse effect on our ~~net interest income, cause us~~business, financial condition and results of operations and our ability to ~~suffer a net loss or cause us~~make distributions to ~~incur additional borrowings to fund interest payments during periods of rising interest rates or sell~~ our ~~investments at a loss.~~shareholders.

Competition may prevent us from acquiring ~~mortgage-related~~ assets on favorable terms or at ~~favorable yields,~~all, which ~~would negatively impact~~could have a material adverse effect on our ~~profitability.~~business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to acquire ~~mortgage-related~~our targeted assets at favorable spreads over our borrowing costs. In acquiring ~~mortgage-related~~our targeted assets, we compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage-related assets, many of which have greater financial resources than us. Additionally, many of our potential competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act. As a result, we may not in the future be able to acquire sufficient ~~mortgage-related~~quantities of our targeted assets at favorable spreads over our borrowing costs, which ~~would adversely affect~~could have a material adverse effect on our ~~profitability.~~business, financial condition and results of operations.

We may experience periods of illiquidity for our assets which could adversely affect our ability to finance our business or operate profitably.

We bear the risk of being unable to dispose of our interest-earning assets at advantageous times or in a timely manner because these assets generally experience periods of illiquidity. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, legal or contractual restrictions on resale or disruptions in the secondary markets. This illiquidity may adversely affect our profitability and our ability to finance our business and could cause us to incur substantial losses.

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An increase in interest rates can have negative effects on us, including causing a decrease in the volume of newly-issued, or investor demand for, RMBS, which could harm our financial condition and adversely affect our operations.

An increase in interest rates can have various negative affects on us. Increases in interest rates may negatively affect the fair market value of our RMBS and other interest-earning assets. When interest rates rise, the value of RMBS and fixed-rate investment securities generally declines. Typically, as interest rates rise, prepayments on the underlying mortgage loans tend to slow. The combination of rising interest rates and declining prepayments may negatively affect the price of RMBS, and the effect can be particularly pronounced with fixed-rate RMBS. In accordance with GAAP, we will be required to reduce the carrying value of our RMBS by the amount of any decrease in the fair value of our RMBS compared to amortized cost. If unrealized losses in fair value occur, we will either have to reduce current earnings or reduce stockholders’ equity without immediately affecting current earnings, depending on how we classify our assets under GAAP. In either case, our net stockholders’ equity will decrease to the extent of any realized or unrealized losses in fair value and our financial position will be negatively impacted.

Furthermore, rising interest rates generally reduce the demand for consumer and commercial credit, including mortgage loans, due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of RMBS available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause Agency RMBS and other interest-earning assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency RMBS and other interest-earning assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends, may be materially and adversely affected.

Changes in interest rates, particularly higher interest rates, can also harm the credit performance of our interest-earning assets. Higher interest rates could reduce the ability of borrowers to make interest payments or to refinance their loans and could reduce property values, all of which could increase our credit losses. In the event we experience a significant increase in credit losses as a result of higher interest rates, our earnings and financial condition will be materially adversely affected.

~~Recent market~~Market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our investment portfolio.

Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie our ~~Agency~~ RMBS. Changes in interest rates and prepayments affect the market price of the ~~Agency~~ RMBS that we hold in our portfolio and in which we intend to invest. In managing our investment portfolio, to assess the effects of interest rate changes and prepayment trends on our investment portfolio, we typically rely on certain assumptions that are based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If the ~~recent~~ dislocations in the residential mortgage market over the last few years or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to (i) assess the market value of our investment portfolio, (ii) effectively hedge our interest rate risk and (iii) implement techniques to reduce our prepayment rate volatility would be significantly affected, which could materially adversely affect our financial position and results of operations.

A substantial majority of the RMBS within our investment portfolio is recorded at fair value as determined in good faith by our management based on market quotations from brokers and dealers. Although we currently are able to obtain market quotations for assets in our portfolio, we may be unable to obtain quotations from brokers and dealers for certain assets within our investment portfolio in the future, in which case our management may need to determine in good faith the fair value of these ~~assets.~~assets.

Substantially all of the assets held within our investment portfolio are in the form of securities that are not publicly traded on a national securities exchange or quotation system. The fair value of securities and other assets that are not publicly traded in this manner may not be readily determinable. A substantial majority of the assets in our investment portfolio are valued by us at fair value as determined in good faith by our management based on market quotations from brokers and dealers. Although we currently are able to obtain quotations from brokers and dealers for substantially all of the assets within our investment portfolio, we may be unable to obtain such quotations on other assets in our investment portfolio in the future, in which case, our manager may need to determine in good faith the fair value of these assets. Because such quotations and valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a public market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize upon their disposal. Misjudgments regarding the fair value of our assets that we subsequently recognize may also result in impairments that we must recognize.

Loan delinquencies on our prime ARM loans held in securitization trusts may increase as a result of significantly increased monthly payments required from ARM borrowers after the initial fixed period.

The scheduled increase in monthly payments on certain adjustable rate mortgage loans held in our securitization trusts may result in higher delinquency rates on those mortgage loans and could have a material adverse affect on our net income and results of operations. This increase in borrowers' monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to fund available replacement loans at comparably low interest rates or at all. A decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance their loans or sell their homes. In addition, these mortgage loans may have prepayment premiums that inhibit refinancing.

We may be required to repurchase loans if we breached representations and warranties from loan sale transactions, which could harm our profitability and financial condition.

Loans from our discontinued mortgage lending operations that were sold to third parties under sale agreements include numerous representations and warranties regarding the manner in which the loan was originated, the property securing the loan and the borrower. If these representations or warranties are found to have been breached, we may be required to repurchase the loan. We may be forced to resell these repurchased loans at a loss, which could harm our profitability and financial condition.

Residential whole mortgage loans, including subprime residential mortgage loans and non-performing and sub-performing residential mortgage loans, are subject to increased risks.

~~Table~~We may acquire and manage pools of ~~Contents~~

~~Under our alternative investment strategy,~~residential whole mortgage loans. Residential whole mortgage loans, including subprime mortgage loans and non-performing and sub-performing mortgage loans, are subject to increased risks of loss. Unlike Agency RMBS, whole mortgage loans generally are not guaranteed by the U.S. Government or any GSE, though in some cases they may benefit from private mortgage insurance. Additionally, by directly acquiring whole mortgage loans, we do not receive the structural credit enhancements that benefit senior tranches of RMBS. A whole mortgage loan is directly exposed to losses resulting from default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgage. In the event of a foreclosure, we may ~~invest directly~~assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and ~~those underlying~~any costs or delays involved in the foreclosure or liquidation process may increase losses.

Whole mortgage loans are also subject to “special hazard” risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower’s mortgage debt by a bankruptcy court). In addition, claims may be assessed against us on account of our ~~CMBS~~position as mortgage holder or property owner, including assignee liability, responsibility for tax payments, environmental hazards and ~~RMBS~~other liabilities. In some cases, these liabilities may be “recourse liabilities” or may otherwise lead to losses in excess of the purchase price of the related mortgage or property.

Commercial mortgage loans are subject to risks of delinquency and foreclosure and risks of loss ~~which could result in losses to us.~~that may be greater than similar risks associated with residential mortgage loans.

~~Under our alternative investment strategy, we~~We may ~~invest in~~acquire CMBS ~~non-Agency RMBS and other~~backed by commercial mortgage ~~assets, including~~loans or directly acquire commercial mortgage loans. Commercial mortgage loans are secured by ~~multi-family~~multifamily or commercial ~~property. They~~property and are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with ~~loans made on the security of single-family~~ residential ~~property.~~mortgage loans. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of ~~the~~such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. ~~Such income can~~If we incur losses on CMBS, or commercial mortgage loans, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be ~~affected by many factors.~~materially adversely affected.

~~Residential mortgage~~

The mezzanine loan assets that we may acquire or originate will involve greater risks of loss than senior loans ~~are~~ secured by ~~single-family residential property. They are subject to risks~~income-producing properties.

We may acquire or originate mezzanine loans, which take the form of ~~delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan~~subordinated loans secured by second mortgages on the underlying property or loans secured by a ~~residential property depends on the income or assets~~pledge of the ~~borrower. Many factors~~ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property, because the loan may ~~impair borrowers’ abilities to repay their loans. ABS are bonds or notes backed~~become unsecured as a result of foreclosure by the senior lender. In addition, mezzanine loans ~~or other financial assets.~~

Inmay have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the ~~event of any default under a mortgage loan held directly by us, we will bear a~~property and increasing the risk of loss of ~~principal~~principal. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the ~~extent~~event of ~~any deficiency~~a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements between the ~~value of the collateral and the principal and accrued interest~~holder of the mortgage ~~loan. This could impair~~loan and us, as the mezzanine lender, may limit our ~~cash flow from operations. In the event of the~~ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies and control decisions made in bankruptcy ofproceedings relating to borrowers. As a mortgage loan borrower, the loan will be deemed secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court). The lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be expensive and lengthy. This could impair our anticipated return on the foreclosed mortgage loan. Moreover, RMBS represent interests in or are secured by pools of residential mortgage loans and CMBS represent interests in or are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. To the extent a foreclosure or loss occurs on the underlying mortgage loan, we will receive less principal and interest from that security in the future. Accordingly, the CMBS and non-Agency RMBS we may invest in are subject to all of the risks of the underlying mortgage loans.

~~Our investments in subordinated CMBS or RMBS could subject us to increased risk of losses.~~

~~Under our~~ alternative investment strategy, we may invest in securities that represent subordinated tranches of CMBS or non-Agency RMBS. In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by any cash reserve fund or letter of credit provided by the borrower, and then by the first loss subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit—and any classes of securities junior to those in which we invest—result, we may not ~~be able to~~ recover some or all of our investment, which could result in ~~the securities we purchase.~~losses. In addition, even if we are able to foreclose on the underlying ~~mortgage portfolio has been overvalued by~~collateral following a default on a mezzanine loan, we would be substituted for the ~~originator, or if~~defaulting borrower and, to the ~~values subsequently decline and, as a result, less collateral is available to satisfy delinquent interest and principal payments due~~extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, may need to commit substantial additional capital to stabilize the property and prevent additional defaults to lenders with existing liens on the property. Significant losses related ~~CMBS~~to mezzanine loans originated or ~~RMBS, the securities in which we invest may effectively become the first loss position behind the more senior securities, which may result in significant losses to us.~~

~~The prices~~acquired by us could have a material adverse effect on our results of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because theoperations and our ability ~~of obligors of mortgages underlying mortgage-backed securities~~ to make ~~principal and interest payments or~~distributions to ~~refinance~~our stockholders.

We may ~~be impaired. In this case, existing credit support~~invest in ~~the securitization structure may be insufficient to protect us against loss of our principal on these securities.~~

~~Our alternative assets may include~~ high yield or subordinated ~~corporate~~and lower rated securities that have greater risks of loss than other investments, which could adversely affect our business, financial condition and cash available for dividends.

~~Under alternative investment strategy, our assets~~We may ~~include~~invest in high yield or subordinated or lower rated securities, including subordinated tranches of CMBS and non-Agency RMBS, which involve a higher degree of risk than other investments. Numerous factors may affect a company’s ability to repay its high yield or subordinated securities, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. These securities may not be secured by mortgages or liens on assets. Our right to payment and security interest with respect to such securities may be subordinated to the payment rights and security interests of the senior lender. Therefore, we may be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Our real estate assets are subject to risks particular to real property.

We own assets secured by real estate and may own real estate directly in the future, either through direct acquisitions or upon a default of mortgage loans. Real estate assets are subject to various risks, including:

·	acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

·	acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

·	adverse changes in national and local economic and market conditions; and

·	changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

The occurrence of any of the foregoing or similar events may reduce our return from an affected property or asset and, consequently, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.

We are highly dependent on information systems and system failures could significantly disrupt our business, which may, in turn, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.

Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including RMBS trading activities, which could materially adversely affect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the ~~liabilities~~risks associated with ~~an alternative investment~~such assets and may not reveal other ~~investment performance issues.~~weaknesses in such assets, which could lead to losses.

Before ~~investing in an alternative asset, we review the~~acquiring certain assets, such as non-Agency RMBS, whole mortgage loans, CMBS or other mortgage-related or financial assets, ~~comprising~~we or the ~~investment~~external manager responsible for the acquisition and management of such asset may decide to conduct (either directly or using third parties) certain due diligence. Such due diligence may include (i) an assessment of the strengths and weaknesses of the asset’s credit profile, (ii) a review of all or merely a subset of the documentation related to the asset, or (iii) other ~~factors~~reviews that we ~~believe are material~~or the external manager may deem appropriate to conduct. There can be no assurance that we or the ~~performance~~external manager will conduct any specific level of the investment. In this process, we rely on the resources available to us and, in some cases, an investigation by HCS, its affiliates or third parties. This process is particularly important and subjective with respect to new or private companies because there may be little or no information publicly available about them. Our due diligence, ~~processes might not~~or that, among other things, the due diligence process will uncover all relevant facts ~~thus resulting~~or that any purchase will be successful, which could result in ~~investment losses.~~

losses on these assets, which, in turn, could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Lack of diversification in the number of assets we acquire would increase our dependence on relatively few individual assets.

Our management objectives and policies do not place a limit on the size of the amount of capital used to support, or the exposure to (by any other measure), any individual asset or any group of assets with similar characteristics or risks. In addition, because we are a small company, we may be unable to sufficiently deploy capital into a number of assets or asset groups. As a result, our portfolio may be concentrated in a small number of assets or may be otherwise undiversified, increasing the risk of loss and the magnitude of potential losses to us and our stockholders if one or more of these assets perform poorly. For example, our portfolio of mortgage-related assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. To the extent that our portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of our assets within a short time period, which may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders

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Risk Related to Our Debt Financing

Continued adverse developments in the residential mortgage market and financial markets, including recent mergers, acquisitions or bankruptcies of potential repurchase agreement counterparties, as well as defaults, credit losses and liquidity concerns, could make it difficult for usOur access to ~~borrow money to fund our investment strategy or continue to fund our investment portfolio on a leveraged basis,~~financing sources, which may not be available on favorable terms, or at all, ~~which could~~especially in light of current market conditions, may be limited, and this may materially adversely affect our ~~profitability.~~business, financial condition and results of operations and our ability to make distributions to our stockholders.

We ~~rely on~~depend upon the availability of adequate capital and financing ~~to acquire Agency RMBS and~~sources to fund our ~~investment portfolio~~operations. However, as previously discussed, the capital and credit markets recently experienced unprecedented levels of volatility and disruption which exerted downward pressure on ~~a leveraged basis. Since March 2008, there have been several announcements of proposed mergers, acquisitions or bankruptcies of investment banks~~stock prices and commercial banks that have historically acted as repurchase agreement counterparties. This has resulted in a fewer number of potential repurchase agreement counterparties operating in the market and reduced financing capacity. In addition, many commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These losses have reduced financial industry capital, leading to reduced liquiditycredit capacity for some institutions. Institutions from which we seek to obtain financing may have owned or financed RMBS which have declined in value and caused them to suffer losses as a result of the recent downturn in the residential mortgage market.lenders. If these conditions persist, these institutions may be forced to exit the repurchase market, merge with another counterparty, become insolvent or further tighten their lending standards or increase the amount of equity capital or haircut required to obtain financing. Moreover, because our equity market capitalization places us at the low endlevels of market ~~capitalization among all mortgage REITs, continued adverse developments in the residential mortgage market may~~volatility and disruption recur, it could materially adversely affect one or more of our lenders and could cause ~~some~~one or more of our lenders to ~~reduce~~be unwilling or ~~terminate~~unable to provide us with financing, or to increase the costs of that financing, or to become insolvent. Moreover, we are currently party to repurchase agreements of a short duration and there can be no assurance that we will be able to roll over or re-set these borrowings on favorable terms, if at all. In the event we are unable to roll over or re-set our ~~access to future borrowings before those of our competitors. Any of these events could make~~reverse repos, it may be more difficult for us to obtain debt financing on favorable terms or at all. ~~Our profitability will~~In addition, if regulatory capital requirements imposed on our lenders change, they may be ~~adversely affected if~~required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. Under current market conditions, securitizations are generally unavailable or limited, which has also limited borrowings under warehouse facilities and other credit facilities that are intended to be refinanced by such securitizations. Consequently, depending on market conditions at the relevant time, we ~~are unable~~may have to ~~obtain cost-effective~~rely on additional equity issuances to meet our capital and financing needs, which may be dilutive to our stockholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our ~~investments.~~operations, future business opportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our asset acquisition activities and/or dispose of assets, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our profitability.

Currently, a significant portion of our borrowings are collateralized borrowings in the form of repurchase agreements. If the interest rates on these agreements increase at a rate higher than the increase in rates payable on our investments, our profitability would be adversely affected.

Our borrowing costs under repurchase agreements generally correspond to short-term interest rates such as LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, without limitation:

the movement of interest rates;

the availability of financing in the market; and

the value and liquidity of our mortgage-related assets.

~~Currently,~~During 2008 and 2009, many repurchase agreement lenders ~~are requiring~~required higher levels of collateral than they ~~have~~had required in the past to support repurchase agreements collateralized by Agency ~~RMBS and if this continues it~~RMBS. Although these collateral requirements have been reduced to more appropriate levels, we cannot assure you that they will make our borrowings and use of leverage less attractive and more expensive. Many financial institutions have increased lending margins for Agency RMBS to approximately 5.0% on average, which means that we are required to pledge Agency RMBS havingnot again experience a ~~value of 105% of the amount of our borrowings. These increased lending margins may require us to post additional cash collateral for our Agency RMBS.~~dramatic increase. If the interest rates, lending margins or collateral requirements under these repurchase agreements increase, or if lenders impose other onerous terms to obtain this type of financing, our results of operations will be adversely affected.

Failure to procure adequate debt financing, or to renew or replace existing debt financing as it matures, would adversely affect our results and may, in turn, negatively affect the value of our common stock and our ability to distribute dividends.

We use debt financing as a strategy to increase our return on investments in our investment portfolio. However, we may not be able to achieve our desired debt-to-equity ratio for a number of reasons, including the following:

~~our lenders do not make debt financing available to us at acceptable rates; or~~

~~our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do.~~

The dislocations in the residential mortgage market and credit markets have led lenders, including the financial institutions that provide financing for our investments, to heighten their credit review standards, and, in some cases, to reduce or eliminate loan amounts available to borrowers. As a result, we cannot assure you that any, or sufficient, debt funding will be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common stock and our ability to make distributions, and you may lose part or all of your investment.

Furthermore, because we rely primarily on short-term borrowings to finance our investment portfolio, our ability to achieve our investment objective depends not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. As of December 31, 2008, substantially all of our borrowings under repurchase agreements bore maturities of 30 days or less. If we are not able to renew or replace maturing borrowings, we will have to sell some or all of our assets, possibly under adverse market conditions.

The repurchase agreements that we use to finance our investments may require us to provide additional collateral, which could reduce our liquidity and harm our financial condition.

We intend to use repurchase agreements to finance our investments. If the market value of the loans or securities pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so. Posting additional collateral to support our repurchase agreements will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase our borrowing rates, liquidate our collateral at inopportune times and terminate our ability to borrow. This could result in a rapid deterioration of our financial condition and possibly require us to file for protection under the U.S. Bankruptcy Code.

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We ~~currently~~intend to leverage our equity, which will exacerbate any losses we incur on our current and future investments and may reduce cash available for distribution to our stockholders.

We ~~currently~~intend to leverage our equity through borrowings, generally through the use of repurchase agreements and CDOs, which are obligations issued in multiple classes secured by an underlying portfolio of securities, and we may, in the future, utilize other forms of borrowing. The amount of leverage we incur varies depending on our ability to obtain credit facilities and our lenders’ estimates of the value of our portfolio’s cash flow. The return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets we hold in our investment portfolio. Further, the leverage on our equity may exacerbate any losses we incur.

Our debt service payments will reduce the net income available for distribution to our stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to sale to satisfy our debt obligations. A decrease in the value of the assets may lead to margin calls under our repurchase agreements which we will have to satisfy. Significant decreases in asset valuation, such as occurred during March 2008, could lead to increased margin calls, and we may not have the funds available to satisfy any such margin calls. WeAlthough we have established a target overall leverage amount for our ~~RMBS investment portfolio of seven to nine times~~Midway Residential Mortgage Portfolio strategy and our ~~equity, but~~legacy assets, there is no established limitation, other than may be required by our financing arrangements, on our leverage ratio or on the aggregate amount of our borrowings.

If we are unable to leverage our equity to the extent we currently anticipate, the returns on certain of our ~~RMBS portfolio~~assets could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.

If we are limited in our ability to leverage certain of our assets, such as Agency RMBS, assets under the Midway Residential Mortgage Portfolio or certain commercial mortgage-related securities, the returns on ~~our portfolio~~these assets may be harmed. A key element of our strategy is our use of leverage to increase the size of our RMBS portfolio in an attempt to enhance our returns. To finance our RMBS investment portfolio, we generally seek to borrow between seven and nine times the amount of our equity. At December 31, 2008 our leverage ratio for our RMBS investment portfolio, which we define as our outstanding indebtedness under repurchase agreements divided by total stockholders’ equity and ~~our Series A Preferred Stock, was 6.8:1. This definition of the leverage ratio is consistent with the manner in which the credit providers under our repurchase agreement calculate our leverage.~~ Our repurchase agreements are not currently committed facilities, meaning that the counterparties to these agreements may at any time choose to restrict or eliminate our future access to the facilities and we have no other committed credit facilities through which we may leverage our equity. If we are unable to leverage our equity to the extent we currently anticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if we default on our obligations under the repurchase agreement, we would incur losses.

When we engage in repurchase transactions, we generally sell RMBS to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same RMBS back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the RMBS to the lender is less than the value of those RMBS (this difference is referred to as the “haircut”), if the lender defaults on its obligation to resell the same RMBS back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the RMBS). Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.

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Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.

Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay in the event that we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.

~~The Company's~~Our liquidity may be adversely affected by margin calls under ~~its~~our repurchase agreements because ~~they~~we are dependent in part on the lenders' valuation of the collateral securing the financing.

Each of these repurchase agreements allows the lender, to varying degrees, to revalue the collateral to values that the lender considers to reflect market value. If a lender determines that the value of the collateral has decreased, it may initiate a margin call requiring ~~the Company~~us to post additional collateral to cover the decrease. When ~~the Company is~~we are subject to such a margin call, itwe must provide the lender with additional collateral or repay a portion of the outstanding borrowings with minimal notice. Any such margin call could harm ~~the Company's~~our liquidity, results of operation and financial condition. Additionally, in order to obtain cash to satisfy a margin call, ~~the Company~~we may be required to liquidate assets at a disadvantageous time, which could cause it to incur further losses and adversely affect ~~its~~our results of operations and financial condition.

~~Our hedging transactions~~

Hedging against credit events and interest rate changes and other risks may ~~limit~~materially adversely affect our ~~gains or result in losses.~~business, financial condition and results of operations and our ability to make distributions to our shareholders.

We ~~use derivatives, primarily interest rate swaps~~have in the past engaged in and ~~caps,~~intend to ~~hedge~~opportunistically pursue in the future, together with our liabilities and this has certain risks, including the risk that losses on a hedging transaction will reduce the amount of cash available for distribution to our stockholders and that such losses may exceed the amount invested in such instruments. Our Board of Directors has adopted a general policy with respect to the use of derivatives, and which generally allows us to use derivatives when we deem appropriate for risk management purposes, but does not set forth specific guidelines. To the extent consistent with maintaining our status as a REIT, we may use derivatives, including interest rate swaps and caps, options, term repurchase contracts, forward contracts and futures contracts, in our risk management strategy to limit the effects of changes in interest rates on our operations. However, a hedge may not be effective in eliminating the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of derivatives in a hedging transaction.

~~Our use of~~external managers, various hedging strategies in an effort to ~~mitigate our interest rate exposure may not be effective and may expose us to counterparty risks.~~

~~In accordance with our operating policies, we may pursue various types of hedging strategies, including swaps, caps and other derivative transactions, to seek to mitigate or~~ reduce our exposure to losses from adverse changes in interest ~~rates.~~rates, credit events and other factors. Hedging against a decline in the values of our portfolio positions does not prevent losses if the values of such positions decline, or eliminate the possibility of fluctuations in the value of our portfolio. Hedging transactions generally will limit the opportunity for gain if the values of our portfolio positions should increase. Further, certain hedging transactions could result in our experiencing significant losses. Moreover, at any point in time we may choose not to hedge all or a portion of these risks, and we generally will not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge. Even if we do choose to hedge certain risks, for a variety of reasons we generally will not seek to establish a perfect correlation between our hedging instruments and the risks being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Our hedging activity will vary in scope based on the composition of our portfolio, our market views, and changing market conditions, including the level and volatility of interest ~~rates, the type of assets held and financing sources used and other changing market conditions. No hedging strategy, however, can completely insulate us from the interest rate risks~~rates. When we do choose to which we are exposed or that the implementation of any hedging strategy would have the desired impact on our results of operations or financial condition. Certain of the U.S. federal income tax requirements that we must satisfy in order to qualify as a REIT may limit our ability to hedge, ~~against such risks. We will not enter into derivative transactions if we believe that they will jeopardize our qualification as a REIT.~~

~~Interest rate~~ hedging may fail to protect or could materially adversely affect us because, among other things:

either we or our external managers may fail to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the assets in the portfolio being hedged;

either we or our external managers may fail to recalculate, re-adjust and execute hedges in an efficient and timely manner;

the hedging transactions may actually result in poorer over-all performance for us than if we had not engaged in the hedging transactions;

credit hedging can be expensive, particularly when the market is forecasting future credit deterioration and when markets are more illiquid;

interest rate hedging can be expensive, particularly during periods of ~~rising and~~ volatile interest rates;

available ~~interest rate~~ hedges may not correspond directly with the ~~interest rate risk~~risks for which protection is sought;

the ~~duration~~durations of the ~~hedge~~hedges may not match the ~~duration~~durations of the related ~~liability;~~assets or liabilities being hedged;

many hedges are structured as over-the-counter contracts with counterparties whose creditworthiness is not guaranteed, raising the ~~amount of income~~possibility that ~~a REIT~~the hedging counterparty may ~~earn from hedging transactions (other than through taxable REIT subsidiaries (or TRSs)) to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;~~default on their payment obligations; and

to the ~~credit quality~~extent that the creditworthiness of ~~the party owing money on the hedge~~a hedging counterparty deteriorates, it may be ~~downgraded~~difficult or impossible to ~~such an extent that it impairs our ability to sell~~terminate or assign ~~our side of the~~any hedging ~~transaction; and~~transactions with such counterparty.

~~the party owing money in the hedging transaction may default on its obligation to pay.~~

~~Table of Contents~~

~~We primarily use swaps to hedge against anticipated future increases in interest rates on~~For these and other reasons, our repurchase agreements. Should a swap counterparty be unable to make required payments pursuant to such swap, the hedged liability would cease to be hedged for the remaining term of the swap. In addition, wehedging activity may be at risk for any collateral held by a hedging counterparty to a swap, should such counterparty become insolvent or file for bankruptcy. Our hedging transactions, which are intended to limit losses, may actuallymaterially adversely affect our ~~earnings, which could reduce~~business, financial condition and results of operations and our ~~cash available for distribution~~ability to make distributions to our stockholders.

Hedging instruments ~~involve risk since they often are~~and other derivatives historically have not, in many cases, been traded on regulated exchanges, or been guaranteed or regulated by ~~an exchange~~any U.S. or ~~its clearing house,~~foreign governmental authorities and involve risks and costs that could result in material losses.

Hedging instruments and other derivatives involve risk because they historically have not, in many cases, been traded on regulated exchanges and have not been guaranteed or regulated by any U.S. or foreign governmental authorities. Consequently, for these instruments there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and ~~positions. Furthermore, the enforceability of hedging instruments may depend on~~ compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Neither we nor our external managers are restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in ~~its default.~~a default under the hedging agreement. Default by a party with whom we enter into a hedging transaction may result in ~~the loss of unrealized profits~~losses and may force us to ~~cover our commitments, if any,~~re-initiate similar hedges with other counterparties at the ~~then current~~then-prevailing market ~~price. Although generally~~levels. Generally we will seek to reserve the right to terminate our hedging ~~positions, it~~transactions upon a counterparty’s insolvency, but absent an actual insolvency, we may not ~~always~~ be ~~possible~~able to ~~dispose of or close out~~terminate a hedging ~~position~~transaction without the consent of the hedging counterparty, and we may not be able to assign or otherwise dispose of a hedging transaction to another counterparty without the consent of both the original hedging counterparty and the potential assignee. If we terminate a hedging transaction, we may not be able to enter into ~~an offsetting~~a replacement contract in order to cover our risk. ~~We cannot assure you~~There can be no assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and therefore we may be required to maintain aany hedging position until exercise or expiration, which could ~~result~~materially adversely affect our business, financial condition and results of operations.

The U.S. Commodity Futures Trading Commission and certain commodity exchanges have established limits referred to as speculative position limits or position limits on the maximum net long or net short position which any person or group of persons may hold or control in ~~losses.~~particular futures and options. Limits on trading in options contracts also have been established by the various options exchanges. It is possible that trading decisions may have to be modified and that positions held may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could materially adversely affect our business, financial condition and results of operation and our ability to make distributions to our stockholders.

Risks Related to ~~the Advisory Agreement~~Our Agreements with ~~HCS~~Our External Managers

We are dependent on ~~HCS~~our external managers and certain of ~~its~~their key personnel and may not find a suitable replacement if ~~HCS terminates the~~they terminate their respective management or advisory ~~agreement~~agreements with us or such key personnel are no longer available to us.

~~Pursuant~~We historically were organized as a self-advised company that acquired, originated, sold and managed its assets; however, as we modified our business strategy and the targeted assets we seek to acquire in response to changing market conditions, we began to outsource the management of certain targeted asset classes for which we had limited internal resources or experience. We presently are a party to two separate management or advisory ~~agreement, subject to oversight by~~agreements that provide for the external management of certain of our ~~Board~~assets and investment strategies. Each of ~~Directors, HCS advises the Managed Subsidiaries. HCS~~our external managers, in some manner, identifies, evaluates, negotiates, structures, closes and monitors certain investments on our behalf. In each case, we have engaged these third parties because of the ~~Managed Subsidiaries, other than assets that we contributed to the Managed Subsidiaries to facilitate compliance with~~expertise of certain key personnel of our ~~exclusion from regulation under the Investment Company Act.~~external managers. The departure of any of the senior officers of ~~HCS,~~our external managers, or of a significant number of investment professionals or principals of ~~HCS,~~our external managers, could have a material adverse effect on our ability to achieve our investment objectives. We are subject to the risk that ~~HCS~~our external managers will terminate ~~the~~their respective management or advisory agreement with us or that we may deem it necessary to terminate ~~the advisory~~such agreement or prevent certain individuals from performing services for us, and that no suitable replacement will be found to manage ~~the Managed Subsidiaries.~~certain of our assets and investment strategies.

Pursuant to ~~the~~our management or advisory ~~agreement, HCS is~~agreements, our external managers, in most cases, are entitled to receive ~~an advisory~~a management fee that is payable regardless of the performance of the assets ~~of the Managed Subsidiaries.~~under their management.

We will pay ~~HCS~~Midway substantial ~~advisory~~base management fees, based on ~~the Managed Subsidiaries’ equity~~our invested capital (as such term is defined in the ~~advisory agreement)~~Midway Management Agreement), regardless of the performance of the ~~Managed Subsidiaries’ portfolio. In addition,~~assets under their management. Similarly, pursuant to the ~~advisory~~HCS Advisory agreement, we will pay HCS a base advisory fee ~~even~~ if ~~they~~such assets are ~~not managing any~~deemed “managed assets” under the HCS Advisory Agreement, and we may pay them, if agreed to by each party, base management fees for assets deemed “scheduled assets, regardless of the ~~Managed Subsidiaries' portfolio. HCS’s~~performance of the assets under their management. In addition, we will pay HCS an annual consulting fee, subject to certain conditions, that is in no way contingent upon the performance or management of any of our assets The external managers’ entitlement in many cases to non-performance based compensation may reduce its incentive to devote the time and effort of its professionals to seeking profitable investment opportunities for ~~the Managed Subsidiaries’ portfolio,~~our company, which could result in ~~a lower performance~~the under-performance of assets under their ~~portfolio~~management and negatively affect our ability to pay distributions to our stockholders or to achieve capital appreciation.

Pursuant to the terms of our management and advisory ~~agreement, HCS is~~agreements, our external managers are generally entitled to receive an incentive fee, which may induce itthem to make certain investments, including speculative or high risk ~~investments~~.investments.

In addition to ~~its advisory fee, HCS is~~the base management and, in some cases, consulting fees, payable to our external managers, our external managers are generally entitled to receive incentive compensation based, in part, upon the ~~Managed Subsidiaries’~~ achievement of targeted levels of net income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may lead ~~HCS~~our external managers to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining liquidity and/or management of credit risk or market risk, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. In addition, ~~HCS~~Midway has broad discretion regarding the types of investments it will make pursuant to ~~the advisory agreement.~~its management agreement with us. This could result in increased risk to the value of our assets under the ~~Managed Subsidiaries’ invested portfolio.~~

~~Table~~management of ~~Contents~~

our external managers.

We compete with ~~HCS’s~~our external managers’ other clients for access to ~~HCS.~~them.

Each of Midway and HCS ~~has sponsored and/or currently~~ manages, ~~other pools of capital and investment vehicles with an investment focus that overlaps with the Managed Subsidiaries’ investment focus,~~ and is expected to continue to ~~do so~~manage, other client accounts with similar or overlapping investment strategies. In connection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our external management or advisory agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of our external managers may have an economic interest in the ~~future. Furthermore,~~accounts they manage or the investments they propose and, in the case of HCS, ~~is not restricted~~may raise, advise or sponsor other REITs or other investment funds that invest in ~~any way from sponsoring or accepting capital from new clients or vehicles, even for investing in asset classes or investment strategies that are~~assets similar to ~~or overlapping~~our targeted assets. As a result, we will compete with ~~the Managed Subsidiaries’ asset classes or investment strategies. Therefore, the Managed Subsidiaries compete~~these other accounts and interests for access to Midway and HCS and the benefits ~~that their relationship with HCS provides them.~~derived from those relationships. For the same reasons, the personnel of each of Midway and HCS may be unable to dedicate a substantial portion of their time managing our investments to the ~~Managed Subsidiaries’ investments if HCS manages~~extent they manage or are associated with any future investment ~~vehicles.~~vehicles not related to us.

There are conflicts of interest in our ~~relationship~~relationships with ~~HCS,~~our external managers, which could result in decisions that are not in the best interests of our stockholders.

~~The Managed Subsidiaries~~We may acquire or sell assets in which an external manager or its affiliates have or may have an interest. In recent years, we have engaged in certain co-investment opportunities with HCS or ~~pursue investments~~one of its affiliates and we may participate in ~~securities~~future co-investment opportunities with our external managers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not always be aligned and this could result in decisions that are not in the best interests of our company. Similarly, one of our external managers or its affiliates may acquire or sell assets in which ~~HCS has or is seeking an interest. Similarly, HCS may invest in securities in which the Managed Subsidiaries~~we have or may have an interest. Although such ~~investments~~acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, ~~the Managed Subsidiaries~~we may engage in transactions directly with ~~HCS,~~our external managers or their affiliates, including the purchase and sale of all or a portion of a ~~portfolio investment.~~targeted asset.

HCS may from time to time simultaneously seek to purchase investments for the Managed Subsidiaries and other entities with similar investment objectives for which it serves as a manager, or for its clients or affiliates and has no duty to allocate such investment opportunities in a manner that favors the Managed Subsidiaries. Additionally, such investmentsAcquisitions made for entities with similar ~~investment~~ objectives may be different from those made on ~~the Managed Subsidiaries’~~our behalf. ~~HCS~~Our external managers may have economic interests in or other relationships with others in whose obligations or securities we may acquire. In particular, such persons may make and/or hold an investment in securities that we acquire that may be pari passu, senior or junior in ranking to our interest in the ~~Managed Subsidiaries may invest.~~securities or in which partners, security holders, officers, directors, agents or employees of such persons serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in securities laws restrictions on transactions in such securities and otherwise create conflicts of interest. In such instances, ~~HCS~~the external managers may, in ~~its~~their sole discretion, make ~~investment~~ recommendations and decisions regarding such securities for other entities that may be the same as or different from those made with respect to ~~the Managed Subsidiaries’ investments~~securities acquired by us and may take actions (or omit to take actions) in the context of these other economic interests or relationships, the consequences of which may be adverse to ~~the Managed Subsidiaries’~~our interests.

~~Although the officers~~The key personnel of our external managers and ~~employees of HCS~~its affiliates devote as much time to ~~the Managed Subsidiaries~~us as ~~HCS deems~~our external managers deem appropriate, ~~the officers and employees~~however, these individuals may have conflicts in allocating their time and services among ~~the Managed Subsidiaries~~us and ~~HCS’s and its affiliates' other accounts. In addition, HCS and its affiliates, in connection with~~ their other ~~business activities,~~accounts and investment vehicles. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our external managers, other entities for which our external manager serves as a manager, or its accounts will likewise require greater focus and attention, placing the resources of our external managers in high demand. In such situations, we may ~~acquire~~not receive the necessary support and assistance we require or would otherwise receive if we were internally managed.

We, directly or through our external managers, may obtain confidential information about the companies or securities in which we have invested or may invest. If we do possess confidential information about such companies or securities, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to the securities of such companies. Our external managers’ management of other accounts could create a conflict of interest to the extent such external manager is aware of material non-public information concerning potential investment decisions and this in turn could impact our ability to make necessary investment decisions. Any limitations that develop as a result of our access to confidential information ~~that may restrict~~ could therefore materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

HCS, ~~from purchasing securities or selling securities for itself or its clients (including the Managed Subsidiaries) or otherwise using such information for the benefit~~which is a wholly-owned subsidiary of ~~its clients or itself.~~

~~HCS and~~ JMP Group Inc., is deemed to beneficially ~~owned~~own approximately ~~16.8% and 12.2%, respectively,~~15.3% of our outstanding common stock as of December 31, ~~2008.~~2010. In evaluating opportunities for us and other management strategies, this may lead HCS ~~is an investment adviser that manages investments and trading accounts~~to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks, or decrease the returns, of ~~other persons, including certain accounts affiliated with JMP Group, Inc., and is deemed~~your investment. In addition, the ~~beneficial owner of shares~~chairman of our ~~common stock held by these accounts.~~board of directors, James J. Fowler, ~~the Non-Executive Chairman of our Board of Directors~~is a portfolio manager at HCS and ~~also the non-compensated chief investment officer of the Managed Subsidiaries, is~~ a managing director of ~~HCS. HCS is an affiliate of~~ JMP Group Inc. ~~Joseph A. Jolson, the Chairman and Chief Executive Officer of JMP Group Inc. and HCS, beneficially owned approximately 9.5% of the~~ ~~Company’s outstanding common stock as of December 3, 2008.~~ In addition, in November 2008, our Board of Directors approved an exemption from the ownership limitations contained in our Charter, to permit Mr. Jolson to beneficially own up to 25% of the aggregate value of our outstanding capital stock. As a result, of the combined voting power of HCS, JMP Group, Inc. and Mr. Jolson, these stockholders exert significant influence over matters submitted to a vote of stockholders, including the election of directors and approval of a change in control or business combination of our company. This concentration of ownership may result in decisions affecting us that are not in the best interests of all our stockholders. In addition, Mr. Fowler may have a conflict of interest in situations where the best interests of our company and stockholders do not align with the interests of HCS, JMP Group, Inc. or its affiliates, which may result in decisions that are not in the best interests of all our stockholders.

There are limitations on our ability to withdraw invested capital from the account managed by Midway and our inability to withdraw our invested capital when necessary may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Pursuant to the terms of the Midway Management Agreement, we may only redeem invested capital in an amount equal to the lesser of 10% of the invested capital in the account managed by Midway or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment Company Act. In addition, we are only permitted to make one such redemption request in any 75-day period. In the event a significant market event or shock, we may be unable to effect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Moreover, because a reduction of invested capital would reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions. If we are unable to withdraw invested capital as needed to meet our obligations in the future, our business and financial condition could be materially adversely affected.

2832

~~Table~~

Termination of ~~Contents~~

the HCS Advisory Agreement may be difficult and costly.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except per share ~~amounts)~~data)

	For the Year
	Ended December 31,
	2010			2009


INTEREST INCOME	$	19,899		$	31,095

INTEREST EXPENSE:
Investment securities and loans held in securitization trusts		4,864			8,572
Subordinated debentures		2,473			3,189
Convertible preferred debentures		2,274			2,474
Total interest expense		9,611			14,235

NET INTEREST INCOME		10,288			16,860

OTHER INCOME (EXPENSE):
Provision for loan losses		(2,230	)		(2,262	)
Impairment loss on investments		(296	)		(119	)
Income from investment in limited partnership		496			-
Realized gain on investment securities and related hedges		5,362			3,282
Total other income (expense)		3,332			901

General, administrative and other expenses		7,950			6,877

INCOME FROM CONTINUING OPERATIONS		5,670			10,884
Income from discontinued operation - net of tax		1,135			786
NET INCOME	$	6,805		$	11,670

Basic income per common share	$	0.72		$	1.25
Diluted income per common share	$	0.72		$	1.19
Dividends declared per common share	$	0.79		$	0.91
Weighted average shares outstanding-basic		9,422			9,367
Weighted average shares outstanding-diluted		9,422			11,867

For the Year Ended December 31,
2008 2007 2006
REVENUES:
Interest income - Investment securities and loans held in securitization trusts $ 44,123 $ 50,564 $ 64,881
Interest expense - Investment securities and loans held in securitization trusts 30,351 46,529 56,553
Net interest income from investment securities and loans held in securitization trusts 13,772 4,035 8,328
Interest expense - subordinated debentures (3,760 ) (3,558 ) (3,544 )
Interest expense - convertible preferred debentures (2,149 ) — —
Net interest income 7,863 477 4,784
OTHER EXPENSE:
Provision for loan losses (1,462 ) (1,683 ) (57 )
Realized losses on securities and related hedges (19,977 ) (8,350 ) (529 )
Impairment loss on investment securities (5,278 ) (8,480 ) —
Total other expense (26,717 ) (18,513 ) (586 )
EXPENSES:
Salaries and benefits 1,869 865 714
Professional fees 1,212 612 598
Insurance 948 474 204
Management fees 665 — —
Other 2,216 803 516
Total expenses 6,910 2,754 2,032
(LOSS) INCOME FROM CONTINUING OPERATIONS (25,764 ) (20,790 ) 2,166
Income (loss) from discontinued operations - net of tax 1,657 (34,478 ) (17,197 )
NET LOSS $ (24,107 ) $ (55,268 ) $ (15,031 )
Basic and diluted loss per common share $ (2.91 ) $ (30.47 ) $ (8.33 )
Dividends declared per common share $ 0.54 $ 0.50 $ 4.70
Weighted average common shares outstanding-basic and diluted 8,272 1,814 1,804

See notes to consolidated financial statements.

F-4

~~Table of Contents~~

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, ~~2008, 2007~~2010 and ~~2006~~2009

(Dollar amounts in thousands)

									Accumulated
			Additional						Other
	Common		Paid-In			Accumulated			Comprehensive			Comprehensive
	Stock		Capital			Deficit			Income/(Loss)			Income			Total
Balance, January 1, 2009	$	93	$	150,790		$	(103,114	)	$	(8,521	)				$	39,248
Net income							11,670					$	11,670			11,670
Dividends declared				(8,531	)											(8,531	)
Restricted stock		1		260												261
Reclassification adjustment for
net gain included in net income										(2,657	)		(2,657	)		(2,657	)
Increase in net unrealized gain on
available for sale securities										20,340			20,340			20,340
Increase in fair value of derivative
instruments utilized for cash flow hedges										2,656			2,656			2,656
Comprehensive income													32,009
Balance, January 1, 2010		94		142,519			(91,444	)		11,818						62,987
Net income							6,805						6,805			6,805
Dividends declared				(7,444	)											(7,444	)
Restricted stock				225												225
Reclassification adjustment for
net gain included in net income										(5,011	)		(5,011	)		(5,011	)
Increase in net unrealized gain on
available for sale securities										9,106			9,106			9,106
Increase in fair value of derivative
instruments utilized for cash flow hedges										1,819			1,819			1,819
Comprehensive income												$	12,719
Balance, December 31, 2010	$	94	$	135,300		$	(84,639	)	$	17,732					$	68,487

Common
Stock

Additional
Paid-In
Capital

Accumulated Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Comprehensive
Income (Loss)

Total

BALANCE, JANUARY 1, 2006 $ 18 $ 107,738 $ (8,708 ) $ 1,910 $ 100,958
Net loss — — (15,031 ) — $ (15,031 ) (15,031 )
Dividends declared — (8,595 ) — — — (8,595 )
Repurchase of common stock (1 ) (299 ) — — — (300 )
Restricted stock 1 819 — — — 820
Performance shares — 8 — — — 8
Stock options exercised — 3 — — — 3
Decrease in net unrealized gain on investment available for sale securities — — — (879 ) (879 ) (879 )
Decrease in derivative instruments utilized for cash flow hedge — — — (5,412 ) (5,412 ) (5,412 )
Comprehensive loss — — — — $ (21,322 )
BALANCE, DECEMBER 31, 2006 18 99,674 (23,739 ) (4,381 ) 71,572
Net loss — — (55,268 ) — $ (55,268 ) (55,268 )
Dividends declared — (909 ) — — — (909 )
Restricted stock — 592 — — — 592
Reclassification adjustment for net loss included in net income
— — — 3,192 3,192 3,192
Decrease in derivative instruments utilized for cash flow hedge — — — (761 ) (761 ) (761 )
Comprehensive loss — — — — $ (52,837 )
BALANCE, DECEMBER 31, 2007 18 99,357 (79,007 ) (1,950 ) 18,418
Net loss (24,107 ) $ (24,107 ) (24,107 )
Dividends declared — (5,033 ) — — — (5,033 )
Common stock issuance 75 56,466 — — — 56,541
Increase in net unrealized loss on investment available for sale securities — — — (2,961 ) (2,961 ) (2,961 )
Decrease in derivative instruments utilized for cash flow hedge — — — (3,610 ) (3,610 ) (3,610 )
Comprehensive loss — — — — $ (30,678 )
BALANCE, DECEMBER 31, 2008 $ 93 $ 150,790 $ (103,114 ) $ (8,521 ) $ 39,248

See notes to consolidated financial statements.

F-5

~~Table of Contents~~

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

	For the Year Ended
	December 31,
	2010			2009
Cash Flows from Operating Activities:
Net income	$	6,805		$	11,670
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		669			1,435
Net accretion on investment securities and mortgage loans held in securitization trusts		(3,248	)		(743	)
Realized gain on securities and related hedges		(5,362	)		(3,280	)
Impairment loss on investment securities		296			119
Proceeds from repayments or sales of mortgage loans		32			1,196
Provision for loan losses		2,230			2,262
Income from investment in limited partnership		(496	)		-
Distributions from investment in limited partnership		234			-
Restricted stock issuance		225			261
Other		-			270
Changes in operating assets and liabilities:
Receivables and other assets		269			795
Accrued expenses and other liabilities		(1,959	)		(2,212	)
Net cash (used in) provided by operating activities		(305	)		11,773

Cash Flows from Investing Activities:
Restricted cash		1,610			4,910
Purchases of investment securities		(5	)		(43,869	)
Issuance of mortgage loans held for investment		(7,460	)		-
Purchase of investment in limited partnership		(19,359	)		-
Proceeds from investment in limited partnership		956			-
Proceeds from sales of investment securities		46,024			296,553
Principal repayments received on mortgage loans held in securitization trusts		45,744			68,914
Principal paydowns on investment securities - available for sale		52,174			70,343
Net cash provided by investing activities		119,684			396,851

Cash Flows from Financing Activities:
Decrease in financing arrangements		(49,474	)		(317,223	)
Dividends paid		(8,102	)		(7,108	)
Redemption of convertible preferred debentures		(20,000	)		-
Payments made on collateralized debt obligations		(46,950	)		(69,158	)
Cash used in financing activities		(124,526	)		(393,489	)
Net (Decrease) Increase in Cash and Cash Equivalents		(5,147	)		15,135
Cash and Cash Equivalents - Beginning of Year		24,522			9,387
Cash and Cash Equivalents - End of Year	$	19,375		$	24,522

Supplemental Disclosure:
Cash paid for interest	$	9,730		$	13,456

Non-Cash Investment Activities:
Sale of investment securities not yet settled	$	5,653		$	-

Non-Cash Financing Activities:
Dividends declared to be paid in subsequent period	$	1,697		$	2,355

Grant of restricted stock	$	183		$	261

For the Years Ended December 31,

2008 2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (24,107 ) $ (55,268 ) $ (15,031 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 1,423 765 2,106
Amortization of premium on investment securities and mortgage loans 997 1,616 2,483
Loss on sale of securities, loans and related hedges 19,977 8,350 1,276
Impairment loss on investment securities 5,278 8,480 —
Purchase of mortgage loans held for investment — — (222,907 )
Origination of mortgage loans held for sale — (300,863 ) (1,841,011 )
Proceeds from sales of mortgage loans 2,746 398,678 2,059,981
Allowance for deferred tax asset / tax (benefit) — 18,352 (8,494 )
Gain on sale of retail lending platform — (4,368 ) —
Change in value of derivatives — 785 289
Provision for loan losses 1,520 2,546 6,800
Other — 1,111 806
Changes in operating assets and liabilities:
Due from loan purchasers — 88,351 33,462
Escrow deposits-pending loan closings — 3,814 (2,380 )
Accounts and accrued interest receivable 415 4,141 7,188
Prepaid and other assets 642 2,903 (1,586 )
Due to loan purchasers 138 (7,115 ) 4,209
Accounts payable and accrued expenses (2,767 ) (5,009 ) (7,957 )
Other liabilities — (131 ) (453 )
Net cash provided by operating activities 6,262 167,138 18,781
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (444 ) (4,364 ) 2,317
Purchases of investment securities (850,609 ) (231,932 ) (292,513 )
Proceeds from sale of investment securities 625,986 246,874 356,895
Principal repayments received on loans held in securitization trust 79,951 154,729 191,673
Proceeds from sale of retail lending platform — 12,936 —
Principal paydown on investment securities 74,172 113,490 162,185
Purchases of property and equipment — (396 ) (1,464 )
Proceeds from sale of fixed asset and real estate owned property 10 880 —
Net cash (used in) provided by investing activities (70,934 ) 292,217 419,093
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock — — (300 )
Increase (decrease) in financing arrangements, portfolio investments 86,615 (672,570 ) (403,400 )
Collateralized debt obligation borrowings — 337,431 —
Collateralized debt obligation paydowns (81,725 ) (117,851 ) (30,779 )
Dividends paid (4,100 ) (1,826 ) (11,524 )
Capital contributions from minority interest member — — 42
Payments made for termination of swaps (8,333 ) — —
Proceeds from common stock issued (net) 56,541 — —
Proceeds from convertible preferred debentures (net) 19,553 — —
Net cash provided by (used in) financing activities 68,551 (454,816 ) (445,961 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,879 4,539 (8,087 )
CASH AND CASH EQUIVALENTS — Beginning 5,508 969 9,056
CASH AND CASH EQUIVALENTS — End $ 9,387 $ 5,508 $ 969
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 31,479 $ 41,338 $ 76,905
NON CASH FINANCING ACTIVITIES
Dividends declared to be paid in subsequent period $ 932 $ — $ 905

See notes to consolidated financial statements.

F-6

~~Table of Contents~~

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~(dollar amounts in thousands unless otherwise indicated)~~

1.	Summary of Significant Accounting Policies

~~1. Summary of Significant Accounting Policies~~

Organization - New York Mortgage Trust, Inc., together with its consolidated subsidiaries (“~~NYMT”,~~NYMT,” the ~~“Company”, “we”,~~“Company,” “we,” “our”, and “us”), is a ~~self-advised~~ real estate investment trust, or REIT, ~~that invests~~in the business of acquiring, investing in, financing and managing primarily in real estate-related assets, including residential adjustable rate mortgage-backed securities (including collateralized mortgage obligation floating rate securities) issued by a United States government-sponsored enterprise (“GSE” or “Agency”), such as the Federal National Mortgage Association (“Fannie Mae”), or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), prime credit quality residential adjustable-rate mortgage (“ARM”) loans, or prime ARM loans, and non-agency mortgage-backed securities. We refer to residential adjustable rate mortgage-backed securities throughout this Annual Report on Form 10-K as “RMBS” and RMBS issued by a GSE as “Agency MBS”. We also may invest, although to a lesser extent, in certain alternative real-estate-related and financial assets that present greater credit risk and less interest rate risk than our investments our current investments RMBS and prime ARM loans. We refer to our investment in these alternative assets as our “alternative investment strategy.” ~~We seek attractive long-term investment returns by investing our equity capital and borrowed funds in such securities.~~mortgage-related assets. Our principal business objective is to generate net income for distribution to our stockholders resulting from the spread between the interest and other income we earn on our interest-earning assets and the interest expense we pay on the borrowings that we use to finance ~~these~~our leveraged assets and our operating costs, which we refer to as our net interest income. We intend to achieve this objective by investing in a broad class of mortgage-related and financial assets that in aggregate will generate what we believe are attractive risk-adjusted total returns for our stockholders. We also may opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate us appropriately for the risks associated with them.

The Company conducts its business through the parent company, NYMT, and several subsidiaries, including special purpose subsidiaries established for loan securitization purposes, a taxable REIT subsidiary ("TRS") and a qualified REIT subsidiary ("QRS"). The Company ~~will conduct~~conducts certain of its ~~operations related to its alternative~~portfolio investment ~~strategy~~operations through its wholly-owned TRS, Hypotheca Capital, LLC (“HC”), in order to utilize, to the extent permitted by law, some or all of a net operating loss carry-forward held in HC that resulted from the Company's exit from the mortgage lending business. Prior to March 31, 2007, the Company conducted substantially all of its mortgage lending business through HC. The Company's wholly-owned QRS, New York Mortgage Funding, LLC (“NYMF”), currently holds certain mortgage-related assets ~~under our principal investment strategy~~ for regulatory compliance purposes. The Company also may conduct certain ~~of our~~other portfolio investment operations related to ~~our~~its alternative investment strategy through NYMF. ~~As of December 31, 2008, the Company had not acquired any investments under its alternative investment strategy.~~ The Company consolidates all of its subsidiaries under ~~Generally Accepted Accounting Principles~~generally accepted accounting principles in the United States of America (“GAAP”).

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.

Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. Prior period amounts has been reclassified to conform to current period classifications, including $0.7 million ~~of deferred debt issuance cost included in prepaid and other assets~~ ~~to an offset to subordinated debentures (net).~~

~~F-7~~

~~Table of Contents~~

~~As used herein, references to the “Company,” “NYMT,” “we,” “our” and “us” refer to New York Mortgage Trust, Inc., collectively with its subsidiaries.~~

The Board of Directors declared a one for five reverse stock split of our common stock, as of October 9, 2007 and a one for two reverse stock split of our common stock, as of May 27, 2008, decreasing the number of common shares then outstanding to approximately 9.3 million. Prior and current period share amounts and earnings per share disclosures have been ~~restated to reflect~~prepared on the ~~reverse stock split. In addition, the terms~~accrual basis of our Series A Preferred Stock provide that the conversion rate for the Series A Preferred Stock be appropriately adjusted to reflect any reverse stock split. As a result, the description of our Series A Preferred Stock reflects the May 2008 reverse stock split (see note 15)accounting in accordance with U.S. generally accepted accounting principles (“GAAP”).

~~Use of Estimates~~ - The preparation of ~~consolidated~~ financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The ~~Company’s estimates~~consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany accounts and ~~assumptions primarily arise~~transactions have been eliminated.

Prior period amounts have been reclassified to conform to current period classifications, including the reclassification of assets and liabilities related to discontinued operations on the balance sheet from ~~risks~~a separate line item to receivables and ~~uncertainties associated~~other assets and accounts payable, accrued expenses and liabilities.

The Company has evaluated all events or transactions through the date of this filing. The Company did not have any material subsequent events that impacted its consolidated financial statements.

Effective July 1, 2009, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification, (the “Codification”), which is now the source of authoritative GAAP. While the Codification did not change GAAP, all existing authoritative accounting literature, with ~~interest rate volatility, prepayment volatility~~certain exceptions, was superseded and ~~credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in~~incorporated into the ~~near term, future changes in market conditions may occur which could cause actual results~~Codification. As a result, pre-Codification references to ~~differ materially.~~GAAP have been eliminated.

F-7

Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

~~Restricted Cash~~Receivables and Other Assets ~~- Restricted~~– Receivables and other assets totaled $8.9 million as of December 31, 2010, and consist of $4.0 million of assets related to discontinued operations, $1.4 million of restricted cash, $1.1 million related to escrow advances, $0.7 million of real estate owned (“REO”) in securitization trusts, $0.6 million of capitalization expenses related to equity and bond issuance cost, $0.6 million of accrued interest receivable, $0.4 million of prepaid expenses and $0.1 million of deferred tax asset. The restricted cash of $1.4 million includes ~~approximately $7.9~~$1.2 million held by counterparties as collateral for hedging instruments and ~~approximately $0.1~~$0.2 million ~~held~~ as collateral for ~~one~~a letter of credit related to the ~~Company’s~~ lease of itthe Company’s corporate headquarters. Receivables and other assets totaled $11.4 million as of December 31, 2009, and consist of $4.2 million of assets related to discontinued operations, $3.0 million of restricted cash, $2.0 million of accrued interest receivable, $0.7 million of other assets, $0.5 million of real estate owned (“REO”) in securitization trusts, $0.5 million of capitalization expenses related to equity and bond issuance cost, $0.3 million of prepaid expenses and $0.2 million related to escrow advances. The restricted cash of $3.0 million includes $2.9 million held by counterparties as collateral for hedging instruments and $0.1 million as collateral for a letter of credit related to the lease of the Company’s corporate headquarters.

Investment Securities Available for Sale - The Company's investment securities ~~are residential mortgage-backed securities~~include RMBS comprised of Fannie Mae, Freddie Mac, non-Agency RMBS and ~~“AAA”- rated adjustable-rate securities, including adjustable-rate securities that have an initial fixed-rate period.~~CLOs. Investment securities are classified as available for sale securities and are reported at fair value with unrealized gains and losses reported in other comprehensive ~~loss~~income (“OCI”). ~~The fair values for all securities in this classification are based on unadjusted price quotes for similar securities in active markets obtained from independent dealers.~~ Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in realized gain (loss) on sale of securities and related ~~hedges.~~hedges in the consolidated statements of operations. Purchase premiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the ~~interest~~effective yield method. ~~Investment securities may be subject~~Adjustments to ~~interest rate, credit and/or~~amortization are made for actual prepayment ~~risk.~~activity.

When the fair value of an ~~available for sale~~investment security is less than its amortized cost ~~management considers whether there~~at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities on at least a quarterly basis, and designates such impairments as either “temporary” or “other-than-temporary.” If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment inthrough earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the ~~security (e.g., whether~~other-than-temporary impairment related to credit losses is recognized through earnings with the ~~security will be sold prior to~~remainder recognized as a component of other comprehensive income (loss) on the ~~recovery~~consolidated balance sheet. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of fair value). Management considers at a minimum the following factors that, both individually or in combination, could indicate the decline is “other-than-temporary:” 1) the length of time and extent to which the fair value has been less than book value; 2) the financial condition and near-term prospects of the issuer; or 3) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. If, in management's judgment, an other-than-temporary impairment ~~exists,~~through earnings, a new cost basis is established for the security and may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security ~~is written down~~on a prospective basis through interest income. The determination as to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Even though no credit concerns exist with respect to an available for sale security,whether an other-than-temporary impairment ~~may be evident if management determines that the Company does not have the intent and ability to hold an investment until a forecasted recovery of the value of the investment. (see note 2)~~

~~Impairment of and Basis Adjustments on Securitized Financial Assets~~ - As previously described herein, during 2005 and early 2006, we regularly securitized our mortgage loans and retained the beneficial interests created by such securitization. Such assets are evaluated for impairment on a quarterly basis or, if events or changes in circumstances indicate that these assets or the underlying collateral may be impaired, on a more frequent basis. We evaluate whether these assets are considered impaired, whether the impairment is other-than-temporaryexists and, if so, the ~~impairment~~amount considered other-than-temporarily impaired is other-than-temporary, recognize an impairment loss equal to the difference between the asset’s amortized cost basis and its fair value. These evaluations require management to make estimates and judgmentssubjective, as such determinations are based on ~~changes in market interest rates, credit ratings, credit~~both factual and ~~delinquency data and other~~subjective information ~~to determine whether unrealized losses are reflective~~available at the time of credit deterioration and our ability and intent to hold the investment to maturity or recovery. This other-than-temporary impairment analysis requires significant management judgment and we deem this to be a critical accounting estimate.

As of December 31, 2008, our principal investment portfolio included approximately $197.7 million of Agency CMO Floaters. Following a review of our principal investment portfolio, we determined in March 2009 that the Agency CMO Floaters held in our portfolio were no longer producing acceptable returns and initiated a program to dispose of these securities on an opportunistic basis. As of March 25, 2009, the Company had sold approximately $149.8 million in current par value of Agency CMO Floaters under this program resulting in a net gain of approximately $0.2 million.assessment. As a result, the timing and amount of ~~these sales and our intent~~other-than-temporary impairments constitute material estimates that are susceptible to sell the remaining Agency CMO Floaters in our principal investment portfolio, we concluded the reduction in value at December 31, 2008 was other-than-temporary and recorded an impairment charge of $4.1 million for the quarter and year ended December 31, 2008.significant change.

In addition, we also determined that $6.1 million in current par value of non-agency RMBS, which includes $2.5 million in current par value of retained residual interest, had suffered an other-than-temporary impairment and, accordingly, recorded an impairment charge of $1.2 million for the year ended December 31, 2008.

F-8

~~Table of Contents~~

~~Accounts and Accrued Interest Receivable~~ ~~- Accounts and accrued receivable includes interest receivable for investment securities and mortgage loans held in securitization trusts.~~

Mortgage Loans Held in Securitization Trusts ~~(net)~~ - Mortgage loans held in securitization trusts are certain ~~Adjustable Rate Mortgage~~adjustable rate mortgage ("ARM") loans transferred to New York Mortgage Trust 2005-1, New York Mortgage Trust 2005-2 and New York Mortgage Trust 2005-3 that have been securitized into sequentially rated classes of beneficial interests. Mortgage loans held in securitization trusts are carried at their unpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses. ~~In accordance with Statement of Financial Accounting Standards (“SFAS”) SFAS No. 140,~~ ~~Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, securitized ARM loans and ARM loans collateralizing debt are accounted for as loans and are not considered investments subject to classification under SFAS No. 115,~~ ~~Accounting for Certain Investments in Debt and Equity Securities~~ ~~(see note 3 and note 6). See Collateralized Debt Obligations below for further description.~~

Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Mortgage Loans Held for Investment – Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in interest income. Loans are considered to be impaired when it is probable that, based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on the facts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan over either: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price.

Investment in Limited Partnership Interest – The Company has an equity investment in a limited partnership. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over the affairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses.

Management periodically reviews its investments for impairment based on projected cash flows from the entity over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

Allowance for Loan Losses on Mortgage Loans Held in Securitization ~~Trusts—~~Trusts - We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of mortgage loans held in securitization trusts.

Estimation involves the consideration of various credit-related factors including but not limited to, macro-economic conditions, the current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower's ~~credit~~current economic condition and other factors deemed to warrant consideration. Additionally, we look at the balance of any delinquent loan and compare that to the current value of the collateralizing property. We utilize various home valuation methodologies including appraisals, broker pricing opinions (“BPOs”), internet-based property data services to review comparable properties in the same area or consult with a realtor in the property's area.

Comparing the current loan balance to the property value determines the current loan-to-value (“LTV”) ratio of the loan. Generally, we estimate that a first lien loan on a property that goes into a foreclosure process and becomes real estate owned (“REO”), results in the property being disposed of at approximately ~~68%~~84% of the ~~property's original~~current appraised value. This estimate is based on management's ~~long term experience.~~experience as well as realized severity rates since issuance of our securitizations. During 2008, as a result of the significant deterioration in the housing market, we revised our policy to estimate recovery values based on current home valuations less expected costs to dispose. These costs typically approximate ~~15%~~16% of the current home value. It is possible given ~~today's~~the deteriorating market conditions experienced since 2008 that we may realize less than that return in certain cases. Thus, for a first lien loan that is delinquent, we will adjust the property value down to approximately ~~85%~~84% of the current property value and compare that to the current balance of the loan. The difference determines the base provision for the loan loss taken for that loan. This base provision for a particular loan may be adjusted if we are aware of specific circumstances that may affect the outcome of the loss mitigation process for that loan. Predominately, however, we use the base reserve number for our reserve.

The allowance for loan losses will be maintained through ongoing provisions charged to operating income and will be reduced by loans that are charged off. As of December 31, ~~2008~~2010 the allowance for loan losses held in securitization trusts totaled ~~$1.4~~$2.6 million. The allowance for loan losses was ~~$1.6~~$2.6 million at December 31, ~~2007.~~2009.

Financing Arrangements, Portfolio Investments ~~— Portfolio investments~~- Investment securities available for sale are typically financed with repurchase agreements, a form of collateralized borrowing which is secured by ~~portfolio~~the securities on the balance sheet. Such financings are recorded at their outstanding principal balance with any accrued interest due recorded as an accrued ~~expense (see note 5).~~expense.

F-9

~~Table of Contents~~

Collateralized Debt Obligations (“CDO”) - We use CDOs to permanently finance our loans held in securitization trusts. For financial reporting purposes, the ARM loans ~~and restricted cash~~ held as collateral are ~~carried~~recorded as assets of the Company and the CDO is ~~carried~~recorded as the Company’s debt. The transaction includes interest rate caps which are held by the securitization trust and recorded as ~~a derivative~~an asset or liability of the Company.

The Company, as transferor, securitizes mortgage loans and securities by transferring the loans or securities to entities (“Transferees”) which generally qualify under GAAP as “qualifying special purpose entities” (“QSPE's”) as defined under SFAS No. 140. The QSPEs issue investment grade and non-investment grade securities. Generally, the investment grade securities are sold to third party investors, and the Company retains the non-investment grade securities. If a transaction meets the requirements for sale recognition under GAAP, and the Transferee meets the requirements to be a QSPE, the assets transferred to the QSPE are considered sold, and gain or loss is recognized. The gain or loss is based on the price of the securities sold and the estimated fair value of any securities and servicing rights retained over the cost basis of the assets transferred net of transaction costs. If subsequently the Transferee fails to continue to qualify as a QSPE, or the Company obtains the right to purchase assets out of the Transferee, then the Company may have to include in its financial statements such assets, or potentially, all the assets of such Transferee. The Company has completed four securitizations since inception, the first three were accounted for as a permanent financing ~~(see note 6)~~ and the fourth was accounted for as a ~~sale.~~sale and accordingly, not included in the Company’s financial statements.

Subordinated Debentures ~~(net) -~~(Net) - Subordinated debentures are trust preferred securities that are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of the Company’s consolidated balance ~~sheet and are presented net of the debt issurance costs (see note 7).~~sheet.

Convertible Preferred Debentures ~~(net)~~(Net) - The Company issued $20.0 million in Series A Convertible Preferred Stock ~~maturing~~that matured on December 31, ~~2010, at which time any~~2010. The outstanding shares ~~must be~~were redeemed by the Company at the $20.00 per share liquidation ~~preference. Pursuant to SFAS No.150,~~ ~~Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, because of this mandatory redemption feature, the Company classifies these securities as a liability~~preference plus accrued dividends on ~~its balance~~ ~~sheet and are presented net of the debt issurance costs (see note 15).~~December 31, 2010.

Derivative Financial Instruments - The Company has developed risk management programs and processes, which include investments in derivative financial instruments designed to manage ~~market~~interest rate risk associated with its ~~mortgage banking and its mortgage-backed~~ securities investment activities.

Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks and investment banks ~~and certain private investors~~ who meet established credit and capital guidelines. Management does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any loss due to counterparty default. In addition, all outstanding interest rate swap agreements have bi-lateral margin call ~~provisions~~capabilities, meaning the Company will require margin for interest rate swaps that ~~has~~are in the ~~effect of~~Company’s favor, minimizing ~~the net exposure to either counterparty.~~any amounts at risk.

Interest Rate Risk - The Company hedges the aggregate risk of interest rate fluctuations with respect to its borrowings, regardless of the form of such borrowings, which require payments based on a variable interest rate index. The Company generally intends to hedge only the risk related to changes in the benchmark interest rate (London Interbank Offered Rate (“LIBOR”) ~~or a Treasury rate)~~. The Company applies hedge accounting utilizing the cash flow hedge ~~criteria in accordance with SFAS No. 133,~~ ~~Accounting for Derivative Instruments and Hedging Activities.~~criteria.

In order to reduce such risks, the Company enters into swap agreements whereby the Company receives floating rate payments in exchange for fixed rate payments, effectively converting the borrowing to a fixed rate. The Company also enters into cap agreements whereby, in exchange for a premium, the Company is reimbursed for interest paid in excess of a certain capped rate.

~~F-10~~

~~Table of Contents~~

To qualify for cash flow hedge accounting, interest rate swaps and caps must meet certain criteria, including:

the items to be hedged expose the Company to interest rate risk; and

the interest rate swaps or caps are expected to be and continue to be highly effective in reducing the Company's exposure to interest rate risk.

The fair values of the Company's interest rate swap agreements and interest rate cap agreements are based on values provided by dealers who are familiar with the terms of these instruments. ~~Effectiveness is~~Correlation and effectiveness are periodically assessed at least ~~monthly~~quarterly based upon a comparison of the relative ~~terms,~~ changes in the fair values or cash flows of the interest rate swaps and caps and the items being hedged.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instruments are reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

F-10

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps, will be recognized in current earnings.

Termination of Hedging Relationships - The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.

Additionally, the Company may elect to un-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.

Revenue Recognition. Interest income on our residential mortgage loans and mortgage-backed securities is a combination of the interest earned based on the outstanding principal balance of the underlying loan/security, the contractual terms of the assets and the amortization of yield adjustments, principally premiums and discounts, using generally accepted interest methods. The net GAAP cost over the par balance of self-originated loans held for investment and premium and discount associated with the purchase of mortgage-backed securities and loans are amortized into interest income over the lives of the underlying assets using the effective yield method as adjusted for the effects of estimated prepayments. Estimating prepayments and the remaining term of our interest yield investments require management judgment, which involves, among other things, consideration of possible future interest rate environments and an estimate of how borrowers will react to those environments, historical trends and performance. The actual prepayment speed and actual lives could be more or less than the amount estimated by management at the time of origination or purchase of the assets or at each financial reporting period.

With respect to interest rate swaps and caps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps and caps will be recognized in current earnings.

F-11

~~Table of Contents~~

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Fiscal Year Ended December 31, ~~2008~~2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Transition Period From ____________ to ____________

Maryland		47-0934168
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share		NASDAQ Stock Market

Document		Where Incorporated
1. Portions of the Registrant's Definitive Proxy Statement relating to its ~~2009~~2011 Annual Meeting of Stockholders scheduled for ~~June 9, 2009~~May 10, 2011 to be filed with the Securities and Exchange Commission by no later than April 30, ~~2009.~~2011.		Part III, Items 10-14

PART I

Item 1.	Business	15
Item 1A.	Risk Factors	1620
Item 1B.	Unresolved Staff Comments	3537
Item 2.	Properties	3537
Item 3.	Legal Proceedings	3537
Item 4.	~~Submission of Matters to a Vote of Security Holders~~ (Removed and Reserved)	3537

PART II

Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3538
Item 6.	Selected Financial Data	3940
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4041
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	6768
Item 8.	Financial Statements and Supplementary Data	7173
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	7173
Item 9A.	Controls and Procedures	7274
Item 9B.	Other Information	7274

PART III

Item 10.	Directors and Executive Officers of the Registrant and Corporate Governance	7375
Item 11.	Executive Compensation	7375
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	7375
Item 13.	Certain Relationships and Related Party Transactions and Director Independence	7375
Item 14.	Principal ~~Accountant~~Accounting Fees and Services	7375

PART IV

Item 15.	Exhibits, ~~and~~ Financial Statement Schedules	74 76

	Common Stock Prices									Cash Dividends
	High			Low			Close			Declared	Paid or Payable	Amount per Share
Year Ended December 31, 2010
Fourth quarter		$	6.96		$	6.23		$	6.96	12/20/10	01/25/11		$	0.18
Third quarter			6.52			5.68			6.26	10/04/10	10/25/10			0.18
Second quarter			7.77			6.51			6.62	06/16/10	07/26/10			0.18
First quarter			8.03			6.54			7.55	03/16/10	04/26/10			0.25

	Common Stock Prices (1)						Cash Dividends
	High		Low		Close		Declared	Paid or Payable	Amount per Share
Year Ended December 31, 2008
Fourth quarter	$	4.37	$	1.51	$	2.20	12/23/08	01/26/09	$	0.10
Third quarter		5.99		2.50		3.17	09/29/08	10/27/08		0.16
Second quarter		6.24		4.00		6.20	06/30/08	7/25/08		0.16
First quarter		9.80		4.40		5.40	04/21/08	05/15/08		0.12

	Common Stock Prices (2)						Cash Dividends
	High		Low		Close		Declared	Paid or Payable		Amount per Share
Year Ended December 31, 2007
Fourth quarter	$	10.00	$	6.02	$	8.60				—
Third quarter		19.26		3.10		8.40				—
Second quarter		29.60		17.70		19.10				—
First quarter		33.90		23.40		25.40	3/14/07	4/26/07	$	0.50

Declaration Date	Record Date	Payment Date	Cash Distribution per share		Income Dividends		Short-term Capital Gain		Total Taxable Ordinary Dividend		Return of Capital

04/21/08	04/30/08	05/15/08	$	0.1200	$	0.0941	$	0.0000	$	0.0941	$	0.0259
06/30/08	07/10/08	07/25/08	$	0.1600	$	0.1600	$	0.0000	$	0.1600	$	0.0000
09/29/08	10/10/08	10/27/08	$	0.1600	$	0.0056	$	0.0000	$	0.0056	$	0.1544
Total 2008 Cash Distributions			$	0.4400	$	0.2597	$	0.0000	$	0.2597	$	0.1803

Plan Category		Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights			Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans
Equity compensation plans approved by security holders		—		$	—		~~103,111~~1,182,823

	As of and For the Year Ended December 31,
(Dollar amounts in thousands, except per Share Amounts)	2008			2007			2006			2005			2004
Operating Data:
Revenues:
Interest income	$	44,123		$	50,564		$	64,881		$	62,725		$	20,394
Interest expense		36,260			50,087			60,097			49,852			12,470
Net Interest Income		7,863			477			4,784			12,873			7,924
Provision for loan losses		(1,462	)		(1,683	)		(57	)		—			—
(Loss) gain on sale of securities and related hedges		(19,977	)		(8,350	)		(529	)		2,207			167
Impairment loss on investment securities		(5,278	)		(8,480	)		—			(7,440	)		—
Total other expense		(26,717	)		(18,513	)		(586	)		(5,233	)		167
Expenses:
Salaries and benefits		1,869			865			714			1,934			382
General and administrative expenses		5,041			1,889			1,318			2,384			810
Total expenses		6,910			2,754			2,032			4,318			1,192
(Loss) income from continuing operations		(25,764	)		(20,790	)		2,166			3,322			6,899
Income (loss) discontinued operations – net of tax (1)		1,657			(34,478	)		(17,197	)		(8,662	)		(1,952	)
Net (loss) income (2)	$	(24,107	)	$	(55,268	)	$	(15,031	)	$	(5,340	)	$	4,947
Basic and diluted (loss) income per common share from continuing operations	$	(3.11	)	$	(11.46	)	$	1.20		$	1.85		$	3.85
Basic and diluted income (loss) per common share from discontinued operations	$	0.20		$	(19.01	)	$	(9.53	)	$	(4.81	)	$	(1.09	)
Basic and diluted (loss) income per common share	$	(2.91	)	$	(30.47	)	$	(8.33	)	$	(2.96	)	$	2.76
Dividends per common share	$	0.54		$	0.50		$	4.70		$	9.20		$	4.00
Balance Sheet Data:
Cash and cash equivalents	$	9,387		$	5,508		$	969		$	9,056		$	7,613
Investment securities available for sale		477,416			350,484			488,962			716,482			1,204,745
Mortgage loans held in securitization trusts or held for investment (net)		348,337			430,715			588,160			780,670			190,153
Assets related to discontinued operations		5,854			8,876			212,805			248,871			201,034
Total assets		853,300			808,606			1,321,979			1,789,943			1,614,762
Financing arrangements		402,329			315,714			815,313			1,166,499			1,115,809
Collateralized debt obligations		335,646			417,027			197,447			228,226			—
Subordinated debentures		44,618			44,345			44,071			43,650			—
Convertible preferred debentures		19,702			—			—			—			—
Liabilities related to discontinued operations		3,566			5,833			187,705			231,925			189,095
Total liabilities		814,052			790,188			1,250,407			1,688,985			1,495,280
Total stockholders’ equity	$	39,248		$	18,418		$	71,572		$	100,958		$	119,482


·	actions taken by the U.S. Federal Reserve and the U.S. Government; and

·	requirements to maintain REIT status and to qualify for an exemption from registration under the Investment Company Act.

December 31, 2008	Sponsor or Rating	Par Value		Carrying Value		% of Portfolio			Coupon			Yield
Credit
Agency Hybrid ARMs	FNMA	$	251,810	$	258,196		54	%		5.15	%		3.93	%
Agency REMIC CMO Floating Rate	FNMA/FHLMC		203,638		197,675		41	%		1.83	%		8.54	%
Private Label Floating Rate	AAA		23,289		18,118		4	%		1.27	%		15.85	%
Private Label Floating Rate	Aa		3,648		2,828		1	%		2.30	%		4.08	%
NYMT Retained Securities	AAA-BBB		609		530		0	%		5.80	%		8.56	%
NYMT Retained Securities	Below Investment Grade		2,462		69		0	%		5.67	%		16.99	%
Total/Weighted Average		$	485,456	$	477,416		100	%		3.55	%		6.51	%

December 31, 2010	Par Value		Carrying Value		% of Portfolio
Agency RMBS	$	45,042	$	47,529		55.3	%
Non-Agency RMBS		11,104		8,985		10.4	%
Collateralized Loan Obligation		45,950		29,526		34.3	%
Total	$	102,096	$	86,040		100.0	%

December 31, 2009	Par Value		Carrying Value		% of Portfolio
Agency RMBS	$	110,324	$	116,226		65.8	%
Non-Agency RMBS		56,984		42,866		24.2	%
Collateralized Loan Obligation		45,950		17,599		10.0	%
Total	$	213,258	$	176,691		100.0	%

December 31, 2007	Sponsor or Rating	Par Value		Carrying Value		% of Portfolio			Coupon			Yield
Credit
Agency REMIC CMO Floating Rate	FNMA/FHLMC/GNMA	$	324,676	$	318,689		91	%		5.98	%		5.55	%
Private Label Floating Rate	AAA		29,764		28,401		8	%		5.66	%		5.50	%
NYMT Retained Securities	AAA-BBB		2,169		2,165		1	%		6.31	%		6.28	%
NYMT Retained Securities	Below Investment Grade		2,756		1,229		0	%		5.68	%		12.99	%
Total/Weighted Average		$	359,365	$	350,484		100	%		5.95	%		5.61	%

	Less than 6 Months		More than 6 Months To 24 Months		More than 24 Months To 60 Months		Total
December 31, 2010	Carrying Value		Carrying Value		Carrying Value		Carrying Value
Agency RMBS	$	25,816	$	5,313	$	16,400	$	47,529
Non-Agency RMBS		8,985		—		—		8,985
Collateralized Loan Obligation		29,526		—		—		29,526
Total	$	64,327	$	5,313	$	16,400	$	86,040

	Acquired prior to 2009 (1)
Current par value	$	11,104
Collateral type
Fixed rate	$	10,495
ARMs	$	609
Weighted average purchase price		90.70	%
Weighted average credit support		3.32	%
Weighted average 60+ delinquencies (including 60+, REO and foreclosure)		6.64	%
Weighted average 3 month CPR		23.39	%
Weighted average 3 month voluntary prepayment rate		21.33	%

	Acquired after 2008			Acquired prior to 2009
Current par value	$	38,682		$	18,302
Collateral type
Fixed rate	$	3,738		$	17,693
ARMs	$	34,944		$	609
Weighted average purchase price		60.51	%		92.05	%
Weighted average credit support		8.76	%		4.06	%
Weighted average 60+ delinquencies (including 60+, REO and foreclosure)		20.61	%		3.66	%
Weighted average 3 month CPR		16.24	%		17.46	%
Weighted average 3 month voluntary prepayment rate		9.78	%		15.84	%

	As of December 31, 2010				As of December 31, 2009
Range of Outstanding Balance	Number of Loans	Maturity Date		Total Principal	Number of Loans		Maturity Date		Total Principal

$0 - $500	11	11/2014 – 11/2017	$	5,404		7	03/2014 - 03/2017	$	3,471
$500 - $2,000	72	5/2013 – 12/2017		95,704		18	12/2011 - 12/2015		24,722
$2,000 - $5,000	88	8/2012 – 11/2017		276,265		55	5/2011 - 2/2016		198,895
$5,000 - $10,000	11	11/2011 – 3/2016		77,366		28	11/2010 - 10/2014		202,080
+$10,000	—	—		—		3	12/2009 - 10/2012		32,292
Total	182		$	454,739		111		$	461,460

	Less than 6 Months					More than 6 Months To 24 Months					More than 24 Months To 60 Months					Total
December 31, 2008	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
Agency Hybrid ARMs	$	—		—	%	$	66,910		3.69	%	$	191,286		4.02	%	$	258,196		3.93	%
Agency REMIC CMO Floating Rate		197,675		8.54	%		—		—	%		—		—	%		197,675		8.54	%
Private Label Floating Rate		20,946		14.25	%		—		—	%		—		—	%		20,946		14.25	%
NYMT Retained Securities		530		8.56	%		—		—	%		69		16.99	%		599		15.32	%
Total/Weighted Average	$	219,151		9.21	%	$	66,910		3.69	%	$	191,355		4.19	%	$	477,416		6.51	%

Industry	Number of Loans	Outstanding Balance		% of Outstanding Balance

Healthcare, Education & Childcare	19	$	52,537	11.55%
Retail Store	10		29,388	6.46%
Electronics	10		29,148	6.41%
Telecommunications	13		26,410	5.81%
Leisure , Amusement, Motion Pictures & Entertainment	10		22,316	4.91%
Personal, Food & Misc Services	10		21,179	4.66%
Chemicals, Plastics and Rubber	9		20,962	4.61%
Beverage, Food & Tobacco	9		18,666	4.10%
Utilities	5		17,035	3.75%
Aerospace & Defense	7		16,468	3.62%
Insurance	3		16,245	3.57%
Hotels, Motels, Inns and Gaming	5		15,389	3.38%
Farming & Agriculture	5		14,983	3.29%
Cargo Transport	3		14,372	3.16%
Diversified/Conglomerate Mfg	6		13,914	3.06%
Personal &Non-Durable Consumer Products	5		13,774	3.03%
Printing & Publishing	4		11,944	2.63%
Diversified/Conglomerate Service	5		10,841	2.38%
Broadcasting & Entertainment	4		10,037	2.21%
Ecological	4		8,763	1.93%
Finance	3		7,803	1.72%
Containers, Packaging and Glass	4		7,635	1.68%
Machinery (Non-Agriculture, Non-Construction & Non-Electronic)	4		7,482	1.65%
Personal Transportation	3		7,306	1.61%
Buildings and Real Estate	3		6,970	1.53%
Banking	2		6,750	1.48%
Automobile	5		6,544	1.44%
Mining, Steel, Iron and Non-Precious Metals	3		5,466	1.20%
Textiles & Leather	3		4,359	0.96%
Oil & Gas	2		3,994	0.88%
Grocery	3		3,808	0.84%
Diversified Natural Resources, Precious Metals and Minerals	1		2,251	0.49%
	182	$	454,739	100.00%

	Par Value		Coupon			Carrying Value		Yield
December 31, 2008	$	347,546		5.56	%	$	348,337		3.96	%
December 31, 2007	$	429,629		5.74	%	$	430,715		5.36	%

	# of Loans		Par Value		Coupon			Carrying Value
December 31, 2010		559	$	229,323		3.16	%	$	228,185
December 31, 2009		647	$	277,007		5.19	%	$	276,176

	Average			High			Low
General Loan Characteristics:
Original Loan Balance (dollar amounts in thousands)	$	443		$	2,950		$	48
Current Coupon Rate		3.16	%		7.25	%		1.38	%
Gross Margin		2.36	%		4.13	%		1.13	%
Lifetime Cap		11.28	%		13.25	%		9.13	%
Original Term (Months)		360			360			360
Remaining Term (Months)		292			300			259
Average Months to Reset		4			11			1
Original Average FICO Score		729			818			593
Original Average LTV		70.48	%		95.00	%		13.94	%

	% of Outstanding Loan Balance			Weighted Average Gross Margin (%)
Index Type/Gross Margin:
One Month LIBOR		2.6	%		1.69	%
Six Month LIBOR		72.9	%		2.40	%
One Year LIBOR		16.6	%		2.26	%
One Year Constant Maturity Treasury		7.9	%		2.65	%
Total		100.0	%		2.36	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Arm Loan Type
Traditional ARMs		2.2	%		2.3	%
2/1 Hybrid ARMs		1.1	%		1.6	%
3/1 Hybrid ARMs		7.8	%		10.2	%
5/1 Hybrid ARMs		86.3	%		83.4	%
7/1 Hybrid ARMs		2.6	%		2.5	%
Total		100.0	%		100.0	%
Percent of ARM loans that are Interest Only		78.6	%		77.3	%
Weighted average length of interest only period	8.3 years			8.3 years

	December 31, 2008 Percentage			December 31, 2007 Percentage
Traditional ARMs - Periodic Caps
None		79.4	%		72.9	%
1%		1.2	%		1.4	%
Over 1%		19.4	%		25.7	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Hybrid ARMs - Initial Cap
3.00% or less		6.7	%		8.3	%
3.01%-4.00%		4.0	%		5.1	%
4.01%-5.00%		88.2	%		85.6	%
5.01%-6.00%		1.1	%		1.0	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Original FICO Scores
650 or less		4.4	%		3.9	%
651 to 700		18.0	%		17.0	%
701 to 750		32.7	%		32.4	%
751 to 800		40.9	%		42.5	%
801 and over		4.0	%		4.2	%
Total		100.0	%		100.0	%
Average FICO Score		736			738

	December 31, 2008 Percentage			December 31, 2007 Percentage
Original Loan to Value (LTV)
50% or less		9.7	%		9.5	%
50.01%-60.00%		8.2	%		8.9	%
60.01%-70.00%		25.8	%		27.3	%
70.01%-80.00%		54.4	%		52.2	%
80.01% and over		1.9	%		2.1	%
Total		100.0	%		100.0	%
Average LTV		69.9	%		69.7	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Property Type
Single Family		51.4	%		51.3	%
Condominium		23.3	%		22.8	%
Cooperative		9.8	%		9.8	%
Planned Unit Development		12.8	%		13.0	%
Two to Four Family		2.7	%		3.1	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Occupancy Status
Primary		85.1	%		84.4	%
Secondary		11.0	%		12.0	%
Investor		3.9	%		3.6	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Documentation Type
Full Documentation		72.7	%		72.0	%
Stated Income		19.6	%		19.7	%
Stated Income/ Stated Assets		6.3	%		6.8	%
No Documentation		1.0	%		1.0	%
No Ratio		0.4	%		0.5	%
Total		100.0	%		100.0	%

	December 31, 2008 Percentage			December 31, 2007 Percentage
Loan Purpose
Purchase		58.0	%		57.8	%
Cash out refinance		16.1	%		15.9	%
Rate & term refinance		25.9	%		26.3	%
Total		100.0	%		100.0	%