OFSThe Company uses warehouse loan arrangements to finance the origination and purchase of pools of principally fixed and adjustable-rate residential first mortgage loans (the “Mortgage Loans”). Subsequent to their origination or purchase, OFS either sells these loans to third partythird-party institutional investors through bulk sale arrangements or through securitization transactions. OFSThe Company generally makes several representations and warranties regarding the performance of the Mortgage Loans in connection with each sale or securitization. OFSThe Company accumulates the desired amount of Mortgage Loans and securitizes them in order to create marketable securities.

OPMACOMAC then sells the Mortgage Loans to an institutional third partythird-party to serve as Depositor, pursuant to a Mortgage Loan Purchase and Servicing Agreement (“P&S Agreement”). Under this P&S Agreement, OFSthe Company makes general representations and warranties for Mortgage Loans sold by OFS.the Company.

The Depositor then deposits the Mortgage Loans into a Real Estate Mortgage Investment Conduit trust (the “REMIC”) where the rights to such Mortgage Loans are pooled and converted into marketable debt securities pursuant to the P&S Agreement. These securities, issued by the REMIC, are divided into different classes of certificates (the “Certificates”) with varying claims to payments received on the Mortgage Loans. These Certificates are transferred to the Depositor in exchange for all of its rights in the Mortgage Loans deposited into the REMIC.

Finally, OFSthe Company transfers the proceeds from the sale of the Public Certificates and the non-publicly offered Certificates representing the residual interest in the REMIC to OPMACOMAC pursuant to the P&S Agreement. The additional non-publicly offered Certificates, representing prepayment penalties and over-collateralization fundings (the “Underlying Certificates”) are held by OPMACOMAC in anticipation of a net interest margin (“NIM”) securitization. Subsequent to a securitization transaction as described above, OFSthe Company executes an additional securitization or “resecuritization” of the Underlying Certificates being held by OPMAC.OMAC. This NIM securitization is typically transacted as follows:

OPMACOMAC deposits the Underlying Certificates into a trust (the “NIM Trust”) pursuant to a deposit trust agreement. The NIM Trust is a Delaware statutory trust. The NIM Trust, pursuant to an indenture, issues (i) notes (the “NIM Notes”) representing interests in the Underlying Certificates and (ii) an owner trust certificate (the “Owner Trust Certificate”) representing the residual interest in the NIM trust.Trust. The NIM Notes are sold to third parties via private placement transactions and the Owner Trust Certificate is transferred from OPMACOMAC to OFSthe Company in consideration for the deposit of the Underlying Certificates.

OFSThe Company recognizes mortgage servicing rights (“MSRs”) as an asset when separated from the underlying mortgage loans uponin connection with the sale of thesuch loans. Upon sale of a loan, OFSthe Company measures the retained MSRs by allocating the total cost of originating a mortgage loan between the loan and the servicing right based on their relative fair values. FairThe estimated fair value of MSRs is estimated based on expected cash flows consideringdetermined by obtaining a market valuation from a specialist who brokers MSRs. To determine the market valuation, the broker uses a valuation model that incorporates assumptions relating to the estimate of the cost of servicing the loan, a discount rate, a float value, an inflation rate, ancillary income of the loan, prepayment estimates, historical prepaymentspeeds and default rates portfolio characteristics, interest rates, and other economic factors.that market participants use for acquiring similar servicing rights. Gains or losses on the sale of MSRs are recognized when title and all risks and rewards have irrevocably passed to the buyerpurchaser of such MSRs and there are no significant unresolved contingencies.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Opteum’sThe Company’s goodwill all arose from the OFS merger. Contingent consideration paid in subsequent periods under the terms of the OFS purchasemerger agreement, if any, would be considered acquisition costs and classified as goodwill. Goodwill was $3.0 million as of March 31, 2006.

OFS’sOFS’ risk management objective for its mortgage loans held for sale includes use of mortgage forward delivery contracts designed as fair value derivative instruments to protect earnings from an unexpected change due to a decline in value. Effective with the adoption of SFAS No. 133, OFS’sOFS’ mortgage forward delivery contracts are recorded at their fair value with changes in fair value recorded to current earnings.

OpteumThe Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, Opteum transfersthe Company sells securities to a lenderrepurchase counterparty and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sales price that Opteumthe Company receives and the repurchase price that Opteumthe Company pays represents interest paid to the lender.repurchase counterparty. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which Opteumthe Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. OpteumThe Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, Opteumthe Company is required to repayrepurchase the loanunderlying MBS and concurrently receives back its pledged collateral from the lenderrepurchase counterparty or, with the consent of the lender, Opteumrepurchase counterparty, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require Opteumthe Company to pledge additional assets to the lenderrepurchase counterparty in the event the estimated fair value of the existing pledged collateral declines. As of March 31,June 30, 2006, and December 31, 2005, Opteumthe Company did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

Original terms to maturity of Opteum'sthe Company’s repurchase agreements generally, but not always, range from one month to twelve months; however, Opteumthe Company is not precluded from entering into repurchase agreements with shorter or longer maturities. Repurchase agreements are reflected in the financial statements at their costs, which approximates their fair value because of the short-term nature of these instruments. Should a counter-partycounterparty decide not to renew a repurchase agreement at maturity, Opteumthe Company must either refinance elsewhere or be in a position to satisfy this obligation. If, during the term of a repurchase agreement, a lender should filecounterparty files for bankruptcy, Opteum mightthe Company could experience difficulty recovering its pledged assets and may have an unsecured claim against the lender'scounterparty's assets for the difference between the amount loaned to Opteumreceived by the Company and the estimated fair value of the collateral pledged to such lender. At March 31, 2006, Opteum had amounts outstanding under repurchase agreements with fifteen separate lenders with a maximum net exposure (the difference between the amount loaned to Opteum and the estimated fair value of the security pledged by Opteum as collateral) to any single lender of approximately $16.9 million. At December 31, 2005, Opteum had amounts outstanding under repurchase agreements with fourteen separate lenders with a maximum net exposure to any single lender of approximately $27.0 million.

SecuritiesMBS are recorded at cost on the date the securitiesMBS are purchased or sold, which is generally the trade date. Realized gains or losses from securitiesMBS transactions are determined based on the specific identified cost of the securities.MBS. Interest income is accrued based on the outstanding principal amount of the securitiesMBS and their stated contractual terms. Premiums and discounts associated with the purchase of the securitiesMBS are amortized or accreted into interest income over the estimated lives of the assetsMBS adjusted for estimated prepayments using the effective interest method. Adjustments are made using the retrospective method to the effective interest computation each reporting periodperiod. The adjustment is based on the actual prepayment experiences to date and the present expectation of future prepayments of the underlying mortgages.

OFSThe Company recognizes gain (or loss) on the sale of loans.  Gains or losses on such sales are recognized at the time legal title transfers to the investorpurchaser of such loans based upon the difference between the sales proceeds from the final investorpurchaser and the allocated basis of the loan sold, adjusted for net deferred loan fees and certain direct costs and selling costs. OFSThe Company defers net loan origination costs and fees as a component of the loan balance on the balance sheet. Such costs are not amortized and are recognized into income as a component of the gain or loss upon sale. Accordingly, salaries, commissions, benefits and other operating expenses of $30.2 million and $14.2 million during the six and three months ended June 30, 2006, respectively, were capitalized as direct loan origination costs. Loan fees related to the origination and funding of mortgage loans held for sale were $3.1 million and $1.5 million during the six and three months ended June 30, 2006. The net (loss)/gain on sale of loans was $7.1 million for the six and three months ended March 31, 2006.June 30, 2006, was ($2.0) million and $5.1 million, respectively.

Servicing fee income is generally a fee based on a percentage of the outstanding principal balances of the mortgage loans serviced by OFSthe Company (or by a subservicer where OFSthe Company is the master servicer) and is recorded as income as the installment payments on the mortgages are received by OFSthe Company or the subservicer.

Comprehensive (Loss)(loss) income is as follows: 

Effective July 9, 2004, theoutstanding shares of Class B common stock,Common Stock, participating and convertible into Class A common stock,Common Stock, became entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stockCommon Stock if, as and when authorized and declared by the Board of Directors. Following the provisions of EITF 03-6, shares of the Class B common stock isCommon Stock are included in the computation of basic EPS using the two-class method and, consequently, is presented separately from Class A common stock.Common Stock.

The shares of Class C common sharesCommon Stock are not included in the basic EPS computation as these shares do not have participation rights. The Class C common shares totaling 319,388 are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.

The CompanyOpteum has elected to be taxed as a REIT under the Code. As further described below, the Company’sOpteum’s TRS, OFS, is a taxpaying entity for income tax purposes and is taxed separately from Opteum. Opteum will generally not be subject to federal income tax on its taxable net income to the extent that Opteum distributes its taxable net income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock ownership tests. A REIT must generally distribute at least 90% of its net taxable income to its stockholders, of which 85% generally must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other requirements.

On November 3, 2005, Opteum acquired 100% of the equity interests of OFS through a newly formed wholly-owned subsidiary of Opteum. OFS is a mortgage lender that originates loans nationwide. Opteum acquired OFS to diversify its revenue stream while remaining in Opteum’s area of expertise. For OFS, the acquisition provides increased access to capital to fund growth. The results of operations of OFS have been included in the Company’s consolidated financial statements since November 3, 2005. During the threesix months ended March 31,June 30, 2006, the Company has increased the aggregate purchase price by $0.6$1.0 million for additional legal and accounting fees incurred and it has made insignificant modifications to the allocation of the purchase price to the net assets acquired, based on final valuations and completion of analysis .analysis. See Note 2 to the Companyfinancial statements included in the Company’s Form 10-K for the year ended 2005 for a complete description.

Upon the closing of a residential mortgage loan or shortly thereafter, OFS will either securitize the majority ofor sell as whole loans its mortgage loan originations.assets. OFS also sells mortgage loans insured or guaranteed by various government-sponsored entities and private insurance agencies.agencies in an effort to maximize profits. The insurance or guaranty is provided primarily on a nonrecourse basis to OFS, except where limited by the Federal Housing Administration and Veterans Administration and their respective loan programs. At March 31,June 30, 2006, OFS serviced approximately $1.7$8.4 billion of mortgage loans sold into the secondary market. All of OFS’sOFS’ loans held for sale are pledged as collateral under the various financing arrangements described in Note 8.9. Mortgage loans held for sale consist of the following as of March 31,June 30, 2006:

SubordinatedRetained interest, trading is the subordinated interests retained representby OFS from OFS’ various securitizations and includes the over-collateralization and residual net interest spread whichremaining after payments to the Public Certificates and NIM Notes. Retained interest, trading represents the present value of estimated cash-flowscash flows to be received from the trustthese subordinated interests in the future from mortgage loanfuture. The subordinated interests retained are classified as “trading securities” and are reported at fair value with unrealized gains or losses reported in earnings.

Default Frequency may be expressed by OFS in accordance with any of three standard market conventions: Constant Default Rate, Percentage of a Standard Default Assumption curve or a vector or curve established to meet forecasted performance for specific collateral pools.

Loss Severity will be expressed by OFS in accordance with historical performance of similar collateral and the standard market conventions of a percentage of the unpaid principal balance of the forecasted defaults lost during the foreclosure and liquidation process.

During the first year of a new issue, OFS may balance positive or adverse effects of the prepayment forecast and the credit performance forecast, thereby allowing for deviation between actual and forecasted performance of the collateral pool. After the first year, OFS will generally adjust the Prepayment and Credit Performance Forecasts to replicate actual performance trends without balancing adverse and positive effects.

The following table summarizes OFS’s residualOFS’ retained interests in securitizations as of March 31,June 30, 2006, and December 31, 2005:

Key economic assumptions used in measuring the fair value of retained interests at the date of securitization resulting from securitizations completed during 2005 and 2006 were as follows:

At March 31,June 30, 2006, and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of residual cash flowsretained interests to the immediate 10% and 20% adverse change in those assumptions are as follows:

These sensitivities are entirely hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon a 10% variationand 20% variations in assumptions generally cannot be extrapolated to greater or lesser percentage variations because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of the variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption, inassumption. In reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. To estimate the impact of a 10% and 20% adverse change of the Forward LIBOR curve, a parallel shift in the forward LIBOR curve was assumed based on the Forward LIBOR curve at March 31,June 30, 2006.

Static pool lossesloss percentages are calculated by dividing projected future credit losses (at the time of securitization) and actual losses incurred as of the date indicated by the original balance of each pool of assets. The amount shown here isfollowing static pool loss percentages are calculated based upon all OFS securitizations that have occurredbeen completed to date.date:

The table below summarizes certain cash flows received from and paid to securitization trusts:

The following information presents quantitative information about delinquencies and credit losses on securitized financial assets as of March 31,June 30, 2006, and December 31, 2005:

The Company has elected to account for all originated mortgage servicing rightsMSRs as one class and, therefore, all MSR will beMSRs are carried at fair value. As a result of the early adoption of SFAS 156, the carrying value of the MSRs has been increased by approximately $4.3 million (pre tax)(pre-tax) as of January 1, 2006. As required by the provisions of SFAS 156, the net of tax effect was recorded as a cumulative-effectcumulative effect adjustment to retained earnings of OFS as of January 1, 2006. In addition, changes in value due to run-offs of the portfolio are recorded as valuation adjustments instead of amortization.

The fair value of MSRs is determined using discounted cash flow techniques. During the firstsecond quarter of 2006, OFS decreasedincreased the MSR value in the aggregate by $2.5$3.3 million primarily as a result of additions to the servicing portfolio and changes in market conditions and adoption of a new valuation model.conditions. Estimates of fair value involve several assumptions, including the key valuation assumptions about market expectations of future prepayment rates, interest rates and discount rates. Prepayment rates are projected using a prepayment model. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the forward LIBOR/swap curve, as well as collateral specific information.

At March 31,June 30, 2006, and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of mortgage servicing rightsMSR cash flows to the immediate 10 percent and 20 percent adverse change in those assumptions are as follows: (Note - base case prepayment and discount rate assumptions are a weighted average of the values applied to the various mortgage loans).

These sensitivities are entirely hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon a 10% and 20% variations in assumptions generally cannot be extrapolated to greater or lesser percentage variation because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of the variation in a particular assumption on the fair value of the mortgage servicing rightMSR is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities.

At March 31,June 30, 2006, and December 31, 2005, all of Opteum's MBS were classified as available-for-sale and, as such, are reported at their estimated fair value. Estimated fair value was determined based on the average of third-party broker quotes received and/or independent pricing sources when available.

At March 31,June 30, 2006, Opteum had financed MBS with a historical amortized cost of $200.3$17.7 million with the party from which it acquired thesuch MBS. Such securitiesThese MBS are included in MBS at a fair value of $196.8$17.4 million and a corresponding repurchase agreement obligation of $197.4$19.0 million at March 31,June 30, 2006.