United Mortgage Trust 10Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number: 000-32409

UNITED MORTGAGE TRUST

(Exact name of registrant as specified in its charter)

Maryland	75-6493585
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1301 Municipal Way, Suite 220

Grapevine, Texas 76051

(Address of principal executive offices)(Zip Code)

(214) 237-9305

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes[X] No [_]

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

Large accelerated filer___ Accelerated filer____ Non-accelerated filer (Do not check if a smaller reporting company)

X Smaller Reporting Company

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

The number of shares outstanding of the Registrant’s shares of beneficial interest, par value $0.01 per share, as of the close of business on November 15, 2010 was 6,421,198.

UNITED MORTGAGE TRUST

INDEX

PART I - FINANCIAL INFORMATION

		Page
ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009	3
	Consolidated Statements of Income for the three months and nine months ended September 30, 2010 and September 30, 2009 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	28
ITEM 4T.	Controls and Procedures	29

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
ITEM 3.	Defaults Upon Senior Securities	30
ITEM 4.	Removed and Reserved	30
ITEM 5.	Other Information	30
ITEM 6.	Exhibits	31
	Signatures	32

UNITED MORTGAGE TRUST

CONSOLIDATED BALANCE SHEETS

	September 30, 2010			December 31, 2009
	(unaudited)			(audited)
Assets
Cash and cash equivalents	$	320,140		$	338,336

Mortgage investments:
Investment in trust receivable		1,326,363			2,023,327
Investment in residential mortgages		5,704,356			5,005,413
Interim mortgages, affiliates		25,136,214			34,249,793
Interim mortgages		248,585			294,600
Allowance for loan losses		(489,508	)		(222,463	)
Total mortgage investments		31,926,010			41,350,670

Line of credit receivable, affiliates		69,166,788			63,303,613
Line of credit receivable		5,760,359			8,202,706
Accrued interest receivable, net		200,320			320,195
Accrued interest receivable, affiliates, net		16,663,411			9,448,192
Recourse obligations, affiliates		18,337,248			16,449,734
Real estate owned, net		16,214,993			9,426,875
Deficiency notes		7,682,179			7,189,311
Deficiency note, affiliates		12,187,419			10,315,478
Allowance for loan losses – deficiency notes		(4,745,660	)		(4,314,128	)
Other assets		365,232			504,617
Total assets	$	174,078,439		$	162,535,599

Liabilities and Shareholders’ Equity
Liabilities:
Dividend payable	$	310,000		$	310,000
Long term debt		6,346,216			3,788,477
Accounts payable and accrued liabilities		879,194			793,775
Accounts payable and accrued liabilities, affiliates		7,858,432			1,990,108
Participation payable, affiliate		57,050,973			53,768,482
Notes payable		168,477			-
Total liabilities		72,613,292			60,650,842

Commitments and contingencies

Shareholders' equity:
Shares of beneficial interest; $0.01 par value; 100,000,000 shares authorized; 8,291,242 and 8,264,616 shares issued in 2010 and 2009, respectively; and 6,425,680 and 6,422,883 outstanding in 2010 and 2009, respectively		82,825			82,646
Additional paid-in capital		146,682,910			146,259,724
Cumulative distributions in excess of earnings		(9,145,632	)		(8,731,773	)
		137,620,103			137,610,597
Less treasury stock of 1,865,562 and 1,841,733 shares in 2010 and 2009, respectively, at cost		(36,154,956	)		(35,725,840	)
Total shareholders' equity		101,465,147			101,884,757
Total liabilities and shareholders' equity	$	174,078,439		$	162,535,599

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues:
Interest income, affiliates	$	952,985			1,919,845	$		4,590,716			5,758,503
Interest income		429,119			366,533			1,278,603			1,028,471
		1,382,104			2,286,378			5,869,319			6,786,974
Expenses:
Trust administration fee		289,159			260,296			844,994			773,853
Loan servicing fee		7,760			2,970			18,015			6,762
General and administrative		348,262			209,434			1,307,342			818,652
Provision for loan losses		302,576			670,000			991,406			1,742,500
Interest expense		120,219			26,528			320,962			27,117
		1,067,976			1,169,228			3,482,719			3,368,884

Net income	$	314,128			1,117,150	$		2,386,600			3,418,090

Net income per share of beneficial interest	$	0.05	$		0.17	$		0.37	$		0.53

Weighted average shares outstanding		6,422,762			6,417,973			6,421,945			6,417,206

Distributions per weighted share outstanding	$	0.15	$		0.14	$		0.44	$		0.59

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30,
	2010			2009
Operating Activities
Net income	$	2,386,600		$	3,418,090
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses		991,406			1,742,500
Depreciation and amortization		1,782			1,035
Changes in assets and liabilities:
Accrued interest receivable, net		19,880			(162,978	)
Accrued interest receivable, affiliates, net		(1,793,578	)		(2,735,473	)
Other assets		137,600			(105,294	)
Accounts payable and accrued liabilities		(550,384	)		143,045
Accounts payable and accrued liabilities, affiliates		546,681			(338,073	)
Net cash provided by operating activities		1,739,987			1,962,852

Investing Activities
Investments in trust receivables		(85,977	)		(3,251	)
Principal receipts on trust receivables		782,941			110,622
Investments in residential mortgages		(1,162,602	)		(100,200	)
Principal receipts on residential mortgages		463,658			41,633
Investment in interim mortgages and deficiency notes		(2,372,509	)		(1,224,788	)
Principal receipts on interim mortgages and deficiency notes		53,715			10,011
Investments in interim mortgages, affiliates		(548,645	)		(310,471	)
Principal receipts on interim mortgages, affiliates		9,662,225			1,493,014
Investments in recourse obligations, affiliates		(1,941,014	)		(144,469	)
Principal receipts from recourse obligations, affiliates		53,501			213,490
Principal receipts from (investments in) lines of credit receivable, affiliates		(2,580,684	)		(1,076,586	)
Principal receipts from (investments in) lines of credit receivable		2,442,347			(2,156,448	)
Investments in real estate owned		(9,859,752	)		(7,300	)
Principal receipts from real estate owned		3,414,608			723,516
Net cash used in investing activities		(1,678,188	)		(2,431,227	)

Financing Activities
Proceeds from issuance of shares of beneficial interest		423,364			667,473
Net borrowings on line of credit payable		2,557,739			3,575,000
Proceeds from notes payable		168,477			-
Purchase of treasury stock		(429,115	)		(994,949	)
Dividends		(2,800,460	)		(3,446,754	)
Net cash used in financing activities		(79,995	)		(199,230	)

Net decrease in cash and cash equivalents		(18,196	)		(667,605	)
Cash and cash equivalents at beginning of period		338,336			1,944,271
Cash and cash equivalents at end of period	$	320,140		$	1,276,666

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

	Nine Months Ended September 30,
	2010			2009
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	272,638		$	18,570
Noncash Activity:
Transfers of affiliate and non-affiliate loans to foreclosed properties or recourse obligations		8,073,332			-
Line of credit receivable, affiliate		(3,282,492	)		(13,222,800	)
Participation payable, affiliate		3,282,492			13,222,800
Accrued interest receivable, affiliate		(5,321,645	)		508,378
Accounts payable and accrued liabilities, affiliate		5,321,645			(508,378	)

See accompanying notes to consolidated financial statements.

UNITED MORTGAGE TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	Nature of Business

United Mortgage Trust (the “Company” and “UMT”) is a Maryland real estate investment trust that qualifies as a real estate investment trust (a “REIT”) under federal income tax laws. The Company’s principal investment objectives are to invest proceeds from its dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in the following types of investments: (i) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (ii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iii) lines of credit and loans secured by entitled and developed single-family lots, referred to as &# 8220;Finished Lot Loans”; and,(iv) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; and, (v) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans” and, (vi) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”; and, (vii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”; and, (viii) discounted cash flows secured by assessments levied on real property. We collectively refer to the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as & #8220;recourse loans,” and deficiency notes.

The Company has no employees. The Company pays a monthly trust administration fee to UMTH General Services, L.P. (“UMTHGS” or “Advisor”), a subsidiary of UMT Holdings, L.P. (“UMTH”), a Delaware real estate finance company and affiliate, for the services relating to its daily operations. The Company’s offices are located in Grapevine, Texas.

2.	Basis of Presentation

The consolidated financial statements include the accounts of the Company and certain wholly-owned subsidiaries and all significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial stateme nts and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC on March 31, 2010. Operating results for the nine months ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. Certain prior period amounts have been reclassified to conform to current period presentation.

3. Deficiency Notes – Affiliate and Non-Affiliate

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

As of September 30, 2010 and December 31, 2009, the Company had two deficiency notes with non-affiliates in the amount of approximately $7,682,000 and $7,189,000, respectively. The Company has recorded reserves of approximately $4,746,000 and $4,314,000 against these notes as of September 30, 2010 and December 31, 2009, respectively. These notes do not accrue interest as the underlying collateral value approximates the note balance, net of reserves.

As of December 31, 2007, UMTH Lending Company, L.P. (“UMTHLC”) issued to the Company a variable amount promissory note in the original amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate. The note bears interest at a rate of 10%, and requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Co mpany. This note had a balance of approximately $12,187,000 and $10,315,000 at September 30, 2010 and December 31, 2009, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default.

4. Related Party Transactions

1) UMT Holdings, L.P. (“UMTH”) is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTH Lending Company, L.P., which originates interim loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in United Development Funding I, L.P. (“UDF”) and acts as UDF's asset manager, and Prospect Service Corp. (“PSC”), which services the Company’s residential mortgages and contracts for deed and manages the Company’s real estate owned (“REO”). In addition, UMTH has a limited guarantee of the obligations of Capital Reserve Group (“CRG”), Ready America Funding Corp (“RAFC”), and South Central Mortgage, Incorporated (“SCMI”), a Texas corporation that sold mortgage investments to the Company, under the Secured Notes. United Development Funding III, L.P., (“UDF III”) which is managed by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit and has purchased an economic participation in a revolving credit facility we have provided to UDF.

2) UMTHLC is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company. The unpaid principal balance of the loans at September 30, 2010 and December 31, 2009 was approximately $15,877,000 and $16,842,000, respectively.

On March 26, 2009, the Company executed a secured line of credit promissory note with UMTH Lending, Company, L.P. in the amount of $8,000,000. The note bears interest at 12.50% per annum, matures on March 26, 2012 and is secured by first lien mortgage interests in single family residential properties. The outstanding balance on this line of credit at September 30, 2010 and December 31, 2009 was approximately $7,338,000 and $6,194,000 respectively and is included in the UMTHLC unpaid principal balance noted above.

See Note 3 above for discussion of additional related party transactions with UMTHLC.

3) Ready America Funding Corporation (“RAFC”) is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing interim loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations. The unpaid principal balance of the loans at September 30, 2010 and December 31, 2009 was approximately $16,597,000 and $23,602,000, respectively.

4) Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit, a partner of UMTH and the sole proprietor of two companies that own 50% of RAFC. Wonder is in the business of financing interim loans for the purchase of land and the construction of single family homes and the purchase and renovation of single family homes. The Company has ceased funding any new originations. As of September 30, 2010 and December 31, 2009, respectively, all remaining obligations owed by Wonder to the Company are included in the recourse obligations discussed below.

5) Recourse Obligations. The Company has made recourse loans to (a) Capital Reserve Group, Inc. (“CRG”), which is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. Whe n principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.

In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.

If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.

On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase if the Company incurs losses upon the foreclosure of loans covered by recourse arran gements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C units, Class D units and Class EIA units of limited partnership interest of UMT Holdings held by each originating company.

Name	Initial principal amount		Balance at September 30, 2010		Promissory Note principal amount (2)		Units pledged as security		Units remaining		Estimated Collateral Value (3)
CRG	$	2,725,442	$	4,424,904	$	4,300,000	4,984 Class C and 2,710 Class D		2,949 Class C and 2,710 Class D		$	4,934,536
RAFC	$	3,243,369	$	8,457,943	$	7,100,000	9,979 Class C and 6,659 Class D		8,493 Class C, 6,658 Class D		$	13,371,077
SCMI	$	3,295,422	$	3,492,531	$	3,488,643	4,545 Class and 3,000 Class D		3,066 Class C and 3,000 Class D		$	7,116,159
RAFC / Wonder(1)	$	1,348,464	$	1,961,870	$	1,400,000	1,657 Class C		1,238 Class C		$	1,238,000
Wonder Indemnification (1)		n/a		n/a		n/a	$	1,134,000		n/a	$	704,789
Totals	$	10,612,697	$	18,337,248	$	16,288,643					$	27,364,561

(1) Wonder is collateralized by an indemnification agreement from UMTH in the amount of $1,134,000, and is secured by the pledge of 3,870 C Units from RMC. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation.

(2) The CRG, RAFC, SCMI and RAFC/Wonder balances at September 30, 2010, exceeded the stated principal amount per their variable Secured Notes by approximately $125,000, $1,358,000, $4,000 and $562,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) than originally anticipated and outpaced the minimum principal reductions scheduled for the loans.

(3) Nominal collateral value does reflect pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions.

Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC and RAF/Wonder Secured Notes amortize over 15 years and mature on December 31, 2020. The SCMI Secured Note amortizes over approximately 22 years and matures on December 31, 2027, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or (2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods o f the underlying assets, suspended the principal component of the amortized loans for the period of July 2007 through June 2009, and reduced the interest rate from 10% to 6%. The above modifications have been extended through December 31, 2010. These loans were reviewed by management and no reserves are deemed necessary at September 30, 2010.

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

-	UMT Holdings. This guaranty is limited to a maximum of $10,582,336 due under all of the Secured Notes and is unsecured.

-	WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd.

-	RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings

Wonder. Wonder Funding obligations are evidenced by a note from RAFC (“RAFC Wonder Note”) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above.

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

6) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note (the "Amendment") with UDF, L.P. (“UDF”), a Nevada limited partnership that is affiliated with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("UDF Loan") to $45,000,000. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects. On July 29, 2009, our trustees approved an amendment to increase the revolving line of credit facility to an amount not to exceed $60,000,000. Effective December 31, 2009, the UDF loan was extended for a period of one year and matures on December 31, 2010.

The UDF Loan is secured by the pledge of all of UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”). Those UDF loans may be first lien loans or subordinate loans.

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

UDF may use the UDF Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the UDF Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.

On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility from UMT to UDF and (ii) a purchase option to acquire a full ownership participation interest in the UDF Loan (the “Option”). On July 29, 2009 our trustees approved an amendment to increase the UDF Loan revolving line of credit facility to an amount not to exceed $60,000,000.

Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UDF Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UDF Loan increases proportionately. UDF III’s economic interest in the UDF Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UDF Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.

The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UDF Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UDF Loan and the Security Agreement, including participation in the management and control of the UDF Loan. UMT will continue to manage and control the UDF Loan while UDF III owns an economic interest in the UDF Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. The UDF Loan matures on December 31, 2010. At September 30, 2010 and December 31, 2009, UDF III had funded appro ximately $57,051,000 and $53,768,000, respectively, to UDF under this agreement. On July 29, 2009 the Company’s trustees approved an amendment to increase the UDF Loan revolving line of credit facility to an amount not to exceed $60,000,000.

The UDF Loan is subordinate to UDF Senior Debt, which includes a loan to UDF from a private investor, in the amount of $15,000,000.

7) Loans are made to certain affiliates of the Advisor. Below is a table of the aggregate principal amount of mortgages funded during the quarters ended September 30, 2010 and September 30, 2009, respectively, from the companies affiliated with the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three quarters indicated:

Affiliated Company	2010		2009
RAFC	$	549,000	$	95,000
UMTHLC	$	1,414,000	$	529,000
UDF	$	4,778,000	$	2,125,000

8) As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2010) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. During the three months ended September 30, 2010 and September 30, 2009, the net fees paid to the Company’s Advisors were approximately $289,000 and $260,000, respectively. During the nine months ended September 30, 2010 and September 30, 2009, the net fees paid to the Company’s Advisors were approximately $845,000 and $774,000, respectively.

The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which the Company’s net income for a year exceeds a 10% per annum non-compounded cumulative return on its adjusted contributions. No incentive fee was paid during 2010 or 2009. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 shares at a price of $20.00 per share (not to exceed 50,000 shares). As of September 30, 2010, the Advisor has not received options to purchase shares under this arrangement.

The Advisor and its affiliates are also entitled to reimbursement of costs of materials and services obtained from unaffiliated third parties and for certain sharholder services performed for the Company’s benefit. During each of the three months ended September 30, 2010 and September 30, 2009, the Company paid the Advisor approximately $19,000 for costs associated with providing shareholder relations activities. During each of the nine months ended September 30, 2010 and September 30, 2009, the Company paid the Advisor approximately $57,000 for costs associated with providing shareholder relations activities.

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

The Advisor Agreement also provides for the Company to pay to the Advisor a debt placement fee. The Company may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit. The Company paid a debt placement fee of $50,000 to an affiliate of the Advisor in September 2009. This fee is amortized monthly, as an adjustment to interest expense, over the term of the credit facility agreement described in Note 6.

9) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. During the three months ended September 30, 2010 and September 30, 2009, the Company paid loan servicing fees of approximately $7,800 and $3,000, respectively. During the nine months ended September 30, 2010 and September 30, 2009, the Company paid loan servicing fees of approximately $18,000 and $7,000, respectively.

10) The Company paid the second of three annual credit enhancement fees of $50,000 to UDF III, L.P. in September 2010. This fee is due annually on the anniversary date of the loan and amortized over 12 months as an adjustment to interest expense.

5. Fair Value of Financial Instruments

In accordance with the reporting requirements of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 825, Disclosures About Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes additional information in notes to the Company’s consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of cash equivalents, accrued interest receivable, accrued interest receivable affiliates, accounts payable and accrued liabilities (including affiliates) approximate the carrying value due to the relatively short maturity of these instruments. The carrying value of investments in residential mortgages, interim mortgages (including affiliates), lines of credit (including affiliates), recourse obligations from affiliates, notes payable, deficiency notes (including affiliates) and the Company’s line of credit payable also approximate fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.

6. Long Term Debt

In August 2009, the Company entered into a revolving line of credit facility with a bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity, which is August 2012. The line of credit is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit at September 30, 2010 and December 31, 2009 was approximately $5,000,000 and $3,788,000, respectively.

On April 21, 2010, the Company entered into a new term loan credit facility with a bank for $1,600,000. The loan bears interest at prime plus one percent, with a floor of 7.0%, and requires monthly interest payments. Principal and all unpaid interest will be due at maturity which is October 21, 2011. The loan is collateralized by a first lien security interest in the underlying real estate financed by the loan. The outstanding balance on this loan at September 30, 2010 was approximately $1,346,000.

7. Subsequent Events

On October 28, 2008, the Company executed two construction loan agreements with a homebuilder. Each loan agreement had a maximum commitment of up to $15,000,000 to a total maximum commitment of up to $30,000,000 and a termination date of October 28, 2009. Advances are made at the base rate of 13.0% and are secured by first liens on the projects under construction. The loan agreements limit advances to no more than 85% of the projected sale price of the finished home (85% LTV) and limits are also in place regarding the number of speculation and model homes allowed in each approved subdivision. The previous renewal agreement, effective October 28, 2009, renewed these loans with similar terms through October 28, 2010. Effective October 28, 2010, these loans were renewed, with similar terms, through October 28, 2011.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the availability of and our ability to find suitable mortgage investments; the difficulties of the real estate industry generally in response to the “sub-prime crisis,” the “credit crisis,” the current difficulties in the housing and mortgage industries, which has resulted in an increase in defaults and foreclosures, including the impact thereof on the homebuilding industry, the current economic environment and changes in economic and credit market conditions, changes in interest rates, our ability to adapt to changing circumstances, the continued financial viability of affiliates to whom we have extended loans, the level of reinvestment of dividends by our shareholders in our dividend reinvestment plan and the requirement to maintain qualification as a real estate investment trust. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore we cannot give assurance that such statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or by any other perso n that the results or conditions described in such statements or in our objectives and plans will be realized. Readers should carefully review our financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009, as well as those statements contained in this report, and in our other filings with the Securities and Exchange Commission.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q may not occur. We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009

General Investment Information

United Mortgage Trust (the “Company”) is a Maryland real estate investment trust that qualifies as a real estate investment trust (a “REIT”) under federal income tax laws. Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in following types of investments:

(i)	secured line of credit to UMTH Lending Company, L.P. for origination of Interim Loans;

(ii)	lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”;

(iii)

lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; and,

(iv)	lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; and,

(v)	loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans” and,

(vi)	lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans”; and,

(vii)

first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”; and,

(viii)

discounted cash flows secured by assessments levied on real property.

We collectively refer to the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans” and deficiency notes. Loans are originated by others to the Company’s specifications or to specifications approved by the Company. Most, if not all, of such loans are not insured or guaranteed by a federally owned or guaranteed mortgage agency.

The following table illustrates the percentage of our mortgage portfolio dedicated to each mortgage loan category as of September 30, 2010 and December 31, 2009:

Mortgage Category:	September 30, 2010	December 31, 2009
First lien secured interim mortgages 12 months or less and residential mortgages and contracts for deed	22.24%	27.35%
Secured interim mortgages and line of credit to UMTHLC	14.79%	14.89%
Land development loans	57.60%	50.27%
Finished lot loans	0.00%	1.76%
Construction loans	5.37%	5.73%

The following table summarizes mortgage loans by type and original loan amount held by United Mortgage Trust at September 30, 2010.

Description	No. of Loans		Interest Rate			Final Maturity Date		Periodic Payment Terms		Prior Liens		Face amount of Mortgage (1)		Carrying amount of Mortgage (2)		Past Due Amounts (3)
Single family residential 1st mortgages and interim loans (5):
Original balance > $100,000		9		10% - 11	%	11/24/11– 5/1/38			n/a		n/a	$	1,004,451	$	992,082	$	608
Original balance $50,000 - $99,999		136		8.5% - 12.75	%	8/30/11 – 3/1/39			n/a		n/a		4,118,802		4,068,085		15,318
Original balance $20,000 - $49,999		201		9% - 14.5	%	3/1/11 – 5/19/36			n/a		n/a		2,098,335		2,072,497		12,337
Original balance under $20,000		8		9% - 14.5	%	12/1/10 – 9/1/31			n/a		n/a		57,716		57,006		233

First Lien secured interim mortgages
Ready America Funding (4)		14		14	%		n/a		n/a		n/a		16,596,578		16,392,213		-

Secured, subordinate LOC to UMTH Lending Co., L.P. (4), (5)		83		12.5% - 13.5	%		n/a		n/a		n/a		15,877,456		15,681,947		-

Land Development Loans
UDF III Economic Interest Participation		1		14	%	12/31/10			n/a		n/a		61,828,968		61,828,968		-

Construction Loans		2		13	%	10/28/11			n/a		n/a		5,760,359		5,760,359		-
Totals		454										$	107,342,665	$	106,853,157	$	28,496

(1)	Current book value of loans.

(2)	Net of allowance for loan losses on mortgage loans of $489,508 at September 30, 2010.

(3)	Principal amounts greater than thirty (30) days past due.

(4)	Lines of credit with Ready America Funding and UMTH Lending Co., L.P. are collateralized by 14 and 83 loans, respectively. Principal amounts due upon disposition of assets.

(5)	No specific maturity date as UMT has first lien collateral position in these loans funded by the originator.

Below is a reconciliation and walk forward of mortgage loans, net of allowance for loan losses, for the nine months ended September 30, 2010.

Balance at beginning of period	$	112,856,988
Additions during period:
Increase in mortgage loans		28,471,928
Other – increase in UDF III participation		3,282,492
Deductions during period:
Collections of principal		(37,491,207	)
Other – decrease in UDF III participation		-
Other (net change in allowance for loan loss)		(267,044	)
Balance at close of period	$	106,853,157

Material Trends Affecting Our Business

We are a real estate investment trust and derive a substantial portion of our income from loans secured by single-family homes (both finished homes and homes under construction), single-family home lots, and entitled land under development into single-family home lots. We continue to concentrate our lending activities in the southwest sections of the United States, particularly in Texas. We believe these areas continue to experience demand for new construction of single-family homes; however, the U.S. housing market has suffered declines over the past three years, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation. National and regional homebuilders responded to this decline by reducing the number of new homes constructed in 2010 and 20 09 as compared to 2008 and 2007. However, we expect to see continued healthy demand for our products as the supply of finished new homes and land is once again aligned with our market demand.

We believe that the housing market has reached a bottom in its four-year decline and has begun to recover. This recovery likely will be regional in its early stages and will be led by those housing markets with balanced supply, affordable and stable home prices, minimal levels of foreclosures, and strong demand fundamentals. Nationally, we expect the recovery will continue to experience headwinds from weak demand fundamentals, specifically consumer confidence, employment, as well as from the limited availability of bank financing. The national consumer confidence index, which fell to record lows during the economic downturn, has recovered somewhat, but remains close to levels historically associated with recession. Unemployment remains elevated and access to conventional real estate and comme rcial financing remains limited across most of the country. These factors pose obstacles to a robust recovery on a national scale. However, we expect the recovery will be stronger in markets such as Texas, where consumer confidence is nearly 25 points higher than the national index, where job growth has been steady and significant since the beginning of the year, and where 14% of all homebuilding permits in the country are issued. We believe the fact that new single-family home permits, starts, and sales have all risen from their respective lows, reflects a continued return of real demand for new homes. However, we anticipate the former bubble markets – principally California, Arizona, Nevada, and Florida – will be slower to recover, as those markets have seen overbuilding and extensive price correction and are experiencing weakened economies and continued foreclosures.

From a national perspective, ongoing credit constriction, a less robust economic recovery, and housing price correction has made potential new home purchasers and real estate lenders cautious. As a result of these factors, the national housing market has experienced a protracted decline, and the time necessary to correct the market likely means a corresponding slow recovery for the housing industry.

Nationally, capital constraints at the heart of the credit crisis have reduced the number of real estate lenders able or willing to finance development, construction and the purchase of homes and have increased the number of undercapitalized or failed builders and developers. The number of new homes and finished lots developed also has decreased, which may result in a shortage of new homes and developed lots in select real estate markets in 2010 and more broadly in 2011. We believe this shortage will be most prominent in markets with balanced supply, stable home prices, and that did not participate in the housing bubble. With credit less available and stricter underwriting standards, mortgages to purchase homes have become more difficult to obtain in some markets. To support the secondary res idential mortgage market and prevent further deterioration of mortgage lending, the Federal Reserve began an unprecedented program to purchase approximately $1.25 trillion of residential mortgage backed securities between January 5, 2009 and March 31, 2010. This program ended on March 31, 2010, as scheduled by the Federal Reserve. As of the date of this quarterly report, the 30-year fixed-rate single family residential mortgage interest rate remains below the rate that was available at the conclusion of the period of Federal Reserve purchases, near record-lows. We believe that such stability at low rates indicates that the secondary residential mortgage market is operating smoothly independent of the support previously provided by the Federal Reserve. However, any limitations or restrictions on the availability of financing or on the liquidity provided in the secondary residential mortgage market by Government Sponsored Enterprises such as Fannie Mae and Freddie Ma c could adversely affect interest rates and mortgage availability, which could cause the number of homebuyers to decrease, which would increase the likelihood of borrowers defaulting on our loans and, consequently, reduce our ability to pay distributions to our shareholders.

Nationally, new single-family home inventory continued to improve in the third quarter of 2010 from the first and second quarters of 2010, while new home sales fell in the immediate aftermath of the expiration of the federal homebuyer tax credit. However, the pace of new home sales increased in each sequential month of the third quarter, leading us to believe that the relative pullback in demand will be short-lived. The national fundamentals that drive home sales are improving in most markets and home affordability remains near record-highs, and we expect the pace of home sales will continue to improve. The U.S. Census Bureau reports that the sales of new single-family residential homes in September 2010 were at a seasonally adjusted annual rate of 307,000 units. This number is down slig htly from the second quarter figure of 310,000 and down approximately 18.9% year over year from the September 2009 estimate of 391,000. However, year over year comparisons are distorted by the effects of the federal homebuyer tax credit and its subsequent extension through June 30, 2010. In September 2009, homebuyers were reacting to an anticipated end of the first-time homebuyer tax credit in November 2009, creating a surge in home closings in the third quarter of 2009. The tax credit was subsequently extended through June 2010, creating a second surge in home purchases at the expense of third quarter 2010 sales figures. The combination of a high volume of home sales in the third quarter of 2009 and the hangover effect on third quarter 2010 sales that followed the expiration of the homebuyer tax credit in June 2010, is likely responsible for the wide disparity in sales figures between September 2009 and September 2010. The seasonally adjusted estimate of new houses for sale at the end of September 2010 was 204,000 – a supply of 8.0 months at the current sales rate. Through much of the downturn, homebuilders reduced their starts and focused on selling existing new home inventory. The number of new homes for sale fell by approximately 48,000 units from September 2009 to September 2010. However, new home inventory fell by just 7,000 units in the third quarter of 2010, which, we believe, indicates that inventory reductions have begun to level off. We believe that, with such reductions and the relative leveling of inventory over more recent quarters, the new home market has been restored to equilibrium in most markets, even at low levels of demand. Further, we believe that what is necessary now to regain prosperity in housing markets is the return of healthy levels of demand.

According to the U.S. Census Bureau, new single-family residential home permits and starts fell nationally from 2006 through 2008, as a result and in anticipation of an elevated supply of and decreased demand for new single-family residential homes in that period. Since early 2009, however, single-family permits and starts have improved significantly. Single-family homes authorized by building permits in September 2010 were at a seasonally adjusted annual rate of 405,000 units. While this was a 14.4% decrease year over year from the rate of 473,000 in September 2009, it remains 18.1% higher than the low of 343,000 set in January 2009. Single-family home starts for September 2010 stood at a seasonally adjusted annual rate of 452,000 units. This pace represented a year-over-year decrease of 10.8% from the September 2009 estimate of 507,000 units and a 19.7% decline from the peak of 2010 – 563,000 in April 2010 – as home builders adjusted their start rate after the expiration of the homebuyer tax credit. Again, year over year figures between September 2009 starts and September 2010 home starts are likely distorted by a surge in new home starts, reflecting homebuilders’ efforts to meet third quarter 2009 demand sparked by the anticipated close of the first-time homebuyer tax credit, as well as the significant reduction in new home starts following the June 2010 expiration of the homebuyer tax credit as builders recalibrated their inventory levels. Even with the reduction in the start rate, the September 2010 pace is still 25.6% higher than the low of 360,000 set in January 2009. Such increases strongly suggest to us that new home inventories are generally in balance and the homebuilding industry now anticipates greater dema nd for new homes in coming months relative to the demand evident in 2009.

The primary factors affecting new home sales are home price stability, home affordability, and housing demand. Housing supply may affect both new home prices and the demand for new homes. When the supply of new homes exceeds new home demand, new home prices may generally be expected to decline. Declining new home prices may result in diminished new home demand as people postpone a new home purchase until such time as they are comfortable that stable price levels have been reached. Also, home foreclosures cause the inventory of existing homes to increase, which may add additional downward price pressure on home prices and cause potential home purchasers to further delay the purchase of a home until such time as they are comfortable that home prices have stabilized. The converse poin t is also true and equally important. When new home demand exceeds new home supply, new home prices may generally be expected to increase; and rising new home prices, particularly at or near the bottom of the housing cycle, may result in increased new home demand as people become confident in home prices and accelerate their timing of a new home purchase. Hence, we intend to concentrate our investments in housing markets with affordable and stable home prices, balanced supply, lower incidences of foreclosures, and strong demand fundamentals. These demand fundamentals are generally job growth, the relative strength of the economy and consumer confidence, household formations, and population growth – both immigration and in-migration.

The U.S. Census Bureau forecasts that California, Florida and Texas will account for nearly one-half of the total U.S. population growth between 2000 and 2030 and that the total population of Arizona and Nevada will double during that period. The U.S. Census Bureau projects that between 2000 and 2030 the total populations of Arizona and Nevada will grow from approximately 5 million to more than 10.7 million and from approximately 2 million to nearly 4.3 million, respectively; Florida’s population will grow nearly 80% between 2000 and 2030, from nearly 16 million to nearly 28.7 million; Texas’ population will increase 60% between 2000 and 2030, from nearly 21 million to approximately 33.3 million; and California’s population will grow 37% between 2000 and 2030, from approximately 34 million to nearly 46.5 mi llion.

The Harvard Joint Center for Housing Studies forecasts that an average of between approximately 1.25 million and 1.48 million new households will be formed per year over the next ten years. Likewise, The Homeownership Alliance, a joint project undertaken by the chief economists of Fannie Mae, Freddie Mac, the Independent Community Bankers of America, the National Association of Home Builders, and the National Association of Realtors, has projected that 1.3 million new households will be formed per year over the next decade and approximately 1.8 million housing units per year should be started to meet such new demand, including approximately 1.3 million new single family homes per year based on the estimation of the Homeownership Alliance that 72% of all housing units built will be single family residences.

While housing woes have beleaguered the national economy, Texas housing markets have held up as some of the best in the country, and Texas is the largest homebuilding market in the country based on the U. S. Census Bureau’s measurements of housing permits and starts. We intend to focus our investment portfolio in Texas as we believe Texas markets, though weakened from their highs in 2007, have remained fairly healthy due to strong demographics, economies, job growth, balanced housing inventories, stable home prices and high housing affordability ratios. Texas did not experience the dramatic price appreciation (and subsequent depreciation) that states such as California, Florida, Arizona, and Nevada experienced. The following graph, created with data from the Federal Housing Finance Agency’s (“FHFA”) Purchase Only Price Index, illustrates the declines in home prices nationally, as well as in California, Florida, Arizona, and Nevada over the past few years. Price declines have begun to moderate in those states in recent quarters, though, and California’s home price appreciation actually turned positive in the last two quarters. Further, the graph illustrates how Texas has maintained home price stability throughout the downturn.

According to numbers publicly released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information, the median new home prices for the third quarter of 2010 in the metropolitan areas of Austin, Houston, Dallas, and San Antonio are $212,107, $205,453, $209,482 and $187,932, respectively. These amounts are all below the September 2010 national median sales price of new homes sold of $223,800, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development.

Using the Department of Housing and Urban Development’s estimated 2010 median family income for the respective metropolitan areas of Austin, Houston, Dallas, and San Antonio, the median income earner in those areas has 1.47 times, 1.34 times, 1.37 times, and 1.30 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area. These numbers illustrate the high affordability of Texas homes. Our measurement of housing affordability, as referenced above, is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, based on the average interest rate for September and assuming an annual mortgage insurance premium of 80 basis points for private mortgage insurance, plus a cost that includes estimated property taxes and insurance for the home. Using the Department of Housing and Urban Development’s 2010 income data to project an estimated median income for the United States of $64,400 and the September 2010 national median sales prices of new homes sold of $223,800, we conclude that the national median income earner has 1.21 times the income required to qualify for a mortgage loan to purchase the median-priced new home in the United States. This estimation reflects the increase in home affordability in housing markets outside of Texas over the past 36 months, as new home prices in housing markets outside of Texas generally have fallen. Recently, however, such price declines have begun to stabilize, and the September 2010 national median new home price of $223,800 was actually higher than the September 2009 median new home sales price of $216,600, according to the U.S. Census Bureau. We believe that s uch price stabilization indicates that new home affordability has been restored to the national housing market.

Due to the national and global recession, the Texas employment market slowed in the fourth quarter of 2008 through the first three quarters of 2009 until beginning to add jobs again in the fourth quarter of 2009 and into 2010. According to the United States Department of Labor, while Texas shed the jobs associated with the U.S. Census in the third quarter, the state has now added approximately 145,700 jobs in the first nine months of 2010. This job growth is consistent with the Federal Reserve Bank of Dallas’ forecast that Texas may add between 100,000 and 200,000 jobs in 2010. Out of these 145,700 jobs created, 127,900 of them have been in the private sector. Further, Texas has added approximately 550,700 new jobs over the past five years, 420,300 in the private sector, in contrast to a loss of more than four million private sector jobs in the country as a whole. Texas’ unemployment rate was unchanged year over year at 8.1% in September 2010 from September 2009, even while adding 19,162 workers to the labor force. Over that time, Texas added approximately 152,800 net new jobs, which was nearly half of the total of all jobs created in the United States in that same 12 month period (344,000). The national unemployment rate fell from September 2009 (9.8%) to September 2010 (9.6%).

The Department of Labor also reports that as of September 2010, the unemployment rate for Austin-Round Rock, Texas was 6.8%, down from 7.2% in September 2009. Dallas-Fort Worth-Arlington, Texas was 7.9%, down from 8.3% a year ago. Houston-Sugar Land-Baytown, Texas was 8.2%, unchanged from a year ago, while San Antonio, Texas was 7.2%, up from 7.1%. Austin added 18,000 jobs year over year from September 2009 to September 2010, while Dallas-Fort Worth added 29,200 jobs over that same time period, which were the second and fourth greatest job gains, respectively, of any city in the country over the past 12 months. San Antonio added 5,100 jobs in that time, and Houston added 500 jobs over that same period. Taken together, these four cities have added an estimated net total of 329, 600 jobs over the past five years: Austin added 72,400 jobs; Dallas-Fort Worth added 72,100 jobs; Houston added 140,100 jobs; and San Antonio added 45,000 jobs. Of those jobs, 232,700 of them have been created in the private sector.

We believe that Texas cities will continue to be among the first in the country to recover based on employment figures, consumer confidence, gross metropolitan product, and new home demand. According to the Texas Workforce Commission, Texas tends to enter into recessions after the national economy has entered a recession and usually leads among states in the economic recovery. The National Bureau of Economic Research has concluded that the U.S. economy entered into a recession in December 2007, ending an economic expansion that began in November 2001. We believe, based on transitions in the Texas Leading Index as prepared by the Federal Reserve Bank of Dallas, that Texas entered into recession in late Fall 2008, trailing the national recession by nearly a year and emerged from the recession in the late spring of 2009. Further, we believe the Texas economy is leading a national economic recovery. The Texas Leading Index has risen significantly since reaching a low of 100.5 in March 2009 and, as of September 2010, was 115.1, which is nearly 700 basis points higher than one year ago. Further, the Conference’s Board’s October measurement of consumer confidence in Texas is nearly 25 points higher than the national average, and the Texas Comptroller of Public Accounts projects that the Texas economy will grow by 3.0% in 2010.

The U.S. Census Bureau reported in its 2009 Estimate of Population Change for the period from July 1, 2008 to July 1, 2009 that Texas led the country in population growth during that period. The estimate concluded that Texas’ population grew by 478,012 people, or 2.00%, a number that was 1.25 times greater than the next closest state in terms of raw population growth, California, and more than 3.57 times the second closest state in terms of raw population growth, North Carolina. The U.S. Census Bureau also reported that among the 15 counties that added the largest number of residents between July 1, 2008 and July 1, 2009, six were in Texas: Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas), Dallas (Dallas) and Travis (Austin). In March 2010, the U.S . Census Bureau reported that Texas’ four major metro areas – Austin, Houston, San Antonio, and Dallas-Fort Worth – were among the top 20 in the nation for population growth from 2008 to 2009. Dallas-Fort Worth-Arlington led the nation in numerical population growth with a combined estimated population increase of 146,530. Houston-Sugarland-Baytown was second in the nation with a population increase of 140,784 from July 1, 2008 to July 1, 2009. Austin-Round Rock had an estimated population growth of 50,975 and San Antonio had an estimated population growth of 41,437 over the same period. The percentage increase in population for each of these major Texas cities ranged from 2.0% to 3.1%.

The First Quarter 2010 U.S. Market Risk Index, a study prepared by PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc., which ranks the nation’s 50 largest metropolitan areas through the first quarter of 2010 according to the likelihood that home prices will be lower in two years, reported that Texas cities are among the nation’s best for home price stability. This index analyzes housing price trends, the impact of foreclosure rates, and the consequence of excess housing supply on home prices. The quarterly report projects that there is a 29.1% chance that Dallas/Fort Worth-area home prices will fall during the next two years; a 41.3% chance that Houston-area home prices will fall during the next two years; a 12.0% chance that San Antonio-area home prices will fall during the next tw o years; and a 60.1% chance that Austin-area home prices will fall during the next two years. All Texas metropolitan areas included in the report are among the nation’s top 21 least-likely areas to experience a decline in home prices in two years. San Antonio, Texas is ranked the second least-likely; Fort Worth-Arlington, Texas is eighth least-likely; Dallas-Plano-Irving, Texas is ninth least-likely; Houston-Sugar Land-Baytown, Texas is fourteenth least-likely; and the Austin area is ranked the twenty-first least-likely.

In their second quarter Purchase Only Price Index, the FHFA reports that Texas had a home price appreciation of 1.43% between the second quarter of 2009 and the second quarter of 2010, which is better than the national average of -1.60%. The FHFA’s all-transaction price index report provides that existing home price appreciation between the second quarter of 2009 and the second quarter of 2010 for (a) Austin was -0.79%; (b) Houston was -0.05%; (c) Dallas was -1.45%; (d) Fort Worth was -2.17%; (e) San Antonio was -3.58%; and (f) Lubbock was -0.10%. However, each city remains well above the national average in the same index, which was -4.95% for the same period. Besides sales prices, the all-transaction price index report also trac ks average house price changes in refinancings of the same single-family properties utilizing conventional, conforming mortgage transactions.

The Texas Comptroller of Public Accounts notes that the rate of foreclosures and defaults in Texas has remained generally stable for the past three years. The national foreclosure tracking service, RealtyTrac, estimates that the Texas September 2010 foreclosure rate is less than half the national average, which is consistent with the Federal Reserve Bank of Dallas’ forecast in its economic letter for the fourth quarter of 2009 that the Texas foreclosure rate will continue to remain below the national average in 2010. We do not expect the four major Texas housing markets to be materially adversely affected by foreclosures and anticipate that home foreclosures will continue to be mostly concentrated in the bubble market states of California, Florida, Arizona, and Nevada. Homebuilding and residential construction employment are likely to remain generally weak for some time, but Texas again will likely continue to outperform the national standards. We believe that Texas’ housing sector is healthier, the cost of living and doing business is lower, and its economy is more dynamic and diverse than the national average.

In contrast to the conditions of many homebuilding markets in the country, new home sales are greater than new home starts in Texas markets, indicating that home builders in Texas continue to focus on preserving a balance between new home demand and new home supply. We believe that home builders and developers in Texas have remained disciplined on new home construction and project development. New home starts are outpaced by new home sales in all four major Texas markets where such data is available: Austin, Dallas-Fort Worth, Houston, and San Antonio. Inventories of finished new homes and total new housing (finished vacant, under construction, and model homes) remain at healthy and balanced levels in all of these major Texas markets. Each major Texas market experienced a rise in the number of mon ths of finished lot inventories as homebuilders reduced the number of new home starts in 2008, causing each major Texas market to reach elevated levels. However, the number of finished lots available in each market has fallen significantly even as the month’s supply has risen. As of September 2010, Houston has an estimated inventory of finished lots of approximately 34.3 months, Austin has an estimated inventory of finished lots of approximately 46.1 months, San Antonio has an estimated inventory of finished lots of approximately 52.7 months, and Dallas-Fort Worth has an estimated inventory of finished lots of approximately 56.9 months. A 24-28 month supply is considered equilibrium for finished lot supplies.

As stated above, the elevation in month’s supply of finished lot inventory in Texas markets owes itself principally to the decrease in the pace of annual starts rather than an increase in the raw number of developed lots, and as the homebuilders begin to increase their pace of home starts, we expect to see the month’s supply of lot inventory rapidly improve. Indeed, the number of finished lots available in each Texas market has been significantly reduced from their peaks. Since peaking in the first quarter of 2008, Houston’s finished lot supply has fallen 23.5% from 73,340 to 56,135 in the third quarter of 2010. San Antonio’s finished lot inventory has fallen 14.3% to 33,937 since peaking at 39,618 in the third quarter of 2008. Austin’s finished lot inventory pea ked in the third quarter of 2008 at 31,628, and has fallen 21.2% to 24,936. The finished lot inventory for Dallas-Fort Worth peaked in the first quarter of 2008 at 97,504 lots and has fallen 23.6% to 74,513 lots. Such inventory reduction continued in the third quarter of 2010, as the number of finished lots dropped by more than 800 in Austin, nearly 2,200 lots in Houston, and more than 2,600 lots in Dallas-Fort Worth. San Antonio’s lot supply increased slightly in the third quarter from 33,847 in the second quarter. Annual starts in each of the Austin, San Antonio, Houston, and Dallas-Fort Worth markets are outpacing lot deliveries. With the discipline evident in these markets, we expect to see a continued decline in raw numbers of finished lot inventories in coming quarters as new projects have been significantly reduced. In correlation, we expect to see increased finished lot sales in late 2010 and in 2011 as homebuilders continue to replenish their invento ry.

Texas markets continue to be some of the strongest homebuilding markets in the country. The pace of homebuilding in Texas slowed over the past four years as a result of the national economic downturn, but has begun to improve on a year-over-year basis in each major Texas home market: Austin, Dallas-Fort Worth, Houston, and San Antonio. With the exception of Austin, new home starts improved on a year-over-year basis in each of these Texas markets in the quarter ended September 30, 2010. While the decline in housing starts caused the month supply of vacant lot inventory to become elevated from its previously balanced position, it also preserved a balance in housing inventory. Annual new home sales in Austin outpace starts 7,650 versus 6,497, with annual new home sales declining year-over- year by approximately 3.44%. Finished housing inventory fell to a healthy level of 2.7 months, while total new housing inventory (finished vacant, under construction and model homes) fell to a balanced supply of 5.8 months. The generally accepted equilibrium levels for finished housing inventory and total new housing inventory are a 2-to-2.5 month supply and a 6.0 month supply, respectively. Like Austin, San Antonio is also a healthy homebuilding market. Annual new home sales in San Antonio run slightly ahead of starts 8,179 versus 7,725, with annual new home sales declining year-over-year by approximately 3.5%. Finished housing inventory held at a generally healthy level with a 2.7 month supply. Total new housing inventory fell to a balanced 5.9 month supply. Houston, too, is a healthy homebuilding market. Annual new home sales there outpace starts 22,288 versus 19,663, with annual new home sales declining year-over-year by approxi mately 3.0%. Finished housing inventory is slightly elevated at a 3.0 month supply while total new housing inventory fell to a healthy 6.0 month supply, respectively. Dallas-Fort Worth is a relatively healthy homebuilding market as well. Annual new home sales in Dallas-Fort Worth outpace starts 17,264 versus 15,706, with annual new home sales declining year-over-year by approximately 4.7%. Finished housing inventory fell slightly to a 2.9 month supply, while total new housing inventory fell to a 6.2 month supply, respectively, each measurement generally healthy. All numbers are as released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information.

The Real Estate Center at Texas A&M University has reported that existing housing inventory levels have become slightly elevated, most likely because residents in these markets are becoming more comfortable putting their homes up for sale as sales of existing homes were healthy in Texas markets through the third quarter. In September 2010, the number of months of home inventory for sale in Austin, Houston, Dallas, Fort Worth, and Lubbock was 6.8 months, 7.9 months, 7.2 months, 7.3 months, and 7.3 months, respectively. San Antonio’s inventory is more elevated with an 8.2 month supply of homes for sale. Like new home inventory, a 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 month s of inventory generally being considered a seller’s market. Through September 2010, the number of existing homes sold to date in (a) Austin was 15,595, essentially unchanged year-over-year; (b) San Antonio was 14,368, up 3% year-over-year; (c) Houston was 43,918, down 2% year-over-year, (d) Dallas was 33,089, down 4% year-over-year, (e) Fort Worth was 6,388, up 1% year-over-year, and (f) Lubbock was 2,271, down 9% year-over-year. As home prices increase, we expect more sellers to enter the market, believing that prices will continue to increase.

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

We face a risk of loss resulting from adverse changes in interest rates. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. In some instances, the loans we make will be junior in the right of repayment to senior lenders, who will provide loans representing 60% to 75% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.

Developers and homebuilders to whom we make loans and with whom we intend to enter into subordinate debt positions will use the proceeds of our loans and investments to develop raw real estate into residential home lots and construct homes. The developers obtain the money to repay our development loans by reselling the residential home lots to homebuilders or individuals who build single-family residences on the lots or by obtaining replacement financing from other lenders. Homebuilders obtain the money to repay our loans by selling the homes they construct or by obtaining replacement financing from other lenders. If interest rates increase, the demand for single-family residences may decrease. Also, if mortgage financing underwriting criteria become stricter, demand for single-family residen ces may decrease. In such an interest rate and/or mortgage financing climate, developers and builders may be unable to generate sufficient income from the resale of single-family residential lots and homes to repay loans from us, and developers’ and builders’ costs of funds obtained from lenders in addition to us may increase, as well. Accordingly, increases in single-family mortgage interest rates or decreases in the availability of mortgage financing could increase the number of defaults on loans made by us.

We are not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that we reasonably anticipate to have a material impact on either the income to be derived from our investments in mortgage loans or entities that make mortgage loans, other than those referred to in this Quarterly Report on Form 10-Q. The disruption of mortgage markets, in combination with a significant amount of negative national press discussing constriction in mortgage markets and the poor condition of the national housing industry, including declining home prices, have made potential new home purchasers and real estate lenders very cautious. The economic downturn, the failure of highly respected financial institutions, significant volat ility in equity markets around the world, unprecedented administrative and legislative actions in the United States, and actions taken by central banks around the globe to stabilize the economy have further caused many prospective home purchasers to postpone their purchases. In summary, we believe there is a general lack of urgency to purchase homes in these times of economic uncertainty. We believe that this has further slowed the sales of new homes and finished lots developed in certain markets; however, we do not anticipate the prices of those lots changing materially. We also expect that the decrease in the availability of replacement financing may increase the number of defaults on development loans made by us or extend the time period anticipated for the repayment of our loans.

Interim Loan Portfolio Overview

The deterioration in the residential mortgage market, specifically the discontinuation of sub-prime and Alt – A products, referred to herein as the sub-prime credit crisis, and the continued slowdown in new home sales are directly and indirectly affecting the ability of our interim loan borrowers to sell the assets securing their loans, pay interest due us and repay the interim loans when due. New and existing home financing solutions are being introduced by both the private and public sectors. Housing inventories are slowly beginning to reduce to sustainable levels. However, consumer confidence remains low. Industry-wide lenders are reevaluating and restructuring credits affected by residential mortgage markets as housing sales decline. Overall recovery of the single f amily housing industry is likely to be prolonged. We believe that a pragmatic and pro-active approach to managing our interim loan credits will allow us to maximize repayments and properly report asset values. In consideration of the above, we are:

ceasing the origination of, and reducing our investment in, interim loans dependent on sub-prime and Alt-A mortgage products for repayment of our loan.

accepting a secured note from UMTHLC for shortfalls from foreclosed properties to enable UMTHLC to efficiently manage past due and foreclosed accounts throughout the duration of the credit crisis.

increasing loss reserves for certain deficiency loans where full collection of the indebtedness is not assured.

re-evaluating collateral value on specific loans deemed to be affected by current mortgage and housing environments and reserving for unsecured deficiencies.

Portfolio Mix

Our portfolio concentrations have shifted during the past decade of investing, and particularly since 2000, as we have sought adequate supplies of suitable loans in a changing real estate finance market. The chart below demonstrates the transition from a portfolio with a concentration on long term, 1st lien single family loans to one comprised primarily of first lien interim loans of 12 months or less in term for the purchase and renovation of single family homes and loans secured by 1st lien and subordinate single family lot development loans. We intend to continue to adapt to changes in the real estate finance market and thus the composition of our loan portfolio is likely to co ntinue to evolve over time based on factors such as interest rates paid under various types of real estate loans, our assessment of the level of risk of the different types of loans, availability of loans, regulatory considerations and other factors.

Results of Operations

Revenues

The three months ended September 30, 2010 compared to the three months ended September 30, 2009.

Revenues for the three months ended September 30, 2010, were approximately $1,382,000 compared to approximately $2,286,000 for the comparable period in the prior year. This decrease of interest income of approximately $904,000 was due primarily to the reduction of interest income of approximately $316,000 from affiliate interim mortgage loans outstanding to UMTH LC due to pay offs and a reduction of approximately $881,000 of interest income due to the placement of certain interim mortgage loans on non-accrual status during the quarter ended September 30, 2010. These decreases in affiliate interest income were partially offset by an increase of approximately $231,000 of interest income earned on the UMTH LC deficiency note and affiliate construction and land development loans and an increase of approximately $63,00 0 of interest income from non-affiliate residential mortgage and construction loans due to increases in these loan balances.

The nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Revenues for the nine months ended September 30, 2010, were approximately $5,869,000 compared to approximately $6,787,000 for the comparable period in the prior year. This decrease of approximately $918,000 was due primarily to the reduction of interest income from affiliate interim mortgage loans and due to pay offs and a reduction of income from affiliate interim mortgage loans due to the placement of certain loans on non-accrual status beginning in July of 2010 of approximately $693,000 and $893,000 respectively. These decreases were partially offset by increased interest income of approximately $417,000 and $250,000 due to increases in the UMTHLC deficiency note and increases in non-affiliate residential mortgage and construction loans respectively.

The three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009.

Revenues from interim loans accounted for approximately 40% of revenues for the three months ended September 30, 2010 compared to 56% in the same period in the prior year. Revenues from interim loans accounted for approximately 50% of revenues for the nine months ended September 30, 2010 compared to 56% in the same period in the prior year. The decrease in our interim portfolio was a function of our intention to cease the origination of and reduce our investment in interim mortgage loans secured by modular and manufactured homes and related lots.

During the three months ended September 30, 2010 and September 30, 2009, approximately 28% and 20%, respectively, of our revenues were derived from lines of credit and lot banking transactions (these secured loans for the acquisition and development of single-family home lots are referred to as “land development loans”, “construction loans”, and “lot banking transactions”). Approximately 19% and 21% of our revenues were derived from lines of credit and lot banking transactions during the nine months ended September 30, 2010 and September 30, 2009, respectively. At September 30, 2010, our investment in the lines of credit to our affiliate, UDF, through the Economic Interest Agreement, and lot banking transactions was approximately $62 million. We anticipate our investm ent in construction loans will increase during the remainder of 2010, facilitated by the Company’s line of credit and continued emphasis on this type of investment activity.

During the three months ended September 30, 2010 and September 30, 2009, approximately 0% and 11% of our revenues, respectively, were derived from secured promissory notes issued by affiliates as evidence of their accrued obligations to reimburse UMT for any defaulted loans that we acquired from them, which notes we refer to as “Recourse Obligations.” During the nine months ended September 30, 2010 and September 30, 2009, approximately 9% and 11% of our revenues, respectively, were derived from secured promissory notes issued by affiliates.

The affiliate secured notes require the originating company to make certain interest and principal payments, as defined by the agreements. Further, these notes are liquidated by any distributions paid to the originating company with respect to the pledged Class C and Class EIA units of UMTH. UMTH has guaranteed the obligations of CRG, SCMI and RAFC under the affiliate secured notes up to the maximum loan amounts defined in the respective notes. The sub-prime credit crisis, as well as the decline in new home sales, have indirectly adversely affected the earnings of UMTH which, in turn, is expected to have an adverse effect on the distributions associated with the security pledged for the Recourse Obligations. The Company monitors the value of the security pledged by the originating companies a nd will consider further modifications to the Recourse Obligations notes to allow UMTH to structure payments under the Recourse Obligations in relation to its earnings, as impacted by the mortgage market and new home sales environments. Any such modifications would be likely to result in a decline in the return being realized by the Company under the Recourse Obligation secured notes.

Expenses

Operating expenses for the three months ended September 30, 2010 and September 30, 2009, were approximately $1,068,000 and $1,169,000, respectively. Operating expenses for the nine months ended September 30, 2010 and September 30, 2009, were approximately $3,483,000 and $3,369,000, respectively. Fluctuations in operating expense line items are discussed below for the three and nine month periods ended September 30, 2010:

Trust administration fees – Approximately $289,000 and $260,000 (a 11% increase) between the comparable three month periods ended September 30, 2010 and 2009, respectively, and approximately $845,000 and $774,000 (a 9% increase) between the comparable nine month periods ended September 30, 2010 and 2009, respectively. This fee is approximately 1/12 of 1.0% monthly of total assets under management. The increase in the fee, during these three and nine month periods, is due to an increase in the Company’s qualifying assets under management during these periods.

General and administrative expenses - Approximately $348,000 and $209,000 (a 67% increase) between the comparable three month periods ended September 30, 2010 and 2009, respectively, and approximately $1,307,000 and $819,000 (a 60% increase) between the comparable nine month periods ended September 30, 2010 and 2009, respectively. The increase was primarily due to increases in REO expenses resulting from transfers of performing real estate owned property from UMTHLC during the fourth quarter of 2009 and increased legal expenses associated with pursuing claims against former borrowers on whom we have foreclosed.

Provision for loan losses - The Company recorded a provision for loan losses for the three months ended September 30, 2010 and 2009 of approximately $303,000 and $670,000, respectively. For the nine months ended September 30, 2010 and 2009, we recorded a provision of approximately $991,000 and $1,743,000, respectively. The Company realized loan losses of approximately $148,000 and $273,000 during the comparable three month periods of 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, the Company realized loan losses of approximately $636,000 and $643,000, respectively. The provision for loan losses expense estimate was lowered in 2010 as management believes the Company is adequately reserved for expect ed future losses at this time however loss reserves are estimates of future losses based on historical default rates, estimated losses on the sale of real estate owned and expectations of future economic conditions and activity. The Company continually re-evaluates collateral value on specific loans deemed to be affected by current mortgage and housing environments and intends to establish reserves for any expected deficiencies that are not otherwise secured. From inception through September 30, 2010, we have acquired approximately $874 million of loans. We have recorded losses approximating 1.3% of those assets to date. We anticipate loan losses to continue, primarily in our long-term and un-affiliated construction loan portfolio, and therefore continue to assess the adequacy of our loan loss reserves.

Net income was approximately $314,000 and $1,117,000 for the three months ended September 30, 2010 and 2009, respectively. Net income was approximately $2,386,600 and $3,418,000 for the nine months ended September 30, 2010 and 2009, respectively. Specific variances are explained in more detail above. Earnings per weighted average share of beneficial interest for the three months ended September 30, 2010 and 2009 were $0.05 and $0.17 per share, respectively. Earnings per weighted average share of beneficial interest for the nine months ended September 30, 2010 and 2009 were $0.37 and $0.53 per share, respectively.

Distributions, per weighted average share of beneficial interest, to shareholders were $0.15 and $0.14 per share for the three months ended September 30, 2010 and 2009, respectively and $0.44 and $0.59 per share for the nine months ended September 30, 2010 and 2009, respectively. We distributed approximately 117% of our net income during the nine months ended September 30, 2010. The portion of the distributions that does not represent earnings represents return of capital.

LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

Sources and Uses of Funds

Cash flows from operating activities are generally the result of net income adjusted for provision for loan losses, depreciation and amortization expense and (increases) decreases in accrued interest receivable and accounts payable and accrued liabilities (including affiliates). Cash provided by operations was approximately $1,740,000 and $1,963,000 during the nine months ended September 30, 2010 and 2009, respectively.

Cash flows used in investing activities generally reflect fundings and payments received from lending activities. The Company used approximately $1,678,000 and $2,431,000 of cash flows from investing activities during the nine months ended September 30, 2010 and September 30, 2009, respectively.

Cash flows used in or provided by financing activities generally reflect proceeds from the issuance of shares, borrowings or repayments on the line of credit, the purchase of treasury stock and the payment of dividends. Cash of approximately $80,000 was used by financing activities during the nine months ended September 30, 2010 and cash of approximately $199,000 was used in financing activities during the nine months ended September 30, 2009.

Credit Facilities

During August 2009, the Company entered into a revolving line of credit facility with a bank for $5,000,000. The line of credit bears interest at prime plus one percent, with a floor of 5.50% and requires monthly interest payments. Principal and all unpaid interest will be due at maturity, which is August 2012. The line is collateralized by a first lien security interest in the underlying real estate financed by the line of credit. The outstanding balance on this line of credit was approximately $5,000,000 and $3,788,000 at September 30, 2010 and December 31, 2009, respectively.

Our primary sources of funds for liquidity consist of our dividend reinvestment plan, repayments of principal on our loans made to purchase mortgage investments, and bank lines of credit. The table below summarizes certain liquidity sources and uses for the nine-month periods ended September 30, 2010 and September 30, 2009:

	2010			2009
Shares issued		26,626			36,932
Dividend reinvestment proceeds	$	423,000		$	667,000
Number of shares returned to treasury		23,829			53,092
Value of shares repurchased	$	(429,000	)	$	(995,000	)
Principal receipts:
First lien mortgage notes and trust receivables	$	1,247,000		$	152,000
Real estate owned	$	3,415,000		$	724,000
Interim loans	$	54,000		$	10,000
Interim loans, affiliates	$	9,662,000		$	1,493,000
Lines of credit	$	22,924,000		$	13,957,000
Lines of credit, affiliates	$	3,613,000		$	8,874,000
Net borrowings – line of credit payable	$	2,558,000		$	3,575,000

We are not currently offering shares in the public markets except to existing shareholders through our dividend reinvestment plan. In July 2006, we registered an additional 1,000,000 shares to be offered through our dividend reinvestment plan.

On March 18, 2009, the Board approved certain modifications to the Company’s Share Repurchase Plan (“SRP”) and Dividend Reinvestment Plan (“DRIP”), which modifications were disclosed in a report on Form 8-K which we filed with the SEC on March 19, 2009. Pursuant to the requirements of the SRP and DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both of which were effective on May 1, 2009.

Shares issued in the aggregate, as of September 30, 2010 and 2009 were 8,291,242 and 8,255,523, respectively. Shares retired to treasury through our share redemption plan in the aggregate were 1,865,562 and 1,835,114 through September 30, 2010 and 2009, respectively. Total shares outstanding were 6,425,680 and 6,420,409, at September 30, 2010 and 2009, respectively. As of September 30, 2010, inception to date gross offering proceeds from all public offerings were approximately $165,411,000 and net proceeds after fees, marketing reallowance and commissions were approximately $146,683,000.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with GAAP. The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accrual of interest income, loan loss reserves and valuation of foreclosed properties. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Significant accounting policies are described in the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009. The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Interest is accrued monthly on outstanding principal balances. Payments are either received monthly for interest or at payoff. Any deficiencies in unpaid interest are either charged off to the reserve for loan losses or charged against the related interest reserve.

We maintain a reserve for loan losses for estimated losses resulting from the inability of our borrowers to make required payments resulting in property foreclosure and losses from the sale of foreclosed property. If the financial condition of our borrowers was to deteriorate, resulting in an impairment of their ability to make payments or, if the market value of the properties securing our loans decreases additional reserves may be required.

We record foreclosed properties at an estimated net realizable value based on our assessment of real estate market conditions and historical discount percentages on the sale of foreclosed properties. Should market conditions deteriorate or loss percentages increase, additional valuation adjustments may be required.

Subsequent Events

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes primarily as a result of the method by which our bank credit facility is calculated at 1.0% over bank prime lending rate.

We provide a line of credit to UDF. UDF is a real estate finance limited partnership which derives a substantial portion of its income by originating, purchasing, participating in and holding for investment mortgage loans made directly by UDF to persons and entities for the acquisition and development of real property as single-family residential lots that will be marketed and sold to home builders. Changes in interest rates may impact both demand for UDF’s real estate finance products and the rate of interest on the loans UDF makes. In most instances, the loans UDF will make will be junior in the right of repayment to senior lenders who will provide loans representing 70% to 80% of total project costs. As senior lender interest rates available to our borrowers increase, demand for UDF mortgage lo ans may decrease, and vice versa.

Developers to whom UDF makes mortgage loans use the proceeds of such loans to develop raw real estate into residential home lots. The developers obtain the money to repay these development loans by selling the residential home lots to home builders or individuals who will build single-family residences on the lots, and by obtaining replacement financing from other lenders. If interest rates increase, the demand for single-family residences may decrease. Also, if mortgage financing underwriting criteria become more strict, demand for single-family residences may decrease. In such an interest rate and/or mortgage financing climate, developers may be unable to generate sufficient income from the resale of single-family residential lots to repay loans from UDF, and developers’ costs of fund s obtained from lenders in addition to us may increase, as well. Accordingly, increases in single-family mortgage interest rates or decreases in the availability of mortgage financing could increase the number of defaults on development loans made by UDF, and correspondingly impact UDF’s ability to make payments under its line of credit.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed by the Company’s management, consisting of the individual who serves as our President, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2010. Based on such evaluation, management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Company does not control the financial reporting process, and is solely dependent on UMTHGS, its Advisor, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Advisor’s disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the third fiscal quarter of 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan, (“SRP”). Under the terms of our plan as modified and effective on May 1, 2009, shareholders who have held their shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 - month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 - month period. The repurchase price is based on the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at September 30, 2010 and December 31, 2009 the stated NAV was $15.89 and $15.86 per share, respectively. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. ; Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Repurchases are subject to cash availability and Trustee discretion.

Share repurchases have been at prices between NAV, which is calculated and adjusted as necessary on a quarterly basis, and $20 per share. Shares repurchased at the lower price were 1) shares held by shareholders for less than 12 months or 2) shares purchased outside of our SRP. Our stated NAV at September 30, 2010 and December 31, 2009 was $15.89 and $15.86 per share, respectively.

The following table sets forth information relating to shares of beneficial interest repurchased into treasury during the period covered by this report.

Month	Total number of shares repurchased		Average Purchase Price		Total number of shares purchased as part of a publicly announced plan		Total number of shares purchased outside of plan
January		7,688	$	19.12		5,462		2,226
February		-		-		-		-
March		-		-		-		-
April		8,282	$	17.52		4,722		3,560
May		-		-		-		-
June		-		-		-		-
July		7,859	$	17.44		3,643		4,216
August
September
Totals		23,829	$	18.01		13,827		10,002

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

On July 21, 2010 the Company entered into a second amendment to our subordination and intercreditor agreement under the UDF Loan. See Exhibit 10.1.

On July 1, 2010 the Company executed an Amended and Restated Variable Amount Promissory Note with UMTH Lending Company, L.P. See Exhibit 10.2.

ITEM 6. EXHIBITS

3.1	Second Amended Restated Declaration of Trust	*
3.2	Bylaws of the Company	*
4.1	Form of certificate representing the shares	*
4.2	Dividend Reinvestment Plan (incorporated by reference from the prospectus to the Company's Registration Statement on Form S-3POS (File no, 333-136107), that became effective October 16, 2006))	**
4.3	Description of Share Repurchase Program (incorporated by reference from the prospectus to the Company's Registration Statement on Form S-3POS (File no, 333-136107), that became effective October 16, 2006))	**

10.1	Second Amended and Restated Subordination and Intercreditor Agreement entered into as of June 21, 2010, by and between the Company, UDF and a private investor (filed as Exhibit 10.1 to Form 10-Q for the Quarter Ended June 30, 2010 and incorporated herein by reference).
10.2	Amended and Restated Variable Amount Promissory Note between the Company and UMTH Lending Company, L.P. dated July 1, 2010 (filed as Exhibit 10.2 to Form 10-Q for the Quarter Ended June 30, 2010 and incorporated herein by reference).

10.3	Economic Interest Participation Agreement and Purchase Option between United Mortgage Trust and UDF III dated September 19, 2008 (filed as Exhibit 10.1 to Form 10-Q for the Quarter Ended September 30, 2008 and incorporated herein by reference)
10.4	Participation Agreement between United Mortgage Trust and UDF III dated September 30, 2008 (filed as Exhibit 10.2 t o Form 10-Q for the Quarter Ended September 30, 2008 and incorporated here in by reference)


10.5	Form of Mortgage Servicing Agreement between the Company and South Central Mortgage, Inc. at a later date assigned to Prospect Service Corp.	*


10.6	Second Amended Secured Line of Credit Promissory Note and Security Agreement between the Company and United Development Funding, L.P. dated June 20, 2006 (incorporated by reference from Form 8-K filed June 21, 2006)

10.7	Secured Variable Amount Promissory Note dated December 31, 2005 issued by Capital Reserve Group, Inc. (incorporated by reference from Form 8-K filed March 31, 2006)
10.8	Secured Variable Amount Promissory Note dated December 31, 2005 issued by South Central Mortgage, Inc. (incorporated by reference from Form 8-K filed March 31, 2006)
10.9	Secured Variable Amount Promissory Note dated December 31, 2005 issued by Ready America Funding Corp. (incorporated by reference from Form 8-K filed March 31, 2006)
10.10	Form of Assignment of Limited Partnership Interest as Collateral Dated December 31, 2005 between the Company and Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. and WLL, L.P. (incorporated by reference from Form 8-K filed March 31, 2006)
10.11	Guaranty dated December 31, 2005 between the Company and Ready Mortgage Corp. (incorporated by reference from Form 8-K filed March 31, 2006)
10.12	Guaranty dated December 31, 2005 between the Company and WLL, L.P. (incorporated by reference from Form 8-K filed March 31, 2006)
10.13	Guaranty dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from Form 8-K filed March 31, 2006)
10.14	Intercreditor and Subordination Agreement dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from Form 8-K filed March 31, 2006)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The exhibits marked with “*” are incorporated by reference from the Company's Registration Statement on Form S-11 (File No. 333-10109) that was declared effective on March 5, 1997. The exhibit marked with “**” is incorporated by reference from the Company's registration statement on Form S-11 (File No. 333-56520) that was declared effective on June 4, 2001.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.


	UNITED MORTGAGE TRUST

Date: November 15, 2010	By	/s/ Stuart Ducote
		President

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United Mortgage Trust (UDMG) Inactive 10-Q2010 Q3 Quarterly report

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