Franklin Credit Holding (FCMC) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

or

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

For the transition period from                    to                    

Commission File Number0-17771

FRANKLIN CREDIT MANAGEMENT CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	75-2243266
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
101 Hudson Street
Jersey City, New Jersey	07302
(Address of principal	(Zip code)
executive offices)

(201) 604-1800
(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. Yesþ Noo

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. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyþ

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

Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of November 11, 2008: 8,025,295

FRANKLIN CREDIT MANAGEMENT CORPORATION

FORM 10-Q

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2008 and December 31, 2007		3
Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and September 30, 2007		4
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2008		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 2007		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Application of Critical Accounting Policies and Estimates		25
Portfolio Characteristics		25
Results of Operations		41
Liquidity and Capital Resources		48
Borrowings		50
Item 3. Quantitative and Qualitative Disclosures about Market Risk		60
Item 4. Controls and Procedures		62
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		63
Item 1A. Risk Factors		64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		69
Item 3. Defaults Upon Senior Securities		69
Item 4. Submission of Matters to a Vote of Security Holders		69
Item 5. Other Information		69
Item 6. Exhibits		70
SIGNATURES		71
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2008
	(Unaudited)			December 31, 2007
ASSETS
Cash and cash equivalents	$	19,198,703		$	18,266,066
Restricted cash		23,473,926			40,326,521
Short-term investments		—			4,735,308
Notes Receivable:
Principal		1,096,264,860			1,289,550,285
Purchase discount		(9,957,715	)		(10,667,649	)
Allowance for loan losses		(394,042,953	)		(230,809,938	)
Notes receivable, net		692,264,192			1,048,072,698
Originated loans held for investment:
Principal, net of deferred fees and costs		408,282,827			501,555,859
Allowance for loan losses		(37,991,565	)		(23,851,715	)
Originated loans held for investment, net		370,291,262			477,704,144
Accrued interest receivable		14,958,495			22,989,901
Other real estate owned		72,105,644			58,838,831
Deferred financing costs, net		7,936,207			8,808,089
Other receivables		5,958,088			4,917,598
Building, furniture and equipment, net		2,646,680			3,363,306
Income tax receivable		4,046,541			3,682,861
Derivatives		3,079,976			—
Other assets		824,049			807,879
Total assets	$	1,216,783,763		$	1,692,513,202
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable, net of debt discount of $208,993 at September 30, 2008 and $232,365 at December 31, 2007	$	1,463,079,941		$	1,628,537,798
Financing agreements		949,178			1,033,073
Accounts payable and accrued expenses		15,535,395			23,108,149
Deferred tax liability		543,507			543,507
Total liabilities		1,480,108,021			1,653,222,527
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value; authorized 3,000,000; issued – none		—			—
Common stock and additional paid-in capital, $0.01 par value, 22,000,000 authorized shares; issued and outstanding: 8,025,295 at September 30, 2008 and 8,025,295 at December 31, 2007		23,309,657			23,091,510
Accumulated other comprehensive income		3,079,976			—
(Accumulated deficit)/Retained earnings		(289,713,891	)		16,199,165
Total stockholders’ (deficit)/equity		(263,324,258	)		39,290,675
Total liabilities and stockholders’ equity	$	1,216,783,763		$	1,692,513,202

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues:
Interest income	$	19,122,096		$	38,692,713		$	78,047,824		$	120,990,305
Purchase discount earned		547,392			1,109,316			2,134,142			3,889,523
Gain on sale of notes receivable		—			—			—			31,118
(Loss) on sale of originated loans		—			(590,243	)		—			(389,510	)
Gain on sale of other real estate owned		743,653			390,653			1,126,360			629,460
Servicing fees and other income		3,706,094			1,961,107			8,903,967			6,085,900
Total revenues		24,119,235			41,563,546			90,212,293			131,236,796
Operating Expenses:
Interest expense		18,267,375			39,132,464			60,052,011			106,101,071
Collection, general and administrative		12,702,951			10,255,570			34,631,247			29,918,343
Provision for loan losses		10,560,709			262,715,207			299,708,175			272,711,893
Amortization of deferred financing costs		297,917			526,729			871,882			2,280,227
Depreciation		247,732	��		364,484			862,034			1,081,839
Total expenses		42,076,684			312,994,454			396,125,349			412,093,373
(Loss) before provision for income taxes		(17,957,449	)		(271,430,908	)		(305,913,056	)		(280,856,577	)
Income tax benefit		—			108,510,170			—			112,398,850
Net (loss)	$	(17,957,449	)	$	(162,920,738	)	$	(305,913,056	)	$	(168,457,727	)
Net (loss) per common share:
Basic	$	(2.25	)	$	(20.51	)	$	(38.34	)	$	(21.22	)
Diluted	$	(2.25	)	$	(20.51	)	$	(38.34	)	$	(21.22	)
Weighted average number of shares outstanding:
Basic		7,986,545			7,945,295			7,979,045			7,937,795
Diluted		7,986,545			7,945,295			7,979,045			7,937,795

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)

					Accumulated
	Common Stock and				Other		Retained
	Additional Paid-in Capital				Comprehensive		Earnings/
	Shares		Amount		Loss		(Deficit)			Total
BALANCE, JANUARY 1, 2008		8,025,295	$	23,091,510	$	—	$	16,199,165		$	39,290,675
Stock-based compensation		—		218,147		—		—			218,147
Net unrealized gains on derivatives		—		—		3,079,976		—			3,079,976
Net (loss)		—		—		—		(305,913,056	)		(305,913,056	)
BALANCE, SEPTEMBER 30, 2008		8,025,295	$	23,309,657	$	3,079,976	$	(289,713,891	)	$	(263,324,258	)

     For the nine months ended September 30, 2008, the total comprehensive loss amounted to $302,833,080, which was comprised of the net loss of $305,913,056 and the net unrealized gains on derivatives of $3,079,976. For the three months ended September 30, 2008, the total comprehensive loss amounted to $20,917,822, which was comprised of the net loss of $17,957,449 and the net unrealized loss on derivatives of $2,960,373.

See Notes to Consolidated Financial Statements.

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)

	Nine Months Ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)	$	(305,913,056	)	$	(168,457,727	)
Adjustments to reconcile income to net cash provided by/(used in) operating activities:
Gain on sale of notes receivable		—			(31,118	)
Gain on sale of other real estate owned		(1,126,361	)		(629,460	)
Loss on sale of originated loans		—			389,510
Depreciation		862,034			1,081,839
Amortization of deferred costs and fees on originated loans		(469,797	)		1,158,610
Amortization of deferred financing costs		871,882			2,280,227
Amortization of debt discount		23,372			116,074
Non-cash compensation		218,147			311,182
Proceeds from the sale of and principal collections on loans held for sale		—			32,989,956
Deferred tax provision		—			(116,439,487	)
Purchase discount earned		(2,085,030	)		(3,889,523	)
Provision for loan losses		299,708,175			272,711,893
Origination of loans held for sale		—			(34,060,310	)
Changes in operating assets and liabilities:
Accrued interest receivable		8,031,406			(2,710,103	)
Other receivables		(1,040,490	)		756,295
Income tax receivable		(363,680	)		5,469,645
Other assets		(16,171	)		(190,668	)
Accounts payable and accrued expenses		(7,572,754	)		1,611,435
Net cash (used in) operating activities		(8,872,323	)		(7,531,730	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash		16,852,595			1,168,663
Purchase of notes receivable		—			(414,826,661	)
Principal collections on notes receivable		68,277,490			150,234,712
Principal collections on loans held for investment		54,306,747			125,462,999
Origination of loans held for investment		—			(247,786,062	)
Short-term securities proceeds/(investments in)		4,735,308			(6,394,169	)
Repurchase of loans held for sale and loans held for investment		—			(8,235,468	)
Putback of acquired notes receivable		1,803,604			14,796,193
Proceeds from sale of other real estate owned		29,539,748			23,297,621
Proceeds from sale of loans held for investment		—			12,716,251
Proceeds from sale of notes receivable		—			20,998,838
Purchase of building, furniture and equipment		(145,408	)		(1,023,945	)
Net cash provided by/(used in) investing activities		175,370,084			(329,591,028	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		—			693,156,528
Principal payments of notes payable		(165,481,229	)		(338,636,504	)
Proceeds from financing agreements		996,773			375,094,599
Principal payments of financing agreements		(1,080,668	)		(367,964,244	)
Repurchase obligation		—			(18,094,061	)
Payment of deferred financing costs		—			(3,342,071	)
Net cash (used in)/provided by financing activities		(165,565,124	)		340,214,247
NET CHANGE IN CASH AND CASH EQUIVALENTS		932,637			3,091,489
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		18,266,066			3,983,104
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,198,703		$	7,074,593
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest	$	60,447,880		$	131,582,708
Cash payments for taxes	$	363,680		$	7,795,132
NON-CASH INVESTING AND FINANCING ACTIVITY:
Transfer from loans held for sale to loans held for investment	$	—		$	4,910,730
Transfer from notes receivable and loans held for investment to other real estate owned	$	71,758,851		$	41,101,073

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FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Overview

     As used herein references to the “Company,” “FCMC,” “we,” “Franklin,” “our” and “us” refer to Franklin Credit Management Corporation, collectively with its subsidiaries.

Uncertain Continued Viability

     The Company has been, and continues to be, significantly and negatively impacted by the unprecedented credit, and most recently, economic market turmoil. Particularly impacting Franklin has been the severe deterioration in the U.S. housing market and the nearly complete shutdown of the mortgage credit market for borrowers without excellent credit histories. These unprecedented market conditions have adversely affected the Company’s portfolio of residential mortgage loans, particularly our second-lien mortgage loans, delinquencies, provisions for loan losses, operating losses and cash flows, which have resulted in a significant stockholders’ deficit of $263.3 million at September 30, 2008. The Company, under the terms of the Forbearance Agreements with its lead lending bank, is expressly prohibited from acquiring or originating loans, and certain existing defaults under the Company’s existing credit facilities with the bank have been temporarily waived until the maturity of the forbearance agreements in May 2009. In addition, the Company’s Forbearance Agreements with The Huntington National Bank, which are described below, contain affirmative covenants that the Company maintain and comply in all material respects with all governmental licenses and authorizations to hold and service mortgage loans and real estate owned properties. The Company’s current non-compliance with the minimum net worth requirements associated with certain of its licenses, which is discussed below, or a determination by the Huntington National Bank that there has been a material adverse affect on the Company’s business, could mature into a Forbearance Default under the Forbearance Agreements if notice thereof is provided by The Huntington National Bank. Any such Forbearance Default, or failure to successfully renew the Forbearance Agreements or enter into new credit facilities with The Huntington National Bank prior to the scheduled maturity of the Forbearance Agreements in May 2009, could entitle the Huntington National Bank to declare the Company’s indebtedness immediately due and payable and could result in the transfer of the Company’s rights as servicer to a third party. As a result, without the continued cooperation and assistance from our lead bank, Franklin’s ability to continue as a viable business would be in doubt.

Operating Losses and Stockholders’ Deficit

     The Company had a net loss of $18.0 million and $305.9 million for the three and nine months ended September 30, 2008, respectively. The net loss for the three months ended September 30, 2008 was driven principally by a significant excess of interest-bearing liabilities over interest-paying loans, which is the result of the Company’s significant amount of delinquent residential 1-4 family loans, and a provision for additional value declines on the Company’s growing portfolio of owned real estate due to an expected continuing decline in housing values. At September 30, 2008, approximately 55% and 45% of the Company’s borrowers were delinquent on a contractual and recency basis, respectively. As a result, the Company’s aggregate net interest income (interest income less interest expense) and non-interest income is not sufficient to support its general and administrative expenses. The net loss for the nine months ended September 30, 2008 was principally the result of a significant provision for loan losses

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during the quarter ended June 30, 2008. Due principally to the continued, substantial deterioration in the housing and subprime mortgage markets and the significant further deterioration in the performance of the Company’s portfolios of acquired and originated loans, including particularly the portfolio of acquired second-lien mortgage loans, the Company’s assessment of its allowance for loan losses (“reserves”) in the quarter ended June 30, 2008 resulted in significantly increased estimates of inherent losses in its portfolios and the need for a substantial increase in reserves. As a result, the provision for loan losses increased to $280.5 million in the quarter ended June 30, 2008 and $299.7 million for the nine months ended September 30, 2008. The Company had a stockholders’ deficit of $263.3 million at September 30, 2008. The continuing deterioration in the U.S. housing market, including generally continuing housing price declines and the severe contraction of available mortgage credit for consumers without excellent credit histories, and most recently coupled with a slowing economy with rising unemployment, may continue to widen the mismatch of the Company’s excess of interest-bearing borrowings over interest-paying loans and further negatively impact the credit quality of the Company’s portfolios, which could result in decreased net interest income and additional significant provisions for loan losses resulting in increased operating losses in future quarters. See “Management’s Discussion and Analysis – Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007.” See “Risk Factors – Risks Related to Our Business.”

Licenses to Service Loans

     The requirements imposed by state mortgage finance licensing laws vary considerably. Many mortgage licensing laws impose a licensing obligation to service residential mortgage loans and certain state collection agency licensing laws require entities collecting on delinquent or defaulted loans for others or to acquire such loans to be licensed as well. Once these licenses are obtained, state regulators impose additional ongoing obligations on licensees, such as maintaining certain minimum net worth or line of credit requirements. If the Company does not, among other things, meet these minimum net worth or line of credit requirements, state regulators may revoke or suspend the Company’s licenses and prevent the Company from continuing to service loans in such states, which would adversely affect the Company’s operations and financial condition and ability to attract new servicing customers. The Company’s deficit net worth at September 30, 2008 has resulted in the Company’s non-compliance with the requirements to maintain certain licenses in approximately 21 states, and consequently, the regulators in all or some of these states may take a number of possible corrective actions in response to the Company’s non-compliance, including license revocation or suspension, requiring the Company to file a corrective action plan, fine assessment, denial of an application for renewal of a license, or a combination of the same, in which case the Company’s business would be adversely affected. In October 2008, the Company was notified of such non-compliance by the state of West Virginia and, as a result, has entered into an Assurance of Voluntary Compliance with the state’s Commissioner of Banking that, as of November 30, 2008, the Company will meet the state’s statutory minimum net worth requirement of $250,000. If the Company is unable to meet this requirement, the Company has agreed to either surrender its license to act as a servicer or receive an Order revoking its license. In addition, the Company’s Forbearance Agreements with The Huntington National Bank, which are described below, contain affirmative covenants that the Company maintain and comply in all material respects with all governmental licenses and authorizations to hold and service mortgage loans and real estate owned properties. If the Company breaches such covenants, which it has breached by not complying with the minimum net worth requirements of certain states, or The Huntington National Bank determines that there has been a material adverse affect on the Company’s business and, in either instance, notice of the same is provided to the Company by The Huntington National Bank, which the Huntington National Bank has not as of the date of this filing provided to the Company, any such noticed event would be a Forbearance Default under the Forbearance Agreements, which would entitle The Huntington National Bank to declare the Company’s indebtedness immediately due and payable and transfer the Company’s rights as servicer to a third party.

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     The Company is currently evaluating various options and corporate structures to address the required minimum net worth situation, in order to help preserve the good standing of the Company’s licenses and to ensure that the Company is able to continue to service loans. These options include changes to the Company’s corporate structure so that the Company’s servicing operations would be segregated into one or two wholly-owned subsidiaries, which would not be borrowers under the Company’s credit facilities. While the Company believes that the required consent and cooperation of The Huntington National Bank for any changes the Company determines to implement, which would enable the Company to retain its servicing and debt collection licenses with all or most states, would be obtained, there can be no assurance that the Company will identify and successfully implement a viable option to enable the Company to retain these licenses.

Delisting – The Nasdaq Capital Market

     Our common stock was delisted from The Nasdaq Capital Market as of November 3, 2008, and is quoted under the stock symbol “FCMC.PK” on the “Pink Sheets,” a centralized quotation service for over-the counter securities. The Company is seeking to encourage brokers to arrange for its common stock to be quoted on the Over-The-Counter Bulletin Board. Prior to November 3, 2008, the Company’s common stock traded on The Nasdaq Capital Market. See “Risk Factors – Risks Related to Our Business.”

Financing

     Since December 28, 2007, Franklin has operated in accordance with a series of agreements (the “Forbearance Agreements”) with The Huntington National Bank, successor by merger in July 2007 to Sky Bank (Sky Bank, prior to the merger, and Huntington, thereafter, are referred to as the “bank”), whereby the bank agreed to restructure approximately $1.93 billion of the Company’s indebtedness to it and its participant banks, forgave $300 million of such indebtedness for a restructuring fee of $12 million paid to the bank, and waived certain existing defaults (the “Restructuring”). See “Management’s Discussion and Analysis – Borrowings.” In November 2007, Franklin ceased to acquire or originate loans and, under the terms of the Forbearance Agreements, the Company is expressly prohibited from acquiring or originating loans.

     On March 31, 2008, the Company entered into amendments to the Forbearance Agreements whereby, among other things, (a) Tribeca’s indebtedness to BOS (USA) Inc., an affiliate of Bank of Scotland, in the amount of $43.3 million was effectively rolled into the Forbearance Agreements, and (b) the interest rate and date of commencement of the accrual of PIK interest on $125 million of the Company’s indebtedness (Tranche C debt) was modified as of March 31, 2008. The Tranche C debt modification resulted in a savings of approximately $3.2 million in accrued interest expense for the three months ended September 30, 2008 and approximately $9.5 million for the nine months ended September 30, 2008. See “Management’s Discussion and Analysis – Borrowings – Forbearance Agreements with Lead Lending Bank – March 2008 Modifications to Forbearance Agreements.” The Company entered into additional amendments to the Forbearance Agreements, effective August 15, 2008, whereby, among other things, (a) the minimum net worth covenant was eliminated, and (b) prescribed interest coverage ratios were changed. See “Management’s Discussion and Analysis – Borrowings – Forbearance Agreements with Lead Lending Bank – August 2008 Modification to Forbearance Agreements.”

Franklin’s Business

     We are a specialty consumer finance company that was, until December 28, 2007, primarily engaged in two related lines of business: (1) the acquisition, servicing and resolution of performing, reperforming and nonperforming residential mortgage loans and real estate assets; and (2) the origination

9

of subprime mortgage loans, principally for our portfolio and to a lesser extent, for sale into the secondary market. We specialized in acquiring and originating loans secured by 1-4 family residential real estate that generally fell outside the underwriting standards of Fannie Mae and Freddie Mac and involved elevated credit risk as a result of the nature or absence of income documentation, limited credit histories, higher levels of consumer debt or past credit difficulties. We typically purchased loan portfolios at a discount, and originated subprime loans with interest rates and fees intended to provide us with a rate of return adjusted to reflect the elevated credit risk inherent in the types of loans we acquired and originated. Unlike many of our competitors, we generally held for investment the loans we acquired and a significant portion of the loans we originated.

     Since the end of 2007, the Company has been actively seeking to begin providing services for third parties, on a fee-paying basis, which are directly related to our servicing operations and our portfolio acquisition experience with residential mortgage loans. We are actively seeking to (a) expand our servicing operations to provide similar subservicing and collection services to third parties, and (b) capitalize on our experience to provide customized, comprehensive loan analysis and in-depth end-to-end transaction and portfolio management services to the residential mortgage markets. Some of these services include, in addition to servicing loans for others, performing 1-4 family residential portfolio stratification and analysis, pricing, due diligence, closing, and collateral transfer. These new business activities are subject to the consent of the Company’s lead lending bank, and we may not be successful in entering into or implementing any of these businesses.

     On May 28, 2008, Franklin entered into various agreements (the “Servicing Agreements”) to service on a fee-paying basis approximately $245 million in residential home equity line of credit mortgage loans for Bosco Credit LLC (“Bosco”). Bosco was organized by Franklin; however, no membership interests were issued. On May 16, 2008, Bosco entered into a Loan Sale Agreement with the National Credit Union Administration Board, as Conservator for the Cal State 9 Credit Union, to purchase the loans that are subject to the Servicing Agreements. As of May 28, 2008, the initial membership interests in Bosco were issued to Thomas J. Axon, Franklin’s Chairman and President. The loans that are subject to the Servicing Agreements were acquired by Bosco on May 28, 2008, and the financing for Bosco was provided by a group of lenders led by the bank. Huntington no longer participates in the Bosco facility, but remains the administrative agent for the lenders to Bosco. Franklin also provided the loan analysis, due diligence and other services for Bosco on a fee-paying basis for the loans acquired by Bosco.

     As of September 30, 2008, we had total assets of $1.22 billion and our portfolios of notes receivable and loans held for investment net, totaled $1.06 billion. From inception through December 31, 2007, we had purchased and originated in excess of $4.73 billion in mortgage loans. We did not purchase or originate any loans in the nine months ended September 30, 2008. As a result of the Forbearance Agreements entered into on December 28, 2007 with the bank, the Company’s principal business and operational activity is the servicing of its previously acquired and originated mortgage loans and real estate assets, and as of the end of May 2008, on a fee-paying basis, the servicing of loans for Bosco. Accordingly, discussions in this Form 10-Q regarding loan acquisition and mortgage origination operations are of a historical nature, referring to those activities that the Company actively engaged in prior to entering into the Forbearance Agreements.

     All disclosures and explanations included in this Form 10-Q must be read in light of the Forbearance Agreements and the changed nature of the Company’s business.

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Loan Acquisitions

     We are not seeking to acquire for the Company, and we did not acquire for the Company during the first nine months of 2008, any mortgage loans or mortgage assets.

     Since commencing operations in 1990, and until December 28, 2007, we had become a nationally recognized buyer of portfolios of residential mortgage loans, both first and second-lien loans, and real estate assets from a variety of financial institutions in the United States, including mortgage banks, commercial banks and thrifts, other traditional financial institutions and other specialty finance companies. These portfolios generally consisted of one or more of the following types of mortgage loans:

• performing loans– loans to borrowers who are contractually current, but may have been delinquent in the past and which may have deficiencies relating to credit history, loan-to-value ratios, income ratios or documentation;

• reperforming loans– loans to borrowers who are not contractually current, but have recently made regular payments and where there is a good possibility the loans will be repaid in full; and

• nonperforming loans– loans to borrowers who are delinquent, not expected to cure, and for which a primary avenue of recovery is through the sale of the property securing the loan.

     We sometimes refer collectively to these types of loans as “scratch and dent” or “S&D” loans. We refer to the S&D loans we acquired as “notes receivable.”

     During the nine months ended September 30, 2008, our Loan Acquisitions group provided on a fee-paying basis the portfolio stratification and analysis, pricing, due diligence, closing, and collateral transfer services for Bosco and due diligence services for several third parties.

Loan Originations

     We are not seeking to originate for the Company, and we did not originate for portfolio or sale to others during the first nine months of 2008, any mortgage loans.

     Until December 28, 2007, we conducted our loan origination business through our wholly-owned subsidiary, Tribeca Lending Corp. (“Tribeca”), which we formed in 1997 in order to capitalize on our experience in evaluating and servicing scratch and dent residential mortgage loans. We originated primarily subprime residential mortgage loans to individuals with serious financial difficulties and whose documentation, credit histories, income and other factors caused them to be classified as subprime borrowers and to whom, as a result, conventional mortgage lenders often would not make loans (“Liberty Loans”). The loans we originated typically carried interest rates that were significantly higher than those of prime loans and we believed had fairly conservative loan-to-value ratios at the time of origination. The principal factor in our underwriting guidelines was historically our determination of the borrower’s equity in his or her home and the related calculation of the loan-to-value ratio based on the appraised value of the property, and not, or to a lesser extent, on a determination of the borrower’s ability to repay the loan. In 2005, we began in an increasing number of cases to gather and analyze additional information that allowed us to assess to a reasonable degree the borrower’s ability and intent to repay the loan in connection with our credit decision. Throughout the first nine months of 2007, we made several credit tightening adjustments and/or modifications to our subprime loan origination programs, principally in response to the rapidly changing mortgage origination and housing markets. We chose to focus our marketing efforts on this segment of the 1-4 family residential real estate mortgage market in order to capitalize on our experience in acquiring and servicing loans with similar credit risk characteristics.

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Due Diligence Services

     During the first quarter of 2008, capitalizing on our portfolio acquisition experience with residential mortgage loans, the Company began providing services for third parties not related to us or our lender, on a fee-paying basis. During the nine months ended September 30, 2008, we completed nine due diligence or loan analysis and pricing assignments for third parties interested in acquiring mortgage loan pools, and in addition to the subservicing contract with Bosco, we obtained a very small subservicing contract to service loans for one of our due diligence services customers.

Loan Servicing

     We service substantially all of the loans in our portfolio, and at September 30, 2008, our servicing department consisted of 158 employees who serviced approximately 26,200 loans. In addition, at September 30, 2008, we serviced approximately 2,689 home equity loans for Bosco.

     We have invested heavily to create a loan servicing capability that is focused on collections, loss mitigation and default management. In general, we seek to ensure that the loans we service are repaid in accordance with the original terms or according to amended repayment terms negotiated with the borrowers. Because we expect our loans will experience above average delinquencies, erratic payment patterns and defaults, our servicing operation is focused on maintaining close contact with our borrowers and as a result is more labor-intensive than traditional mortgage servicing operations. Our servicing staff employs a variety of collection strategies that we have developed to successfully manage serious delinquencies, bankruptcy and foreclosure. Additionally, we maintain a real estate department with experience in property management and the sale of residential properties.

     During the past several months, due to the continued decline in housing prices nationally, the deterioration in mortgage markets and the increased delinquency performance of the acquired and originated loans in the Company’s portfolios, including particularly the portfolio of acquired second-lien mortgage loans, we have significantly added to our servicing staff, developed new programs for delinquent borrowers and intensified our efforts to work with borrowers to modify their loans, and segregated into a separate department, reporting directly to the Company’s President, our deficiency operations. We have recently begun to more quickly identify those borrowers who are likely to move into seriously delinquent status and are attempting to promptly apply appropriate loss mitigation strategies to encourage positive payment performance. During the third quarter of 2008, we completed approximately $162.0 million of loan modifications, including approximately $65.3 million of one-year interest rate modifications, as we added an Interest Rate Reduction modification option for struggling borrowers. The Company’s interest rate modification option provides for a reduction in the borrower’s current interest rate in order to reduce the monthly mortgage payment to an affordable amount based on our assessment of the borrower’s financial situation and ability to pay on a regular basis. Interest rate modifications are generally for a period of one year and any unpaid interest is deferred until the maturity of the loan. At the end of the one-year modification period, the borrower’s financial situation is re-evaluated, and if warranted, an additional loan modification may be granted. As of September 30, 2008, approximately $276.0 million of loans have been subject to modification, and have been modified principally during the second and third quarters of 2008. See “Management’s Discussion and Analysis – Portfolio Characteristics.”

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation– The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions

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have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the periods.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates of the Company are the allowance for loan losses, the valuation of other real estate owned, and income taxes. The Company’s estimates and assumptions primarily arise from risks and uncertainties associated with credit exposure, interest rate volatility and declining real estate values. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions, particularly regarding a deterioration of the housing and mortgage markets, a slowing U.S. economy and increasing unemployment, may occur that could significantly exacerbate our portfolio delinquencies and could cause actual results to differ materially. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The operating and financial results for interim periods reported are not necessarily indicative of the results that may be expected for the full year.

     Notes Receivable and Income Recognition– The notes receivable portfolio consists primarily of secured real estate mortgage loans purchased from financial institutions and mortgage and finance companies. Such notes receivable were performing, non-performing or sub-performing at the time of purchase and were generally purchased at a discount from the principal balance remaining. Notes receivable are stated at the amount of unpaid principal, reduced by purchase discount and allowance for loan losses. The Company reviews its loan portfolios upon purchase of loan pools, at loan boarding, and on a frequent basis thereafter to determine an estimate of the allowance necessary to absorb probable loan losses in its portfolios. Management’s judgment in determining the adequacy of the allowance for loan losses is based on an evaluation of loans within its portfolios, the known and inherent risk characteristics and size of the portfolio, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience and other relevant factors. In connection with the determination of the allowance for loan losses, management obtains independent property valuations for the underlying collateral when considered necessary.

     In general, interest on the notes receivable is calculated based on contractual interest rates applied to daily balances of the principal amount outstanding using the accrual method. Accrual of interest on notes receivable, including impaired notes receivable, is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Except for certain loan modifications, subsequent recognition of income occurs only to the extent payment is received, subject to management’s assessment of the collectibility of the remaining interest and principal. Except for certain performing loans that are modified by a reduction in the interest rate, while all accrued and unpaid interest is reversed and in these cases, interest at the new modified interest rate is accrued, a nonaccrual note is restored to an accrual status when collectibility of interest and principal is expected to be fully recovered.

     Discounts on Acquired Loans– Effective January 1, 2005, as a result of the required adoption of SOP 03-3, the Company was required to change its accounting for loans acquired subsequent to December 31, 2004, which have evidence of deterioration of credit quality since origination and for

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which it is probable, at the time of our acquisition, that the Company will be unable to collect all contractually required payments. For these loans, the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated by us at the time of acquisition is not accreted into income (nonaccretable discount). The amount representing the excess of cash flows estimated by us at acquisition over the purchase price is accreted into purchase discount earned over the life of the loan (accretable discount). The nonaccretable discount is not accreted into income. If cash flows cannot be reasonably estimated for any loan, and collection is not probable, the cost recovery method of accounting may be used. Under the cost recovery method, any amounts received are applied against the recorded amount of the loan.

     Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount and timing of the cash flows related to the nonaccretable discount are reasonably estimable and collection is probable, the corresponding decrease in the nonaccretable discount is transferred to the accretable discount and is accreted into interest income over the remaining life of the loan on the interest method. If cash flow projections deteriorate subsequent to acquisition, the decline is accounted for through the allowance for loan losses.

     There is judgment involved in estimating the amount of the loan’s future cash flows. The amount and timing of actual cash flows could differ materially from management’s estimates, which could materially affect our financial condition and results of operations. Depending on the timing of an acquisition, the initial allocation of discount generally will be made primarily to nonaccretable discount until the Company has boarded all loans onto its servicing system; at that time, any cash flows expected to be collected over the purchase price will be transferred to accretable discount. Generally, the allocation will be finalized no later than ninety days from the date of purchase.

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     The following table sets forth certain information relating to the activity in the accretable and nonaccretable discounts, which are shown as a component of notes receivable principal on the balance sheet, in accordance with SOP 03-3 for the periods indicated:

	Three Months Ended September 30,
	2008			2007
Accretable Discount
Balance, beginning of period	$	25,504,408		$	17,248,794
New acquisitions		—			—
Accretion		(372,101	)		(742,925	)
Transfers from nonaccretable		—			9,448,913
Net reductions relating to loans sold		—			—
Net reductions relating to loans repurchased		—			—
Other		—			—
Balance, end of period	$	25,132,307		$	25,954,782
Nonaccretable Discount
Balance, beginning of period	$	99,636,258		$	117,887,304
New acquisitions		—			6,504,425
Transfers to accretable		—			(9,448,913	)
Net reductions relating to loans sold		—			—
Net reductions relating to loans repurchased		(102,423	)		(161,099	)
Net reduction relating to loans charged off		—			(17,579,853	)
Loans transferred to OREO, other		(226,672	)		(1,051,671	)
Balance, end of period	$	99,307,163		$	96,150,193

	Nine Months Ended September 30,
	2008			2007
Accretable Discount
Balance, beginning of period	$	26,507,403		$	12,842,755
New acquisitions		—			29,080
Accretion		(1,375,096	)		(2,273,623	)
Transfers from nonaccretable		—			15,915,964
Net reductions relating to loans sold		—			(558,022	)
Net reductions relating to loans repurchased		—			—
Other		—			(1,372	)
Balance, end of period	$	25,132,307		$	25,954,782
Nonaccretable Discount
Balance, beginning of period	$	102,141,880		$	60,531,503
New acquisitions		—			78,020,542
Transfers to accretable		—			(15,915,964	)
Net reductions relating to loans sold		—			(227,821	)
Net reductions relating to loans repurchased		(123,760	)		(654,713	)
Net reduction relating to loans charged off		(868,928	)		(21,570,331	)
Loans transferred to OREO, other		(1,842,029	)		(4,033,023	)
Balance, end of period	$	99,307,163		$	96,150,193

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     There were no loans acquired during the three and nine months ended September 30, 2008. The outstanding balance of notes receivable subject to SOP 03-3 at September 30, 2008 was $1.00 billion.

     Originated Loans Held for Sale– There were no loans held for sale at September 30, 2008 or December 31, 2007. The gain/loss on loans held for sale during the three and nine months ended September 30, 2007 was recorded as the difference between the carrying amount of the loan and the proceeds from sale on a loan-by-loan basis. The Company records a sale upon settlement and when the title transfers to the seller.

     Transfers of financial assets were accounted for as sales, when control over the assets had been surrendered. Control over transferred assets was deemed to be surrendered when (1) the assets had been isolated from the Company, (2) the transferee had the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company did not maintain effective control over the transferred assets through either (a) an agreement that entitled and obligated the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets.

     Gains or losses resulting from loan sales are recognized at the time of sale, based on the difference between the net sales proceeds and the carrying value of the loans sold.

     Originated Loans Held for Investment– In general, interest on originated loans held for investment is calculated based on contractual interest rates applied to daily balances of the principal amount outstanding using the accrual method. The Company accrues interest on secured real estate first mortgage loans originated by the Company up to a maximum of 209 days contractually delinquent with a recency payment in the last 179 days, and that are judged to be fully recoverable for both principal and accrued interest.

     The accrual of interest is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful, which can be less than 209 days contractually delinquent with a recency payment in the last 179 days. During the first quarter of 2008, the Company modified its estimate of the collectibility of accrued interest on certain fully secured loans that are in the foreclosure process. When interest accrual is discontinued, the unpaid accrued interest on certain loans in the foreclosure process is not reversed against interest income where the current estimate of the value of the underlying collateral exceeds 110% of the outstanding loan balance. As a result of this change, approximately $2.1 million of accrued and unpaid interest was not reversed out of interest income in the nine months ended September 30, 2008. For all other loans held for investment, all unpaid accrued interest is reversed against interest income when interest accrual is discontinued. The Company’s most recent experience is that it is collecting 80% or more of the delinquent interest when these loans in the foreclosure process are paid off or settled. Except for certain loan modifications, subsequent recognition of income occurs only to the extent payment is received, subject to management’s assessment of the collectibility of the remaining interest and principal. Except for certain performing loans that are modified by a reduction in the interest rate, while all accrued and unpaid interest is reversed and in these cases interest at the new modified interest rate is accrued, a nonaccrual note is restored to an accrual status when collectibility of interest and principal is expected to be fully recovered.

     Allowance for Loan Losses– The Company reviews its loan portfolios upon purchase of loan pools, at loan boarding, and on a frequent basis thereafter to determine an estimate of the allowance necessary to absorb probable loan losses in its portfolios. Management’s judgment in determining the adequacy of the allowance for loan losses is based on an evaluation of loans within its portfolios, the known and inherent risk characteristics and size of the portfolio, the assessment of current economic and

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real estate market conditions, estimates of the current value of underlying collateral, past delinquency experience, delinquency migration experience, loan loss experience and other relevant factors. In connection with the determination of the allowance for loan losses, management obtains independent property valuations for the underlying collateral when considered necessary. Management believes as of September 30, 2008, that the allowance for loan losses is adequate. The allowance for loan losses is a material estimate, which could change significantly in the near term. The table below summarizes the changes in the allowance for loan losses for the three and nine months ended September 30, 2008 and September 30, 2007.

	Three Months Ended September 30,
	2008			2007
Allowance for loan losses, beginning of period	$	462,369,168		$	48,134,560
Provision for loan losses		2,042,349			257,507,795
Loans transferred to OREO		(11,408,951	)		(1,747,628	)
Loans charged off		(21,119,116	)		(45,240,952	)
Other, net		151,068			23,467
Allowance for loan losses, end of period	$	432,034,518		$	258,677,242

	Nine Months Ended September 30,
	2008			2007
Allowance for loan losses, beginning of period	$	254,661,653		$	53,290,841
Provision for loan losses		269,629,524			262,216,229
Loans transferred to OREO		(18,122,066	)		(6,136,443	)
Loans charged off		(74,177,371	)		(50,478,842	)
Other, net		42,778			(214,543	)
Allowance for loan losses, end of period	$	432,034,518		$	258,677,242

     Write-downs for declines in the estimated net realizable value of OREO, including management’s estimate of further declines in housing values, resulted in a provision for loan losses of $8.5 million and $30.0 million during the three and nine months ended September 30, 2008, respectively, which are not included in the above table. During the nine months ended September 30, 2008, the write down included management’s estimate of continuing housing price declines and its impact on the estimated net realizable value of OREO. Write-downs for declines in the estimated net realizable value of OREO resulted in a provision for loan losses of $5.2 million and $9.9 million during the three and nine months ended September 30, 2007, respectively, which are not included in the above table.

     Stock-Based Compensation Plans– The Company maintains share-based payment arrangements under which employees are awarded grants of restricted stock, non-qualified stock options, incentive stock options and other forms of stock-based payment arrangements. Prior to January 1, 2006, the Company accounted for these awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as permitted under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, compensation cost for stock options was not recognized as long as the stock options granted had an exercise price equal to the market price of the Company’s common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) using the modified-prospective transition method. Under this transition method, compensation cost recognized beginning January 1, 2006 includes

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compensation cost for all share-based payment arrangements issued, but not yet vested as of December 31, 2005, based on the grant date fair value and expense attribution methodology determined in accordance with the original provisions of SFAS 123. Compensation cost for all share-based payment arrangements granted subsequent to December 31, 2005, is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). In addition, the effect of forfeitures on restricted stock (if any), is estimated when recognizing compensation cost.

     Prior to adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

     Stock Options– The Company awarded stock options to certain officers and directors under the Franklin Credit Management Corporation 1996 Stock Incentive Plan (the “Plan”) as amended. The Compensation Committee of the Board of Directors (the “Compensation Committee”) determines when eligible employees or directors will receive awards, the types of awards to be received, and the terms and conditions thereof.

     Options granted under the Plan may be designated as either incentive stock options or non-qualified stock options. The Compensation Committee determines the terms and conditions of the option, including the time or times at which an option may be exercised, the methods by which such exercise price may be paid, and the form of such payment. Options are generally granted with an exercise price equal to the market value of the Company’s stock at the date of grant. These option awards generally vest over 1 to 3 years and have a contractual term of 10 years.

     The Company estimated the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model. The table below presents the assumptions used to estimate the fair value of stock options granted on the date of grant using the Black-Scholes option-pricing model for the nine months ended September 30, 2008 and 2007. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company uses historical data to estimate stock option exercise. The expected term of stock options granted is derived from the output of the model and represents the period of time that stock options granted are expected to be outstanding. The estimates of fair value from these models are theoretical values for stock options and changes in the assumptions used in the models could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options are exercised.

	Incentive Stock Options						Non-Qualified Stock Options
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Risk-free interest rate		2.94	%		4.96	%		3.57	%		—
Weighted average volatility		103.06			95.15			102.23			—
Expected lives (years)		10.0			6.0			10.0			—

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     A summary of the status of the Company’s stock option awards as of September 30, 2008 and changes during the nine month period then ended is presented below:

						Weighted
						Average
				Weighted		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise		Term		Value
Balance, January 1, 2008		370,000		$	3.44	4.82 years		$	23,400
Granted		262,000			1.71	9.57 years
Forfeited		(50,000	)		2.05		—
Balance, September 30, 2008		582,000			2.78	6.53 years
Options unvested		250,000			1.75		—
Options exercisable at September 30, 2008		332,000		$	3.56	4.24 years		$	—

     There were 12,000 and 15,000 stock option awards granted to the board of directors that immediately vested during the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, 12,000 stock options granted to the board of directors were vested and the related compensation cost was fully recognized. The compensation cost recognized in income was $9,735 and $59,043 for the nine months ended September 30, 2008 and 2007, respectively. In April 2008, the Company issued to certain members of senior management 250,000 stock options that will vest over four years. The compensation cost recognized in income was $26,266 and $56,696 for the nine months ended September 30, 2008 and 2007, respectively.

     At September 30, 2008, the Company had 10,000 warrants outstanding at an exercise price of $5.00.

     •Restricted Stock– Restricted shares of the Company’s common stock have been awarded to certain executives. The stock awards are subject to restrictions on transferability and other restrictions, and step vest over a three year period.

     A summary of the status of the Company’s restricted stock awards as of September 30, 2008 and changes during the period then ended is presented below:

				Weighted Average
				Grant Date
	Shares			Fair Value
Non-vested balance, January 1, 2008		65,000		$	8.24
Vested		(22,500	)		9.00
Non-vested balance, September 30, 2008		42,500		$	7.83

     The compensation cost recognized in income for restricted stock was $182,146 and $195,439 for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, there was $305,375 of unrecognized compensation cost related to the Company’s restricted stock awards, which will be recognized over a period of 1.46 years.

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     Operating Segments– SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets. The Company has two reportable operating segments: (i) portfolio asset acquisition and resolution; and (ii) mortgage banking. The portfolio asset acquisition and resolution segment acquires performing, reperforming or nonperforming notes receivable and promissory notes from financial institutions and mortgage and finance companies, and services and collects such notes receivable through enforcement of terms of the original note, modification of original note terms and, if necessary, liquidation of the underlying collateral. The mortgage banking segment, until December 28, 2007, originated subprime residential mortgage loans from individuals whose credit histories, income and other factors cause them to be classified as subprime borrowers, and generally retained the loans for its portfolio. Since December 28, 2007, the mortgage banking segment consists principally of holding and servicing the portfolio of previously originated subprime residential mortgage loans, and commencing in the quarter ended September 30, 2008, all of the Company’s OREO.

     The Company’s management evaluates the performance of each segment based on profit or loss from operations before unusual and extraordinary items and income taxes.

	Three Months Ended September 30,
	2008			2007
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	18,731,260		$	30,841,271
Mortgage banking		5,387,975			10,722,275
Consolidated revenue	$	24,119,235		$	41,563,546
CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(5,436,402	)	$	(146,281,291	)
Mortgage banking		(12,521,047	)		(16,639,447	)
Consolidated net income	$	(17,957,449	)	$	(162,920,738	)
	Nine Months Ended September 30,
	2008			2007
CONSOLIDATED REVENUE:
Portfolio asset acquisition and resolution	$	67,066,218		$	97,967,676
Mortgage banking		23,146,075			33,269,120
Consolidated revenue	$	90,212,293		$	131,236,796
CONSOLIDATED NET INCOME:
Portfolio asset acquisition and resolution	$	(264,664,916	)	$	(149,913,862	)
Mortgage banking		(41,248,140	)		(18,543,865	)
Consolidated net income	$	(305,913,056	)	$	(168,457,727	)
	September 30, 2008			December 31, 2007
CONSOLIDATED ASSETS:
Portfolio asset acquisition and resolution	$	736,910,519		$	1,149,317,726
Mortgage banking		479,873,244			543,195,476
Consolidated assets	$	1,216,783,763		$	1,692,513,202

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     Recent Accounting Pronouncements– In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option for any of its existing financial instruments on the effective date and has not determined whether or not it will elect this option for any eligible financial instruments that may be acquired in the future.

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. While SFAS 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. The Company adopted SFAS 157 as of January 1, 2008, and the adoption did not have a material impact on the financial statements.

     On July 13, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns, which the Company adopted on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

     Based on our evaluation, we have concluded that there are no significant uncertain tax positions, requiring recognition in our financial statements. Our evaluation was performed for the tax years ended 2003 through 2007, which remain open to examination by major tax jurisdictions to which we are subject as of September 30, 2008.

     We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Should we receive an assessment for interest and/or penalties, it would be classified in the financial statements as collection, general and administrative expenses.

     Derivatives– As part of the Company’s interest-rate risk management process, we entered into interest rate cap agreements in 2006 and 2007, and interest rate swap agreements in the nine months ended September 30, 2008. In accordance with SFAS No. 133, “Accounting for Derivative Instruments

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and Hedging Activities,” as amended and interpreted, derivative financial instruments are reported on the consolidated balance sheets at their fair value.

     Interest rate caps are recorded at fair value. The interest rate caps are not designated as hedging instruments for accounting purpose, and unrealized changes in fair value are recognized in the period in which the changes occur and realized gains and losses are recognized in the period when such instruments are settled.

     Franklin’s management of interest-rate risk predominantly includes the use of plain-vanilla interest-rate swaps to convert a portion of its LIBOR-based variable-rate debt to fixed-rate debt, synthetically. In accordance with SFAS 133, derivative contracts hedging the risks associated with expected future cash flows are designated as cash flow hedges. The Company formally documents at the inception of its SFAS 133 hedges all relationships between hedging instruments and the related hedged items, as well as its interest risk management objectives and strategies for undertaking various accounting hedges. Additionally, we use regression analysis at the inception of the hedge and for each reporting period thereafter to assess the derivative’s hedge effectiveness in offsetting changes in the cash flows of the hedged items. The Company discontinues hedge accounting if it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in the fair value of the derivative in earnings. All of the Company’s interest-rate swaps qualify for cash flow hedge accounting, and are so designated.

     Effective April 30, 2008, the Company entered into $275 million (notional amount) of fixed-rate interest rate swaps in order to effectively stabilize the future interest payments on a portion of its interest-sensitive borrowings. The fixed-rate swaps are for a period of three years, are non-amortizing, and at a fixed rate of 3.47%. These swaps will reduce further the Company’s exposure to future increases in interest costs on a portion of its borrowings due to increases in one-month LIBOR during the remaining terms of the swap agreements.

     As of the end of the third quarter of 2008, the notional amount of the Company’s fixed-rate interest rate swaps totaled $1.00 billion, representing approximately 75% of the Company’s outstanding variable rate debt and the effective fixed/floating debt mix was approximately 77%/23%. The fixed-rate interest rate swaps are expected to reduce the Company’s exposure to future increases in interest costs on a portion of its borrowings due to increases in one-month LIBOR during the remaining terms of the swap agreements. All of our interest rate swaps were executed with the Company’s lead lending bank.

     Changes in the fair value of derivatives designated as cash flow hedges, in our case the swaps, are recorded in accumulated other comprehensive income (“AOCI”) within stockholders’ equity to the extent that the hedges are effective. Any hedge ineffectiveness is recorded in current period earnings. If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, or a forecasted transaction will not occur, related amounts in AOCI are reclassified into earnings in that period. During the three and nine months ended September 30, 2008, the net impact to interest expense of our existing cash flow hedges was an increase of $1.3 million and $1.8 million, respectively.

     The effects of interest-rate swaps on the Company’s financial statements at and for the nine months ended September 30, 2008 are as follows:

Swaps in Cash Flow	Amount Recognized	Ineffective Amount
Hedging	in OCI	Recognized in
Relationships	(Effective Portion)	Earnings
Interest rate contracts	$3,079,976	$—

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Fair Value Measurements

     SFAS 157 establishes a three-tier hierarchy for fair value measurements based upon the transparency of the inputs to the valuation of an asset or liability and expands the disclosures about instruments measured at fair value. A financial instrument is categorized in its entirety and its categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are described below.

• Level 1– Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2– Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset of liability, either directly or indirectly, for substantially the full term of the financial instrument. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

• Level 3– Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Fair values are initially valued based upon transaction price and are adjusted to reflect exit values as evidenced by financing and sale transactions with third parties.

     Fair values for over-the-counter interest rate contracts are provided either by third-party dealers in the contracts or by quotes provided by independent pricing services. The significant inputs, including the LIBOR curve and measures of volatility, used by these third-party dealers or independent pricing services to determine fair values are considered Level 2, observable market inputs.

     The fair values of derivative instruments on the Company’s financial statements at September 30, 2008 are as follows:

	Level 1		Level 2		Level 3
Interest rate swaps	$	—	$	3,079,976	$	—

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     Safe Harbor Statements.Statements contained herein that are not historical fact may be 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, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in forward-looking statements made by the Company. These factors include, but are not limited to: (i) unanticipated changes in the U.S. economy, including changes in business conditions such as interest rates, changes in the level of growth in the finance and housing markets, such as slower or negative home price appreciation; (ii) the Company’s relations with the Company’s lenders and such lenders’ willingness to waive any defaults under the Company’s agreements with such lenders; (iii) increases in the delinquency rates of the Company’s borrowers, (iv) the availability of third parties holding subprime mortgage debt for servicing by the Company on a fee-paying basis; (v) changes in the statutes or regulations applicable to the Company’s business or in the interpretation and enforcement thereof by the relevant authorities; (vi) the status of the Company’s regulatory compliance; and (vii) other risks detailed from time to time in the Company’s SEC reports and filings. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company’s filings with the Securities and Exchange Commission, including, but not limited to, those factors discussed under the captions “Risk Factors,” “Interest Rate Risk” and “Real Estate Risk” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which the Company urges investors to consider. The Company undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events, except as otherwise required by securities, and other applicable laws. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the results on any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Allowance for Loan Losses

     The substantial deterioration in the housing and subprime mortgage markets, the continued declines in housing values and the general lack of available mortgage credit especially for subprime borrowers, coupled with a weakening national economy, have continued to negatively impact the credit quality of the acquired and originated loans in the Company’s portfolios, including particularly the portfolio of acquired second-lien mortgage loans. As a result of increases in both early-stage and severe delinquencies and increased loss severities, the Company substantially increased its allowance for loan losses at June 30, 2008 and recorded a provision for loan losses of $280.5 million during the three months ended June 30, 2008. At September 30, 2008, approximately 48% of the Company’s second-lien portfolio of acquired loans was delinquent on a recency payment basis, and which approximately 37% of such acquired portfolio was in the most serious stages of nonpayment (such as foreclosure, bankruptcy and judgment), compared with approximately 32% at December 31, 2007, and approximately 17% which were in the most serious stages of nonpayment. At September 30, 2008, approximately 51% of the portfolio of originated Liberty Loans was delinquent on a recency payment basis, of which approximately 45% of such portfolio was in the most serious stages of nonpayment (such as foreclosure, bankruptcy and judgment), compared with approximately 45% at December 31, 2007, and approximately 42% which were in the most serious stages of nonpayment. The allowance for loan losses for all portfolios at September 30, 2008 aggregated $432.0 million, compared with $254.7 million at December 31, 2007.

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Until December 28, 2007, the Company was primarily engaged in the acquisition, servicing and resolution of performing, reperforming and nonperforming residential mortgage loans and real estate assets, and the origination of subprime mortgage loans, principally for its portfolios. As a result, the Company will continue to be exposed to the deteriorating conditions of the housing and subprime mortgage markets noted above, and depending on those market conditions, the Company may experience increased delinquencies and defaults on its portfolios that could result in possible additional and significant future losses.

Application of Critical Accounting Policies and Estimates

     The Company’s significant accounting policies are described in Note 2 to the December 31, 2007 consolidated financial statements filed on Form 10-K. We have identified notes receivable and income recognition, discounts on acquired loans, allowance for loan losses, originated loans held for sale, originated loans held for investment, other real estate owned (“OREO”), and income taxes as the Company’s most critical accounting policies and estimates. The following discussion and analysis of financial condition and results of operations is based on the amounts reported in our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. In preparing the consolidated financial statements, management is required to make various judgments, estimates and assumptions that affect the financial statements and disclosures. Changes in these estimates and assumptions could have a material effect on our consolidated financial statements. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time.

Portfolio Characteristics

Overall Portfolio

     At September 30, 2008, our portfolio (excluding OREO) consisted of $1.22 billion of notes receivable (inclusive of purchase discount not reflected on the face of the balance sheet) and $411.9 million of loans held for investment. Our total loan portfolio declined 15% to $1.63 billion as of September 30, 2008, from $1.92 billion at December 31, 2007, as the Company did not acquire or originate mortgage loans during the first nine months of 2008. The following table sets forth information regarding the types of properties securing our loans.

			Percentage of Total
Property Types	Principal Balance		Principal Balance
Residential 1-4 family	$	1,360,719,295		83.34	%
Condos, co-ops, PUD dwellings		207,997,433		12.74	%
Manufactured and mobile homes		15,674,206		0.96	%
Multi-family		485,410		0.03	%
Secured, property type unknown(1)		20,404,652		1.25	%
Commercial		1,902,564		0.12	%
Unsecured loans(2)		25,349,343		1.55	%
Other		109,604		0.01	%
Total	$	1,632,642,507		100.00	%

(1)	The loans included in this category are principally small balance (less than $10,000) second-lien loans acquired, and are collateralized by residential real estate.
(2)	The loans included in this category are principally second-lien loans where the residential real estate collateral has been foreclosed by the first-lien holder.

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     Geographic Dispersion.The following table sets forth information regarding the geographic location of properties securing the loans in our portfolio at September 30, 2008:

			Percentage of Total
Location	Principal Balance		Principal Balance
California	$	239,539,893		14.67	%
New York		179,055,475		10.97	%
New Jersey		151,069,427		9.25	%
Florida		146,099,950		8.95	%
Pennsylvania		74,971,756		4.59	%
Texas		73,921,074		4.53	%
Ohio		54,414,229		3.33	%
Illinois		52,892,744		3.24	%
Maryland		52,464,934		3.22	%
Michigan		47,679,320		2.92	%
All Others		560,533,705		34.33	%
Total	$	1,632,642,507		100.00	%

     Amounts included in the tables above under the heading “Principal Balance” represent the aggregate unpaid principal balance outstanding of notes receivable and loans held for investment.

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Asset Quality

     Delinquency.Because we specialized in acquiring and servicing loans with erratic payment patterns and an elevated level of credit risk, a portion of the loans we have acquired were in various stages of delinquency, foreclosure and bankruptcy when we acquired them. We monitor the payment status of our borrowers based on both contractual delinquency and recency delinquency. By contractual delinquency, we mean the delinquency of payments relative to the contractual obligations of the borrower. By recency delinquency, we mean the recency of the most recent full monthly payment received from the borrower. By way of illustration, on a recency delinquency basis, if the borrower has made the most recent full monthly payment within the past 30 days, the loan is shown as current regardless of the number of contractually delinquent payments. In contrast, on a contractual delinquency basis, if the borrower has made the most recent full monthly payment, but has missed an earlier payment or payments, the loan is shown as contractually delinquent. We classify a loan as in foreclosure when we determine that the best course of action to maximize recovery of unpaid principal balance is to begin the foreclosure process. We classify a loan as in bankruptcy when we receive notice of a bankruptcy filing from the bankruptcy court. We classify a previously delinquent or performing loan as modified when we have restructured the loan due to the borrowers deteriorated financial situation, and, as a condition to the closing of the modification, received at least one full monthly payment at the time of the closing of the modification. Modified loans are classified as current on both a contractual and recency basis at the time of the modification. As of September 30, 2008 principally all of the modified loans consisted of the deferral of the past due and uncollected interest or a reduction in the interest rate. Interest rate reduction modifications generally are for a period of one year, and for rate reduction modifications of delinquent loans, also incorporate a deferral of the past due and uncollected interest.

     During the past several months, due to the continued decline in housing prices nationally, the deterioration in mortgage markets and the increased delinquency performance of the acquired and originated loans in the Company’s portfolios, including particularly the portfolio of acquired second-lien mortgage loans, we significantly added to our servicing staff and intensified our efforts to work with borrowers to modify their loans, and have recently begun to more quickly identify those borrowers who are likely to move into seriously delinquent status and are attempting to promptly apply appropriate loss mitigation and deficiency strategies to encourage positive payment performance. In addition, we segregated our deficiency unit into a separate department headed by a senior manager and reporting directly to the President of the Company. The Company’s deficiency department primarily utilizes the filing of a judgment action in order to seek some recovery from seriously delinquent borrowers, principally defaulted borrowers of second-lien mortgage loans.

     During the third quarter of 2008, we completed approximately $162.0 million of loan modifications, including approximately $65.3 million of interest rate reduction modifications. As of September 30, 2008, total loan modifications amounted to $276.0 million, which included approximately $65.3 million of interest rate reductions. The average interest rate reduction on the $65.3 million of rate modified loans was approximately 4.91% at September 30, 2008, from approximately 11.53% to an average of 6.62%. These interest rate modifications will reduce interest income by as much as approximately $3.0 million on an annualized basis. Approximately 85% of all loan modifications as of September 30, 2008 were performing loans that were delinquent on a contractual basis less than 90 days at the time of modification, including approximately 58% that were in a current status on a contractual basis and granted modifications based on our evaluation of the borrowers deteriorated financial situation. At December 31, 2007 and September 30, 2007, loan modifications totaled $10.5 million and $12.6 million, respectively.

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     The following tables provide a breakdown of the delinquency status of our notes receivable, loans held for investment and loans held for sale portfolios as of the dates indicated, by principal balance.

		September 30, 2008
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	512,646,413		31.40	%	$	581,847,496		35.64	%
Delinquent	31 – 60 days		49,585,457		3.04	%		35,140,081		2.15	%
	61 – 90 days		5,146,400		0.31	%		24,242,795		1.48	%
	90+ days		155,106,917		9.50	%		81,254,815		4.98	%
Modified Loans	0 – 30 days		187,270,400		11.47	%		219,059,007		13.42	%
Delinquent	31 – 60 days		38,965,710		2.39	%		22,208,670		1.36	%
	61 – 90 days		1,297,552		0.08	%		14,846,238		0.91	%
	90+ days		48,473,706		2.97	%		19,893,453		1.22	%
Bankruptcy	0 – 30 days		25,085,074		1.53	%		71,807,705		4.40	%
Delinquent	31 – 60 days		6,538,642		0.40	%		6,906,295		0.42	%
	61 – 90 days		1,979,875		0.12	%		5,684,040		0.35	%
	90+ days		119,949,707		7.35	%		69,155,258		4.23	%
Foreclosure	0 – 30 days		6,322,187		0.39	%		24,999,493		1.53	%
Delinquent	31 – 60 days		871,576		0.05	%		6,101,502		0.37	%
	61 – 90 days		238,783		0.02	%		4,318,266		0.27	%
	90+ days		473,164,108		28.98	%		445,177,393		27.27	%
	Total	$	1,632,642,507		100.00	%	$	1,632,642,507		100.00	%
Total loans	0 – 30 days	$	731,324,074		44.79	%	$	897,713,701		54.99	%

     Included in the foreclosure category are approximately $186.4 million of loans for which the Company has proceeded to file a judgment action against the borrower on the note personally instead of seeking to foreclose on the related collateral, of which approximately $180.2 million are second-lien loans, and approximately $9.7 million of loans for which judgments have been obtained, of which approximately $8.7 million are second-lien loans.

     Included in the above table are second-lien mortgage loans in our notes receivable portfolio in the amount of $807.9 million, of which $371.2 million and $419.7 million were current on a contractual and recency basis, respectively. The legal status composition of the second-lien mortgage loans at September 30, 2008 was: $442.6 million, or 55%, are performing; $62.7 million, or 8%, are modified due to delinquency or the borrower’s financial difficulty; $69.2 million, or 9%, are in bankruptcy; and, $233.4 million, or 29%, are in foreclosure (including $188.9 million where a judgment action has been filed against the borrower on the note personally or where judgments have been obtained). At September 30, 2008, $15.0 million of the modified loans was delinquent on a contractual basis, while $11.0 million of the modified loans was delinquent on a recency basis.

     During 2007, particularly during the second half of the year, and continuing in the first nine months of 2008, due to declining housing prices in general and a rapid and severe credit tightening throughout the mortgage industry, particularly for subprime borrowers, total portfolio payoffs through

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borrower refinancing have declined significantly as it became more difficult for borrowers with any type of credit deficiency to refinance their loans. Total portfolio payoffs declined approximately 59% in the nine months ended September 30, 2008 from the same nine month period in 2007. In addition, due principally to the increase in delinquent loans in the Company’s portfolio, which at September 30, 2008 comprised approximately 45% of the total portfolio, total portfolio principal collections, excluding loan payoffs, declined by approximately 30% during the nine months ended September 30, 2008 compared with the same nine month period in 2007, and approximately 19% during the current three months compared with the same three month period in 2007.

		December 31, 2007
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	951,861,876		49.48	%	$	1,110,650,415		57.73	%
Delinquent	31 – 60 days		123,519,019		6.42	%		95,368,280		4.96	%
	61 – 90 days		8,853,424		0.46	%		34,790,945		1.81	%
	90+ days		285,242,612		14.83	%		128,667,291		6.69	%
Modified Loans	0 – 30 days		7,982,183		0.41	%		10,146,896		0.52	%
Delinquent	31 – 60 days		1,694,772		0.09	%		393,498		0.02	%
	61 – 90 days		77,350		0.00	%		—		—
	90+ days		794,889		0.04	%		8,800		0.00	%
Bankruptcy	0 – 30 days		29,384,478		1.53	%		87,622,292		4.55	%
Delinquent	31 – 60 days		6,383,420		0.33	%		7,556,925		0.39	%
	61 – 90 days		2,556,033		0.13	%		3,995,884		0.21	%
	90+ days		114,241,573		5.94	%		53,390,403		2.78	%
Foreclosure	0 – 30 days		1,991,903		0.10	%		32,997,880		1.71	%
Delinquent	31 – 60 days		3,597,615		0.19	%		11,465,656		0.60	%
	61 – 90 days		374,471		0.02	%		10,356,000		0.54	%
	90+ days		385,324,958		20.03	%		336,469,411		17.49	%
	Total	$	1,923,880,576		100.00	%	$	1,923,880,576		100.00	%
Total loans	0 – 30 days	$	991,220,440		51.52	%	$	1,241,417,483		64.53	%

     Included in the foreclosure category are approximately $39.0 million of loans for which the Company has proceeded to file a judgment action against the borrower on the note personally instead of seeking to foreclose on the related collateral, of which approximately $35.7 million are second-lien loans, and approximately $19.4 million of loans for which judgments have been obtained, of which approximately $18.2 million are second-lien loans.

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		September 30, 2007
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	1,092,646,191		55.50	%	$	1,250,927,577		63.55	%
Delinquent	31 – 60 days		123,976,227		6.30	%		75,308,691		3.82	%
	61 – 90 days		10,207,069		0.52	%		31,061,780		1.58	%
	90+ days		212,203,034		10.78	%		81,734,473		4.15	%
Modified Loans	0 – 30 days		7,834,137		0.40	%		9,567,237		0.49	%
Delinquent	31 – 60 days		968,230		0.05	%		756,551		0.04	%
	61 – 90 days		231,602		0.01	%		197,202		0.01	%
	90+ days		1,568,083		0.08	%		81,062		0.00	%
Bankruptcy	0 – 30 days		30,749,328		1.56	%		88,300,973		4.49	%
Delinquent	31 – 60 days		7,626,350		0.39	%		9,383,435		0.48	%
	61 – 90 days		2,693,854		0.14	%		3,595,828		0.18	%
	90+ days		106,736,276		5.42	%		46,525,572		2.36	%
Foreclosure	0 – 30 days		779,147		0.04	%		32,380,044		1.64	%
Delinquent	31 – 60 days		4,619,690		0.23	%		16,766,930		0.85	%
	61 – 90 days		1,187,643		0.06	%		18,614,531		0.95	%
	90+ days		364,488,152		18.52	%		303,313,127		15.41	%
	Total	$	1,968,515,013		100.00	%	$	1,968,515,013		100.00	%
Total loans	0 – 30 days	$	1,132,008,803		57.51	%	$	1,381,175,831		70.16	%

     Included in the foreclosure category are approximately $38.4 million of loans for which the Company has proceeded to file a judgment action against the borrower on the note personally instead of seeking to foreclose on the related collateral, of which approximately $35.2 million are second-lien loans, and approximately $14.8 million of loans for which judgments have been obtained, of which approximately $13.8 million are second-lien loans.

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Notes Receivable Portfolio

     At September 30, 2008, our notes receivable portfolio included approximately 24,405 loans with an aggregate unpaid principal balance (“UPB”) of $1.22 billion and a net UPB of $702.2 million (after allowance for loan losses of $394.0 million), compared with approximately 28,865 loans with an aggregate UPB of $1.42 billion and a net UPB of $1.06 billion (after allowance for loan losses of $230.8 million) as of December 31, 2007. Impaired loans comprise and will continue to comprise a significant portion of our portfolio. Many of the loans we acquired were impaired loans at the time of purchase. We generally purchased such loans at discounts and have considered the payment status, underlying collateral value and expected cash flows when determining our purchase price. While interest income generally is not accrued on impaired loans, interest and fees are received on a portion of loans classified as impaired. The following table provides a breakdown of the notes receivable portfolio by performing and impaired loans:

	September 30, 2008		December 31, 2007
Performing loans	$	615,793,474	$	1,087,987,060
Allowance for loan losses		117,120,054		129,967,195
Nonaccretable discount*		24,005,390		61,590,526
Total performing loans, net of allowance for loan losses and nonaccretable discount		474,668,030		896,429,339
Impaired loans		604,910,856		330,212,508
Allowance for loan losses		276,922,899		100,842,743
Nonaccretable discount*		75,301,773		40,551,354
Total impaired loans, net of allowance for loan losses and nonaccretable discount		252,686,184		188,818,411
Total notes receivable, net of allowance for loan losses and nonaccretable discount		727,354,214		1,085,247,750
Accretable discount*		25,132,307		26,507,403
Total Notes Receivable, net of allowance for loan losses and accretable/nonaccretable discount	$	702,221,907	$	1,058,740,347

* Represents purchase discount not reflected on the face of the balance sheet in accordance with SOP 03-3 for loans acquired after December 31, 2004. Accretable Discount is the excess of the loan’s estimated cash flows over the purchase prices, which is accreted into income over the life of the loan. Nonaccretable Discount is the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated at the time of acquisition.

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     The following table provides a breakdown of the balance of our portfolio of notes receivable between fixed-rate and adjustable-rate loans, net of allowance for loan losses as of September 30, 2008 and December 31, 2007, respectively.

	September 30, 2008		December 31, 2007
Performing Loans:
Fixed rate	$	411,900,685	$	765,622,654
Adjustable rate		86,772,734		192,397,211
Total Performing Loans	$	498,673,419	$	958,019,865
Impaired Loans:
Fixed rate	$	206,880,105	$	143,666,475
Adjustable rate		121,107,853		85,703,290
Total Impaired Loans	$	327,987,958	$	229,369,765
Total Notes	$	826,661,377	$	1,187,389,630
Accretable discount	$	25,132,307	$	26,507,403
Nonaccretable discount	$	99,307,163	$	102,141,880
Total Notes Receivable, net of allowance for loan losses	$	702,221,907	$	1,058,740,347

     Impaired loans comprise and will continue to comprise a significant portion of our portfolio. Many of the loans we acquired were impaired loans at the time of purchase. We generally purchased such loans at discounts and considered the payment status, underlying collateral value and expected cash flows when determining our purchase price. While interest income generally is not accrued on impaired loans, interest and fees are received on a portion of loans classified as impaired.

     Lien Position.The following table sets forth information regarding the lien position of the properties securing our portfolio of notes receivable at September 30, 2008 and December 31, 2007:

	September 30, 2008					December 31, 2007
			Percentage of Total					Percentage of Total
Lien Position	Principal Balance		Principal Balance			Principal Balance		Principal Balance
1st Liens	$	412,763,010		33.81	%	$	497,433,756		35.08	%
2nd Liens		807,941,320		66.19	%		920,765,812		64.92	%
Total	$	1,220,704,330		100.00	%	$	1,418,199,568		100.00	%

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Loan Acquisitions

     We purchased approximately $35.2 million in assets (principally residential single-family first and second-lien loans) during the three months ended September 30, 2007, and $492.8 million of loans during the nine months ended September 30, 2007. Approximately 59% and 46% of the loans purchased in the three and nine months ended September 30, 2007, respectively, were secured by first liens. We did not purchase any loans in the three and nine months ended September 30, 2008. The following table sets forth the amounts and purchase prices of our mortgage loan acquisitions during the three and nine months ended September 30, 2007:

	Three Months Ended			Nine Months Ended
	September 30, 2007			September 30, 2007
Number of loans		351			6,341
Aggregate unpaid principal balance at acquisition	$	35,198,391		$	492,828,610
Purchase price	$	28,693,946		$	414,826,661
Purchase price percentage		82	%		84	%
Percentage of 1st liens		59	%		46	%
Percentage of 2nd liens		41	%		54	%

     During the three and nine months ended September 30, 2007, we put back $2.2 million and $14.8 million of loans, respectively, principally to one seller, which were purchased in late 2006, and recovered the total amount paid at the time of purchase.

Notes Receivable Dispositions

     In the ordinary course of our loan servicing process and through the periodic review of our portfolio of purchased loans, there are certain loans that, for various reasons, we determine to sell. We typically sell these loans on a whole-loan, servicing-released basis, for cash. The following table sets forth our dispositions of previously purchased loans during the three and nine months ended September 30, 2007. There were no sales of non-performing loans during the three and nine months ended September 30, 2007. There were no sales of previously purchased loans during the three and nine months ended September 30, 2008.

	Three Months Ended		Nine Months Ended
	September 30, 2007		September 30, 2007
Sale of Performing Loans
Aggregate unpaid principal balance	$	—	$	22,255,982
Gain on sale	$	—	$	31,118

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Tribeca’s Loan Originations

     The following table sets forth Tribeca’s loan originations, as well as dispositions, during the three and nine months ended September 30, 2007. There were no Tribeca loans originated or sold during the three and nine months ended September 30, 2008.

	Three Months Ended			Nine Months Ended
	September 30, 2007			September 30, 2007
Number of loans originated		313			1,164
Original principal balance(1)	$	71,983,001		$	281,846,372
Average loan amount	$	229,978		$	242,136
Originated as fixed	$	1,839,300		$	31,304,840
Originated as ARM(2)	$	70,143,701		$	250,541,532
Number of loans sold		28			147
Aggregate face value(3)	$	5,659,452		$	36,927,474
(Loss) on sale(4,5)	$	(590,243	)	$	(389,510	)
(Loss) on sale percentage		(10.43	)%		(1.05	)%

(1)	In the three and nine months ended September 30, 2007, we originated $230,000 and $22.4 million, respectively, of “Alt-A” loans.
(2)	Originated ARM loans are principally fixed-rate for the first two years and six-month adjustable-rate for the remaining term.
(3)	Net of loans repurchased during the period; aggregate face amount of loans sold was $8.0 million and $45.2 million, respectively, for the three and nine months ended September 30, 2007.
(4)	Included in loss on sale for the three months ended September 30, 2007 are: net gain of $78,000 on the sale of Liberty and other loans originated for sale; a negative mark-to-market valuation of $596,000 on “Alt-A” loans held for sale; a net loss of $58,000 on sales of “Alt-A” loans; and, a net loss of $14,000 from repurchased loans.
(5)	Included in loss on sale for the nine months ended September 30, 2007 are: net gain of $469,000 on the sale of Liberty and other loans originated for sale; a negative mark-to-market valuation of $746,000 on “Alt-A” loans held for sale; a net loss of $167,000 on sales of “Alt-A” loans; and, a net recovery of $54,000 for previously established early payment default reserves for Liberty Loans sold in 2006.

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     Property Types of Originated Loans Held for Investment.At September 30, 2008, Tribeca’s portfolio consisted of 1,795 loans with an aggregate unpaid principal balance of $411.9 million of previously originated loans that are held for investment. Tribeca’s portfolio of loans held for investment declined by $93.7 million, or 19%, as of September 30, 2008, from $505.7 million at December 31, 2007. The following table sets forth information regarding the types of properties securing Tribeca’s portfolio of loans held for investment.

	Loans Held for Investment
	at September 30, 2008
			Percentage of Total
Property Types	Principal Balance		Principal Balance
Residential 1-4 family	$	383,988,376		93.22	%
Condos, co-ops, PUD dwellings		26,465,308		6.42	%
Commercial		1,217,284		0.30	%
Other		267,209		0.06	%
Total	$	411,938,177		100.00	%

     Geographic Dispersion of Originated Loans Held for Investment.The following table sets forth information regarding the geographic location of properties securing all loans held for investment at September 30, 2008:

	Loans Held for Investment
	at September 30, 2008
	Principal		Percentage of Total
Location	Balance		Principal Balance
New York	$	128,329,415		31.15	%
New Jersey		114,241,956		27.73	%
Pennsylvania		40,231,377		9.77	%
Florida		22,956,952		5.57	%
Maryland		19,659,581		4.77	%
Massachusetts		17,753,307		4.31	%
Connecticut		15,396,808		3.74	%
Virginia		13,908,384		3.38	%
California		9,500,408		2.31	%
Georgia		4,592,645		1.11	%
All Others		25,367,344		6.16	%
Total	$	411,938,177		100.00	%

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     Delinquency.Because we specialized in originating residential mortgage loans for individuals with credit histories, income and/or factors that caused them to be classified as subprime borrowers, a substantially greater portion of the loans we originated experience varying degrees of delinquency, foreclosure and bankruptcy than those of prime lenders. We monitor the payment status of our borrowers based on both contractual delinquency and recency delinquency. By contractual delinquency, we mean the delinquency of payments relative to the contractual obligations of the borrower. By recency delinquency, we mean the recency of the most recent full monthly payment received from the borrower. By way of illustration, on a recency delinquency basis, if the borrower has made the most recent full monthly payment within the past 30 days, the loan is shown as current regardless of the number of contractually delinquent payments. In contrast, on a contractual delinquency basis, if the borrower has made the most recent full monthly payment, but has missed an earlier payment or payments, the loan is shown as contractually delinquent. We classify a loan as in foreclosure when we determine that the best course of action to maximize recovery of unpaid principal balance is to begin the foreclosure process. We classify a loan as in bankruptcy when we receive notice of a bankruptcy filing from the bankruptcy court. We classify a previously delinquent or performing loan as modified when we have restructured the loan due to the borrowers deteriorated financial situation, and, as a condition to the closing of the modification, received at least one full monthly payment at the time of the closing of the modification. Modified loans are classified as current on both a contractual and recency basis at the time of the modification. As of September 30, 2008 principally all of the modified loans consisted of the deferral of the past due and uncollected interest or a reduction in the interest rate. Interest rate reduction modifications generally are for a period of one year, and for the rate reduction modifications of delinquent loans, also incorporate a deferral of the past due and uncollected interest.

     During the past several months, due to the continued decline in housing prices nationally, the deterioration in mortgage markets and the increased delinquency performance of the originated loans in the Company’s portfolios, we have recently begun to more quickly identify those borrowers who are likely to move into seriously delinquent status and are attempting to promptly apply appropriate loss mitigation strategies to encourage positive payment performance. We have been aggressively strengthening our servicing staff and intensifying our efforts to work with borrowers to modify their loans.

     During the third quarter of 2008, we completed approximately $80.4 million of loan modifications, including approximately $20.2 million of interest rate reduction modifications. As of September 30, 2008, loan modifications totaled approximately $126.0 million, which included approximately $20.2 million of interest rate reductions. The average interest rate reduction on the $20.2 million of rate modified loans was approximately 4.63% at September 30, 2008, from an average of approximately 11.63% to an average of 7.00%. Approximately 82% of the modifications as of September 30, 2008 were performing loans that were delinquent on a contractual basis less than 90 days at the time of modification, including approximately 49% that were in a current status on a contractual basis and granted modifications based on our evaluation of the borrowers deteriorated financial situation. At December 31, 2007 and September 30, 2007, loan modifications were less than $1.0 million.

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     The following tables provide a breakdown of the delinquency status of our loans held for investment and loans held for sale portfolios as of the dates indicated, by principal balance.

		September 30, 2008
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	69,628,789		16.90	%	$	85,195,715		20.68	%
Delinquent	31 – 60 days		10,310,026		2.51	%		6,199,174		1.51	%
	61 – 90 days		—		—			3,373,423		0.82	%
	90+ days		19,905,859		4.83	%		5,076,362		1.23	%
Modified Loans	0 – 30 days		81,484,191		19.78	%		97,320,031		23.63	%
Delinquent	31 – 60 days		20,218,103		4.91	%		10,009,923		2.43	%
	61 – 90 days		218,395		0.05	%		7,801,707		1.89	%
	90+ days		24,035,269		5.84	%		10,824,297		2.63	%
Bankruptcy	0 – 30 days		162,044		0.04	%		10,731,517		2.60	%
Delinquent	31 – 60 days		183,670		0.04	%		1,528,229		0.37	%
	61 – 90 days		—		—			1,969,778		0.48	%
	90+ days		33,909,800		8.23	%		20,025,990		4.86	%
Foreclosure*	0 – 30 days		2,477,420		0.60	%		9,945,618		2.41	%
Delinquent	31 – 60 days		279,990		0.07	%		3,344,295		0.81	%
	61 – 90 days		—		—			1,474,609		0.36	%
	90+ days		149,124,621		36.20	%		137,117,509		33.29	%
	Total	$	411,938,177		100.00	%	$	411,938,177		100.00	%
Total loans	0 – 30 days	$	153,752,445		37.32	%	$	203,192,881		49.33	%

* $151.9 million of loans were in various stages of the foreclosure process; our servicing practice for this portfolio is to move loans into our foreclosure collection process at an early stage of delinquency.

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		December 31, 2007
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	200,705,800		39.69	%	$	248,559,560		49.15	%
Delinquent	31 – 60 days		44,601,018		8.82	%		31,105,569		6.15	%
	61 – 90 days		1,065,746		0.21	%		4,859,698		0.96	%
	90+ days		44,465,074		8.79	%		6,312,811		1.25	%
Modified Loans	0 – 30 days		158,960		0.03	%		283,721		0.06	%
Delinquent	31 – 60 days		124,761		0.03	%		—		—
	61 – 90 days		—		—			—		—
	90+ days		—		—			—		—
Bankruptcy	0 – 30 days		166,127		0.03	%		9,925,751		1.96	%
Delinquent	31 – 60 days		120,973		0.03	%		1,260,665		0.25	%
	61 – 90 days		—		—			278,405		0.06	%
	90+ days		32,572,842		6.44	%		21,395,121		4.23	%
Foreclosure*	0 – 30 days		1,336,973		0.26	%		21,252,751		4.20	%
Delinquent	31 – 60 days		2,774,853		0.55	%		6,860,658		1.36	%
	61 – 90 days		190,867		0.04	%		7,353,839		1.45	%
	90+ days		177,397,014		35.08	%		146,232,459		28.92	%
	Total	$	505,681,008		100.00	%	$	505,681,008		100.00	%
Total loans	0 – 30 days	$	202,367,860		40.02	%	$	280,021,783		55.38	%

* $181.7 million of loans were in various stages of the foreclosure process; our servicing practice for this portfolio is to move loans into our foreclosure collection process at an early stage of delinquency.

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		September 30, 2007
		Contractual Delinquency					Recency Delinquency
	Days Past Due	Amount		%			Amount		%
Performing – Current	0 – 30 days	$	257,470,124		48.48	%	$	303,867,475		57.22	%
Delinquent	31 – 60 days		44,359,200		8.35	%		28,422,959		5.35	%
	61 – 90 days		1,202,479		0.23	%		15,299,979		2.88	%
	90+ days		56,822,561		10.70	%		12,263,951		2.31	%
Modified Loans	0 – 30 days		159,279		0.03	%		159,279		0.03	%
Delinquent	31 – 60 days		124,944		0.02	%		124,944		0.02	%
	61 – 90 days		—		—			—		—
	90+ days		—		—			—		—
Bankruptcy	0 – 30 days		234,805		0.05	%		5,820,359		1.10	%
Delinquent	31 – 60 days		55,169		0.01	%		691,759		0.13	%
	61 – 90 days		—		—			1,414,940		0.27	%
	90+ days		26,412,185		4.97	%		18,775,101		3.53	%
Foreclosure*	0 – 30 days		415,975		0.08	%		15,519,903		2.92	%
Delinquent	31 – 60 days		1,319,025		0.25	%		5,361,888		1.01	%
	61 – 90 days		696,816		0.13	%		7,112,284		1.34	%
	90+ days		141,803,415		26.70	%		116,241,156		21.89	%
	Total	$	531,075,977		100.00	%	$	531,075,977		100.00	%
Total loans	0 – 30 days	$	258,280,183		48.63	%	$	325,367,016		61.27	%

* $144.2 million of loans were in various stages of the foreclosure process; our servicing practice for this portfolio is to move loans into our foreclosure collection process at an early stage of delinquency.

     During 2007 and during the first nine months of 2008, our loans held for investment, principally Liberty Loans, became more seasoned and, as generally anticipated, a significant portion of our Liberty Loans were in the foreclosure process. At September 30, 2008, $149.6 million of Liberty Loans, or 36%, of the portfolio of loans held for investment were in our foreclosure process, compared with $180.8 million, or 36%, at December 31, 2007 and $143.0 million, or 27%, at September 30, 2007. The reduction in Liberty Loans in the foreclosure process was the result of our recent efforts to modify loans in the foreclosure process as a viable alternative to foreclosure. Our historical experience with Liberty Loans is that a percentage of the loans in the foreclosure process pay off in full, and our recent historical experience is that such payoffs have included 80% or more of all unpaid interest due on the loans being repaid at the time of payoff, prior to actual foreclosure sale. However, during 2007, particularly during the second half of the year, and continuing in the first nine months of 2008, due to declining housing prices in general and a rapid and severe credit tightening throughout the mortgage industry, particularly for subprime borrowers, total portfolio payoffs through borrower refinancing have declined significantly as it became more difficult for borrowers with any type of credit deficiency to refinance their loans. Portfolio payoffs declined approximately 21% in the quarter ended September 30, 2008 from the quarter

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ended June 30, 2008, and approximately 14% in the quarter ended June 30, 2008 from the quarter ended March 31, 2008.

Loans Held for Investment

     At September 30, 2008, our portfolio of loans held for investment included approximately 1,795 loans with an aggregate unpaid principal balance (“UPB”) of $411.9 million and a net UPB of $370.3 million (after allowance for loan losses of $38.0 million), compared with approximately 2,214 loans with an aggregate UPB of $505.7 million and a net UPB of $477.7 million (after allowance for loan losses of $23.9 million) as of December 31, 2007. Impaired loans comprise and will continue to comprise a significant portion of our portfolio because we specialized in originating residential mortgage loans for individuals with credit histories, income and/or factors that caused them to be classified as subprime borrowers. The following table provides a breakdown of the portfolio of loans held for investment by performing and impaired loans:

	September 30, 2008		December 31, 2007
Performing loans	$	188,393,829	$	308,677,771
Allowance for loan losses		9,092,233		13,140,989
Net deferred fees and costs		1,700,616		2,815,205
Total performing loans, net of allowance for loan losses and net deferred fees and costs		177,600,980		292,721,577
Impaired loans		223,544,349		197,003,236
Allowance for loan losses		28,899,332		10,710,725
Net deferred fees and costs		1,954,735		1,309,944
Total impaired loans, net of allowance for loan losses and net deferred fees and costs		192,690,282		184,982,567
Total loans held for investment, net of allowance for loan losses net deferred fees and costs	$	370,291,262	$	477,704,144

Other Real Estate Owned

     The following table sets forth our real estate owned, or OREO portfolio, and OREO sales during the three and nine months ended September 30, 2008 and September 30, 2007:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Other real estate owned	$	72,105,644		$	41,410,637		$	72,105,644		$	41,410,637
OREO as a percentage of total assets		5.93	%		2.25	%		5.93	%		2.25	%
OREO sold	$	11,762,540		$	6,717,392		$	28,413,387		$	22,644,877
Gain on sale	$	743,653		$	390,653		$	1,126,360		$	629,460

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Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

     Overview.The Company had a net loss of $18.0 million for the third quarter of 2008, compared with a net loss of $162.9 million for the third quarter of 2007. The continued and substantial deterioration in the housing and subprime mortgage markets, including the general lack of available mortgage credit for subprime borrowers, coupled with a weakening national economy, has continued to cause both greater early stage and severe delinquencies of the acquired and originated loans in the Company’s portfolios, including particularly the portfolio of acquired second-lien mortgage loans. The resulting significant increase in the amount of loans on nonaccrual status and interest reversals for nonaccrual loans, coupled with a declining balance of the Company’s loan portfolios, continued to negatively impact our operations and net loss. In addition, a provision for additional value declines on the Company’s growing portfolio of owned real estate, which increased to $72.1 million at September 30, 2008 from $58.8 million at December 31, 2007, due to an expected continuing decline in housing values, contributed to the third quarter net loss. During the third quarter of 2008, nonaccrual loans increased to approximately $828.5 million, an increase of 38%, compared with approximately $601.4 million at December 31, 2007 and an increase of 71% from $485.5 million at September 30, 2007, while the aggregate portfolio of loans (before reserves and unearned discounts) declined to $1.63 billion at September 30, 2008 from $1.92 billion at December 31, 2007 and $1.97 billion at September 30, 2007. The provision for loan losses for the quarter ended September 30, 2008 was $10.6 million compared with a provision of $262.7 million in the quarter ended September 30, 2007. The allowance for loan losses for all portfolios at September 30, 2008 aggregated $432.0 million, compared with $254.7 million at December 31, 2007, and the amount of nonaccretable purchase discount at September 30, 2008 and 2007 was $99.3 million and $96.2 million, respectively. The Company had a stockholders’ deficit of $263.3 million at September 30, 2008, compared to stockholders’ equity of $39.3 million at December 31, 2007.

     The Company had a loss per common share for the three months ended September 30, 2008 of $2.25 both on a diluted and basic basis, compared to a loss per common share of $20.51 on both a diluted and basic basis for the three months ended September 30, 2007. The size of our total portfolio of net notes receivable, loans held for sale, loans held for investment and OREO at September 30, 2008 decreased to $1.13 billion from $1.58 billion at the end of 2007, and from $1.61 billion at September 30, 2007. Revenues decreased by 42% to $24.1 million for the three months ended September 30, 2008, from $41.6 million for the three months ended September 30, 2007. Our total debt outstanding decreased to $1.46 billion at September 30, 2008 from $1.63 billion at December 31, 2007, and from $1.94 billion at September 30, 2007. As a result of the decrease of our total debt, particularly the restructuring of our debt, including $300 million of debt forgiveness and no interest on $125 million of outstanding borrowings, and the benefit of a decline in one-month LIBOR over the past twelve months on our interest-sensitive borrowings, interest expense (inclusive of amortization of deferred financing costs and success fees) decreased by $21.1 million, or 53%, during the third quarter of 2008 compared with the same period in 2007. Collection, general and administrative expenses increased by $2.4 million, or 24%, to $12.7 million during the three months ended September 30, 2008, from $10.3 million for the same period in 2007. The provision for loan losses decreased by $252.2 million to $10.6 million in the three months ended September 30, 2008.

     Revenues.Revenues decreased by $17.4 million, or 42%, to $24.1 million during the third quarter of 2008, from $41.6 million during the same period in 2007. Revenues include interest income, purchase discount earned, gains on sales of notes receivable, gains on sales of originated loans, gains on sales of OREO, third-party acquisition services fees, subservicing fees, other servicing fees and other income.

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     Interest income decreased by $19.6 million, or 51%, to $19.1 million during the three months ended September 30, 2008 from $38.7 million during the three months ended September 30, 2007. The decrease in interest income reflected a $335.9 million decline in the aggregate portfolio of loans (UPB before reserves and unearned discounts), or approximately 17%, from September 30, 2007, an approximate 71% increase in loans on nonaccrual due to increased serious delinquencies in the Company’s loan portfolios (from $485.5 million at September 30, 2007 to $828.5 million at September 30, 2008), which caused an increase in interest reversals for nonaccrual loans and a reduction in the amount of loans on accrual status during the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The impact of interest reversals on loans placed on nonaccrual during the three months ended September 30, 2008 and 2007 was approximately $8.4 million and $5.8 million, respectively.

     Purchase discount earned decreased by $562,000, or 51%, to $547,000 during the third quarter of 2008 from $1.1 million during the third quarter of 2007. This decrease resulted primarily from a slower rate of prepayments from the acquired notes receivable loan portfolio and less purchase discount available for accretion of discount from portfolios purchased in 2006 and 2007. We received $18.6 million of principal payments from notes receivable during the three months ended September 30, 2008, compared with $44.5 million of principal payments during the same quarterly period in 2007.

     There were no gains on sales of notes receivable as the Company did not sell any acquired (purchased) loans during the three months ended September 30, 2008 or September 30, 2007.

     The Company did not sell any originated loans during the three months ended September 30, 2008, compared with sales of $5.7 million of originated loans during the three months ended September 30, 2007. The average loss on the sale of loans, inclusive of a negative $596,000 mark-to market valuation on certain Alt-A loans that were held in inventory, was 10.43% during the third quarter of 2007. In the fourth quarter of 2007, the Company suspended its sales of originated loans due to unfavorable market conditions, and, as of December 2007, the Company ceased to originate loans.

     Gain on sale of OREO increased by $353,000, or 90%, to $744,000 during the three months ended September 30, 2008, from $391,000 during the three months ended September 30, 2007. We sold 116 OREO properties with an aggregate carrying value of $11.8 million during the third quarter of 2008, as compared to 89 OREO properties with an aggregate carrying value of $6.7 million during the third quarter of 2007. The increase in gain on sale of OREO properties in the three months ended September 30, 2008 was due to the sale of more properties and the sale of certain high-equity properties acquired through the foreclosure of Liberty Loans.

     Servicing fees and other income (principally third-party acquisition services fees and subservicing fees, late charges and prepayment penalties) increased by $1.7 million, or 89%, to $3.7 million during the three months ended September 30, 2008 from $2.0 million during the corresponding period last year. This increase was primarily due to approximately $488,000 in increased recoveries of outside foreclosure attorney costs from delinquent borrowers, approximately $789,000 in subservicing fees from a new third party servicing contract (Bosco) that began during the quarter ended June 30, 2008 and approximately $316,000 in due diligence fees. These increases were partially offset by decreases in prepayment penalties due to a continuing slower rate of loan payoffs in general and fewer payoffs from states where prepayment penalties are allowed.

     Operating Expenses.Operating expenses decreased by $270.9 million, or 87%, to $42.1 million during the third quarter of 2008 from $313.0 million during the same period in 2007. Total operating expenses include interest expense, collection, general and administrative expenses, provisions for loan losses, amortization of deferred financing costs and depreciation expense.

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     Interest expense decreased by $20.9 million, or 53%, to $18.3 million during the three months ended September 30, 2008, from $39.1 million during the three months ended September 30, 2007. This decrease was principally the result of a lower average cost of funds during the three months ended September 30, 2008 of 5.00%, compared to 8.11% during the three months ended September 30, 2007, reflecting the restructuring in December 2007 of the interest rate terms of our debt, a decline of about 119 basis points in one-month LIBOR since the end of the third quarter of 2007, an interest rate of 0% on $125 million of our debt and the forgiveness of $300 million of our debt effective December 28, 2007, and to a lesser extent the amortization and prepayment of our debt. As of September 30, 2008, the Company had a total of $1.00 billion (notional amount) of fixed-rate interest rate swaps that effectively stabilized the future interest payments on a portion of its variable-rate debt for the contractual terms of the swaps. Because short-term interest rates declined during this period, these interest rate swaps increased the Company’s interest cost by $1.3 million during the three months ended September 30, 3008. At September 30, 2008, the weighted average interest rate of our borrowed funds, exclusive of the interest rate swaps, was 4.49%, compared with 8.14% at September 30, 2007.

     Collection, general and administrative expenses increased by $2.4 million, or 24%, to $12.7 million during the three months ended September 30, 2008, from $10.3 million during the corresponding period in 2007. Collection, general and administrative expenses as a percentage of average assets increased to 4.05% during the three months ended September 30, 2008 from 2.14% during the three months ended September 30, 2007, due principally to a reduced balance sheet. The increase in collection, general and administrative expenses was the result of increased servicing costs, including the salary and benefits costs of additional staff in the collection, loss mitigation and deficiency areas, and foreclosure and OREO operating expenses, due to the increased delinquencies and defaults in our loan portfolio. Salaries and employee benefits expenses increased by $812,000, or 18%, due to the expansion of our Servicing Department, which were only partially offset by reductions in staff throughout the Company that began since late 2007 to downsize operations as a result of our withdrawal from all loan acquisition and origination activities. While the number of servicing employees increased to 158 at September 30, 2008, from 106 employees at December 31, 2007 and 97 employees at September 30, 2007, we ended the third quarter of 2008 with a total of 213 employees, compared to a total of 207 employees at year-end 2007 and a total of 225 employees at the end of the third quarter of 2007. Legal fees relating to increased collection and loss mitigation activities increased by $663,000, or 46%, to $2.1 million from $1.4 million during the same period last year, reflecting the cost of outside legal services for increased foreclosure, bankruptcy and judgment activities for both the notes receivable and Liberty Loan portfolios. The Company also experienced an increase in corporate legal expenditures, principally related to the restructuring of our debt with our lenders, of $326,000, or 221%, to $474,000 from $148,000 during the same period last year. Servicing expenses related to the maintenance and management of OREO increased by approximately $1.1 million to $1.4 million during the third quarter of 2008, from $282,000 during the same period last year, primarily due to the growth in the OREO portfolio and payments of delinquent property taxes. OREO amounted to $72.1 million at September 30, 2008 compared with $58.9 million at year-end 2007 and $41.4 million at September 30, 2007. In addition, other third-party servicing expenses related to our collection, loss mitigation and deficiency operations decreased by $340,000 to $730,000, from $1.1 million primarily due to a decrease in the volume of property appraisals ordered compared to the three months ended September 30, 2007. Professional fees increased by $204,000, or 37%, to $757,000 from $554,000, principally due to increased outside tax and audit fees compared to the same period last year and a special consulting fee related to a potential restructuring of the Company’s debt and loan portfolios. Loan acquisition costs decreased by $331,000 as the Company did not seek to acquire pools of mortgage loans in the third quarter of 2008. Various other general and administrative expenses decreased slightly by approximately $25,000 during the three months ended September 30, 2008, principally due to reduced costs throughout the Company’s operations, reflecting the impact on our business activities of the Forbearance Agreements entered into on December 28, 2007, principally the stoppage of all acquisitions and originations of loans.

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     The provision for loan losses decreased by $252.2 million to $10.6 million during the three months ended September 30, 2008, from $262.7 million during the three months ended September 30, 2007. The provision during this quarter was due primarily to an $8.0 million write-down taken on the OREO inventory due to anticipated continued deterioration in U.S. housing values, and to a lesser extent, increased defaults experienced in certain pools of loans purchased prior to 2005. The provision during the corresponding quarter last year was based on a reassessment of the allowance for losses due principally to the rapid and substantial deterioration in the housing and subprime mortgage markets and the concomitant deterioration in the performance of the Company’s loan portfolios. The allowance for loan losses for all portfolios at September 30, 2008 aggregated $432.0 million, compared with $254.7 million at December 31, 2007.

     Amortization of deferred financing costs decreased by $229,000, or 43%, to $298,000 during the third quarter of 2008 from $527,000 during the third quarter of 2007. This decrease resulted primarily from a slower rate of prepayments on all portfolios of loans, which caused reduced prepayments of our borrowed funds, and from the elimination of $300 million of debt as of December 28, 2007.

     Depreciation expenses decreased by $117,000, or 32%, to $248,000 in the third quarter of 2008. This decrease during the three months ended September 30, 2008 was principally due to fully depreciated assets during the past twelve months and a reduction in assets purchased compared with the same quarterly period in 2007.

     Our pre-tax loss decreased by $253.5 million to a loss of $18.0 million during the three months ended September 30, 2008, from a loss of $271.4 million during the three months ended September 30, 2007 for the reasons set forth above.

     The Company did not record a tax benefit during the three months ended September 30, 2008, compared with a tax benefit of $108.5 million recorded during the three months ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

     Overview.The Company had a net loss of $305.9 million for the first nine months of 2008, compared with a net loss of $168.5 million for the nine months of 2007. Due principally to the rapid and substantial deterioration in the U.S. housing and subprime mortgage markets and deterioration in the performance of the Company’s portfolios of acquired and originated loans, including particularly the portfolio of acquired second-lien mortgage loans, and the resultant significantly increased estimates of inherent losses in its portfolios described above during both nine month periods, the Company’s provision for loan losses was $299.7 million in the nine months ended September 30, 2008, compared with $272.7 million in the nine months ended September 30, 2007. In addition, the significant increase of loans on nonaccrual status and interest reversals for nonaccrual loans negatively impacted the Company’s operations and net loss. At September 30, 2008, nonaccrual loans increased to approximately $828.5 million, an increase of 38%, compared with approximately $601.4 million at December 31, 2007 and an increase of 71% from $485.5 million at September 30, 2007. The allowance for loan losses for all portfolios at September 30, 2008 was $432.0 million, compared with $254.7 million at December 31, 2007, and the amount of nonaccretable purchase discount at September 30, 2008 and 2007 was $99.3 million and $96.2 million, respectively. The Company had a stockholders’ deficit of $263.3 million at September 30, 2008, compared to stockholders’ equity of $39.3 million at December 31, 2007.

     The Company had a net loss of $305.9 million for the first nine months of 2008, compared with a net loss of $168.5 million for the first nine months of 2007. The Company had a loss per common share for the nine months ended September 30, 2008 of $38.34 both on a diluted and basic basis, compared to a

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loss per common share of $21.22 on both a diluted and basic basis for the nine months ended September 30, 2007. The size of our total portfolio of net notes receivable, loans held for sale, loans held for investment and OREO at September 30, 2008 decreased to $1.13 billion from $1.58 billion at the end of 2007, and from $1.61 billion at September 30, 2007. Revenues decreased by 31% to $90.2 million for the nine months ended September 30, 2008, from $131.2 million for the nine months ended September 30, 2007. Our total debt outstanding decreased to $1.46 billion at September 30, 2008 from $1.63 billion at December 31, 2007, and from $1.94 billion at September 30, 2007. As a result of the decrease of our total debt, the restructuring of our debt, including $300 million of debt forgiveness and no interest on $125 million of borrowings, and the benefit of a decline of approximately 119 basis points in one-month LIBOR since October 1, 2007 on our interest-sensitive borrowings, interest expense (inclusive of amortization of deferred financing costs and success fees) decreased by $47.5 million, or 44%, during the first nine months of 2008 compared with the same period in 2007. Collection, general and administrative expenses increased by $4.7 million, or 16%, to $34.6 million during the nine months ended September 30, 2008, from $29.9 million for the same period in 2007. The provision for loan losses increased by $27.0 million to $299.7 million in the nine months ended September 30, 2008.

     Revenues.Revenues decreased by $41.0 million, or 31%, to $90.2 million during the first nine months of 2008, from $131.2 million during the same period in 2007. Revenues include interest income, purchase discount earned, gains on sales of notes receivable, gains on sales of originated loans, gains on sales of OREO, third-party acquisition services fees, subservicing fees, other servicing fees and other income.

     Interest income decreased by $42.9 million, or 35%, to $78.0 million during the nine months ended September 30, 2008 from $121.0 million during the nine months ended September 30, 2007. The decrease in interest income reflected an approximate 71% increase in loans on nonaccrual due to increased serious delinquencies in the Company’s loan portfolios (from $485.5 million at September 30, 2007 to $828.5 million at September 30, 2008), which caused an increase in interest reversals for nonaccrual loans and a reduction in the amount of loans on accrual status during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The impact of interest reversals on loans placed on nonaccrual during the nine months ended September 30, 2008 and 2007 was approximately $19.6 million and $9.7 million, respectively.

     Purchase discount earned decreased by $1.8 million, or 45%, to $2.1 million during the first nine months of 2008 from $3.9 million during the first nine months of 2007. This decrease resulted primarily from a slower rate of prepayments from the acquired notes receivable loan portfolio, and less purchase discount available for accretion of discount from portfolios purchased in 2006 and 2007 and a lower balance of purchase discount available for accretion from pre-2005 acquisitions. We received $68.3 million of principal payments from notes receivable during the nine months ended September 30, 2008, compared with $150.2 million of principal payments during the same period in 2007.

     There were no gains on sales of notes receivable as the Company did not sell any acquired (purchased) loans during the nine months ended September 30, 2008. The Company realized a gain on sales of notes receivable of $31,000 from sales of $22.3 million of performing low-coupon notes receivable during the nine months ended September 30, 2007.

     The Company did not sell any originated loans during the nine months ended September 30, 2008, compared with $36.9 million of originated loans sold during the nine months ended September 30, 2007. The average loss on loans sold was 1.05%, inclusive of a negative $746,000 mark-to market valuation on certain Alt-A loans that were held in inventory, during the first nine months of 2007. In the fourth quarter of 2007, the Company suspended its sales of originated loans due to unfavorable market conditions, and as of December 2007, the Company ceased to originate loans.

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     Gain on sale of OREO increased by $497,000, or 79%, to $1.1 million during the nine months ended September 30, 2008, from $629,000 during the nine months ended September 30, 2007. We sold 337 OREO properties with an aggregate carrying value of $28.4 million during the first nine months of 2008, as compared to 330 OREO properties with an aggregate carrying value of $22.6 million during the first nine months of 2007. The increase in the gain on sale of OREO properties was due to certain high-equity properties acquired through the foreclosure of Liberty Loans that were sold in the nine months ended September 30, 2008.

     Servicing fees and other income (principally third-party acquisition services fees and subservicing fees, late charges and prepayment penalties) increased by $2.8 million, or 46%, to $8.9 million during the nine months ended September 30, 2008 from $6.1 million during the corresponding period last year. This increase was primarily due to an increase of approximately $1.2 million in recoveries of outside foreclosure attorney costs from delinquent borrowers that were the result of new loss mitigation activities (loan modification programs), approximately $1.1 million in subservicing fees from a new third party servicing contract (Bosco) that began during the quarter ended June 30, 2008, approximately $595,000 in due diligence fees received for due diligence services provided to third parties, and increased late charges resulting primarily from the increase in delinquencies. These increases were partially offset by a decrease of approximately $871,000 in prepayment penalties due to a slower rate of loan payoffs in general and fewer payoffs from states where prepayment penalties are allowed.

     Operating Expenses.Operating expenses decreased by $16.0 million, or 4%, to $396.1 million during the first nine months of 2008 from $412.1 million during the same period in 2007. Total operating expenses include interest expense, collection, general and administrative expenses, provisions for loan losses, amortization of deferred financing costs and depreciation expense.

     Interest expense decreased by $46.0 million, or 43%, to $60.1 million during the nine months ended September 30, 2008, from $106.1 million during the nine months ended September 30, 2007. This decrease was principally the result of a lower average cost of funds during the nine months ended September 30, 2008 of 5.19%, compared to 7.89% during the nine months ended September 30, 2007, reflecting the restructuring in December 2007 of the interest rate terms of our debt, including the forgiveness of $300 million of our debt, an interest rate of 0% on $125 million of our debt, and a decline of about 119 basis points in one-month LIBOR since October 1, 2007. On February 27, 2008, the Company entered into $725 million (notional amount) of fixed-rate interest rate swaps, and on April 30, 2008, the Company entered into an additional $275 million (notional amount) of fixed-rate interest rate swaps, in order to effectively stabilize the future interest payments on a portion of its variable-rate debt. Because short-term interest rates declined during the nine months ended September 30, 2008, these interest rate swaps increased the Company’s interest cost by $1.8 million. At September 30, 2008, the weighted average interest rate of our borrowed funds, exclusive of the interest rate swaps, was 4.49%, compared with 8.14% at September 30, 2007.

     Collection, general and administrative expenses increased by $4.7 million, or 16%, to $34.6 million during the nine months ended September 30, 2008, from $29.9 million during the corresponding period in 2007. Collection, general and administrative expenses as a percentage of average assets increased to 3.17% during the nine months ended September 30, 2008 from 2.27% during the nine months ended September 30, 2007, due principally to the Company’s reduced balance sheet. The increase in collection, general and administrative expenses was principally the result of increased servicing costs due to increased delinquencies and defaults in our loan portfolio. Salaries and employee benefits expenses increased $454,000, or 3%, to $14.0 million during the nine months ended September 30, 2008, from $13.5 million during the nine months ended September 30, 2007, due to the expansion of our Servicing Department, which were only partially offset by reductions in staff throughout all other areas of the Company that began since late 2007 due to our withdrawal from all loan acquisition and

46

origination activities. While the number of servicing employees increased to 158 at September 30, 2008, from 97 employees at September 30, 2007, we ended the third quarter of 2008 with a total of 213 employees, compared to a total of 225 employees at the end of the third quarter of 2007. Legal fees relating to increased collection and loss mitigation activities increased by $2.4 million, or 60%, to $6.4 million from $4.0 million during the same period last year. This increase reflected the cost of outside legal services for increased foreclosure, bankruptcy and judgment activity in both the notes receivable and Liberty Loan portfolios. The Company also experienced an increase in corporate legal expenditures, principally related to the restructuring of our debt with our lenders, of $828,000, or 144%, to $1.4 million from $573,000 during the same nine-month period last year. Servicing expenses related to the maintenance and management of OREO increased by approximately $2.0 million to $2.8 million during the nine months of 2008, from $771,000 during the same nine-month period last year, primarily due to the growth in the OREO portfolio and payments of delinquent property taxes. In addition, third-party servicing expenses related to our collection, loss mitigation and deficiency operations decreased by $325,000 to $2.0 million, from $2.3 million primarily due to a decrease in the volume of tax services, credit reports and property appraisals ordered compared to the nine months ended September 30, 2007. Professional fees increased by $252,000, or 16%, to $1.9 million from $1.6 million, principally due to increased outside tax and audit fees and a special consulting fee related to a potential restructuring of the Company’s debt and loan portfolios, compared to the same period last year. Loan acquisition costs decreased by $1.3 million as the Company did not seek to acquire pools of mortgage loans in the first nine months of 2008. Various other general and administrative expenses increased by approximately $212,000 during the nine months ended September 30, 2008, principally due to a $661,000 lease write-off of vacated Tribeca Lending office space, which was partially offset by other reduced costs throughout the Company’s operations reflecting the impact of the Forbearance Agreements entered into on December 28, 2007 on our business activities, principally the stoppage of all acquisitions and originations of loans.

     During the nine months ended September 30, 2008, the U.S. housing and subprime mortgage markets experienced continued deterioration. This deterioration continued to give rise to industry-wide increases in mortgage delinquencies reflecting the decline in collateral values and related declines in borrowers’ equity in their homes, particularly with respect to subprime loans originated throughout the mortgage industry during 2005, 2006 and the early months of 2007. These deteriorating conditions in the housing and subprime mortgage markets continued to negatively impact the credit quality of the Company’s portfolios during the first nine months of 2008, particularly with regard to the second-lien mortgage loan portfolio. As a result, the Company significantly increased its estimates of inherent losses in its portfolios of loans, particularly its purchased second-lien mortgage loans, which resulted in a provision for loan losses of $299.7 million during the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the provision for loan losses was $272.7 million due to the rapid and substantial deterioration in the subprime mortgage and housing markets that developed during this period, which negatively impacted the credit quality of the Company’s portfolios, particularly with regard to the second-lien mortgage loan portfolio. As a result, the Company significantly increased its estimates of inherent losses in the portfolios of purchased loans, particularly its purchased second-lien mortgage loans, in the nine month period ended September 30, 2007.

     Amortization of deferred financing costs decreased by $1.4 million, or 62%, to $872,000 during the first nine months of 2008 from $2.3 million during the first nine months of 2007. This decrease resulted primarily from a slower rate of prepayments on all portfolios of loans, which caused reduced prepayments of our borrowed funds, and from the elimination of $300 million of debt as of December 28, 2007.

     Depreciation expenses decreased by $220,000, or 20%, to $862,000 in the first nine months of 2008. This decrease during the nine months ended September 30, 2008 was principally due to fully

47

depreciated assets during the past twelve months and a reduction in assets purchased compared with the corresponding period in 2007.

     Our pre-tax loss increased by $25.1 million to a loss of $305.9 million during the nine months ended September 30, 2008, from a loss of $280.9 million during the nine months ended September 30, 2007 for the reasons set forth above.

     The Company did not record a tax benefit during the nine months ended September 30, 2008, compared with a tax benefit of $112.4 million recorded during the nine months ended September 30, 2007.

Liquidity and Capital Resources

General

     We ceased to acquire and originate loans in November 2007, and under the terms of the Forbearance Agreements, the Company cannot originate or acquire mortgage loans or other assets without the prior consent of the bank.

     We have one source of external funding to meet our liquidity requirements, in addition to the cash flow provided from borrower payments of interest and principal on mortgage loans. See “– Borrowings.” In addition, we have had the ability, from time to time, to sell loans in the secondary market. Prior to 2008, we sold pools of acquired mortgage loans and newly originated Liberty Loans from time to time, and we sold loans that we originated specifically for sale into the secondary market on a regular basis. Due to severe disruptions in the capital markets since mid-2007 and current secondary market conditions, particularly the severe contraction in secondary market liquidity for non-prime mortgage loans, sales of loans in the near future are unlikely.

     We are required to submit all payments we receive from our mortgage loans to a lockbox, from which we receive an operating allowance, which is subject to periodic review and approval by the bank, to sustain our business. Substantially all amounts submitted to the lockbox in excess of the agreed upon operating allowance are used to pay down amounts outstanding under our credit facilities with the bank. The operating allowance may not be sufficient to sustain our operations in the future, particularly for new business activities. If it is insufficient, there is no guarantee that the bank will increase our operating allowance, which could have a material adverse impact on our business.

     Short-term Investments.The Company’s short-term investment portfolio includes principally U.S. treasury bills and investment-grade commercial paper. The Company’s investment policy is structured to provide an adequate level of liquidity in order to meet normal working capital needs, while taking minimal credit risk. As of September 30, 2008, all of the Company’s short-term investments were converted into money market accounts and certificates of deposits and are all held at The Huntington National Bank.

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     Cost of Funds.As of September 30, 2008, we had total borrowings of $1.46 billion, of which $1.42 billion was subject to our credit facilities and modified by the Forbearance Agreements effective December 28, 2007, as amended effective March 31, 2008 and August 15, 2008, and $41.2 million remained under our unrestructured credit facility. Substantially all of the debt under these facilities was incurred in connection with the purchase and origination of, and is secured by, our acquired loans (notes receivable), originated loans held for investment and OREO portfolios. At September 30, 2008, the interest rates on our term debt were as follows:

			Under the terms of credit
	In accordance with the		agreements excluded
	terms of the Forbearance		from the Forbearance
	Agreements as amended		Agreements as amended
LIBOR plus 2.25%	$	884,432,436	$	—
LIBOR plus 2.75%		412,613,418		—
0% (fixed)*		125,000,000		—
FHLB one-month LIBOR advance rate plus 2.60%		—		16,675,160
FHLB one-month LIBOR advance rate plus 2.75%		—		24,567,920
	$	1,422,045,854	$	41,243,080

* Interest of 20% begins to accrue after the Franklin Tranche A debt, $519.0 million as of September 30, 2008, is paid off in full.

     At September 30, 2008, the weighted average interest rate on term debt was 4.49%. Our warehouse facilities were utilized, until December 28, 2007, to fund Tribeca’s originations of loans and the acquisition of loans through our “Flow Acquisitions Group” pending sale to others or pending funding under our credit facilities for loans to be held in portfolio. As of December 31, 2007, both warehouse facilities were discontinued.

Cash Flow from Operating, Investing and Financing Activities

     Liquidity represents our ability to obtain adequate funding to meet our financial obligations. Our liquidity position prior to December 28, 2007 was affected by mortgage loan purchase and origination volume, and is affected by mortgage loan payments, including prepayments, loan maturities and the amortization and maturity structure of borrowings under our credit facilities. In accordance with the terms of our Forbearance Agreements, we receive a cash allowance that has been generally adequate to meet our operating expenses.

     At September 30, 2008, we had cash and cash equivalents of $19.2 million compared with $18.3 million at December 31, 2007. As of November 2008, all of the Company’s depository accounts were at The Huntington National Bank. Restricted cash of $23.5 million and $40.3 million at September 30, 2008 and December 31, 2007, respectively, was restricted under our credit agreements and lockbox facility with our bank.

     Substantially all of our assets are invested in our portfolios of notes receivable, loans held for investment, OREO and, from time to time, loans held for sale. Primary sources of our cash flow for operating and investing activities have been borrowings under our various credit facilities, collections of interest and principal on notes receivable and loans held for investment and proceeds from sales of notes and OREO properties, and from time to time, sales of our newly originated loans that generally were held for investment. Primary uses of cash included purchases of notes receivable, originations of loans and for operating expenses. We relied significantly upon our lender and the other banks that participated in the

49

loans made to us by our lender to provide the funds necessary for the purchase of notes receivable portfolios and the origination of loans. While we historically had been able to finance these purchases and originations, we have not had, at any time since our inception, committed loan facilities in significant excess of the amount we currently had outstanding under our credit facilities. We ceased to acquire and originate loans in November 2007, and under the terms of the Forbearance Agreements, we are expressly prohibited from acquiring or originating mortgage loans or other assets without the prior consent of the bank.

     Net cash used in operating activities was $8.9 million during the nine months ended September 30, 2008, compared with net cash used of $7.5 million during the nine months ended September 30, 2007. The increase in cash used in operating activities during the nine months ended September 30, 2008 was primarily due to the Company not originating new loans for sale in the secondary market during the first nine months of 2008.

     Net cash provided by investing activities was $175.4 million during the nine months ended September 30, 2008, compared to $329.6 million of cash used during the nine months ended September 30, 2007. The decrease in cash used in investing activities during the nine months ended September 30, 2008 was due primarily to our not acquiring or originating loans in the first nine months of 2008, which was partially offset by a reduction in principal collections on both notes receivable and loans held for investment.

     Net cash used in financing activities increased to approximately $165.6 million during the nine months ended September 30, 2008, compared to $340.2 million provided by financing activities during the nine months ended September 30, 2007. The decrease in cash provided by financing activities during the nine months ended September 30, 2008 was due to the reasons set forth above.

Borrowings

     As of September 30, 2008, the Company owed an aggregate of $1.46 billion under the Forbearance Agreements and one remaining credit facility excluded from the Forbearance Agreements with our lender. These borrowings are shown in the Company’s financial statements as “Notes payable” (referred to as “term loans” herein).

Forbearance Agreements with Lead Lending Bank

     On December 28, 2007, the Company entered into a series of agreements with the bank, pursuant to which the bank agreed to forbear with respect to certain defaults of the Company relating to the Company’s indebtedness to the bank and restructure approximately $1.93 billion of such indebtedness to the bank and its participant banks.

     The Restructuring did not relate to:

• $44.5 million of the Company’s indebtedness under the Master Credit and Security Agreement, dated as of October 13, 2004, as amended, by and among Franklin Credit, certain subsidiaries of Franklin Credit and the bank; and,

• $44.8 million of Tribeca’s indebtedness to BOS (USA) Inc., an affiliate of Bank of Scotland, under the Master Credit and Security Agreement, dated March 24, 2006, by and among Tribeca, certain subsidiaries and BOS.

     These amounts remained subject to the original terms specified in the applicable agreements (the “Unrestructured Debt”).

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     Loan Restructuring.Pursuant to the Restructuring:

• the Company acknowledged, and the bank waived, certain existing defaults under the Company’s existing credit facilities with the bank through May 2009;

• Franklin Credit’s indebtedness to the bank was reduced by $300 million and Franklin Credit paid a restructuring fee of $12 million to the bank;

• the remaining approximately $1.54 billion of outstanding indebtedness to the bank, including approximately $1.05 billion of outstanding indebtedness of Franklin Credit and approximately $491.1 million of outstanding indebtedness of Tribeca, was restructured into six term loans with modified terms and a maturity date of May 15, 2009; and,

• the Company paid all of the accrued interest on its debt outstanding to the bank through December 27, 2007 and guaranteed payment and performance of the restructured indebtedness.

     Terms of the Restructured Indebtedness.The following table summarizes the principal economic terms of the Company’s indebtedness immediately following the Restructuring.

						Applicable
				Outstanding		Interest			Required Monthly			Required Monthly
	Outstanding			Principal		Margin Over			Principal			Principal
	Principal Amount –			Amount –		LIBOR			Amortization –			Amortization –
	Franklin Credit			Tribeca		(basis points)			Franklin Credit			Tribeca
Tranche A	$	600,000,000		$	400,000,000		225		$	5,400,000		$	3,600,000
Tranche B	$	323,255,000		$	91,142,000		275		$	750,000		$	250,000
Tranche C	$	125,000,000			N/A		N/A	(1)		N/A	(2)		N/A
Tranche D	$	1,033,000	(3)		N/A		250	(4)		N/A			N/A
Unrestructured Debt	$	44,537,000		$	44,835,000		235-250		$	148,000		$	498,000

(1)	The applicable interest rate is fixed at 10% per annum. Interest will be paid in kind during the term of the forbearance.
(2)	Tranche C requires no principal amortization. All principal is due at maturity.
(3)	Tranche D serves as a revolving credit line with a maximum availability of $5 million, and an additional $5 million which may be used for issuance of letters of credit.
(4)	Does not include a letter of credit facing fee of 0.125% per annum on the average daily undrawn amount of each issued and outstanding letter of credit.

     The interest rate under the terms of the Forbearance Agreements that is the basis, or index, for the Company’s interest cost is the one-month London Interbank Offered Rate (“LIBOR”) plus applicable margins.

     The following table compares the approximate weighted average interest rate of the Company’s indebtedness immediately prior to and following the Restructuring.

	Total Outstanding
	Principal Amount	Weighted Average
	(Franklin Credit and Tribeca)(1)	Applicable Interest Rate
Immediately after restructuring	$1.63 billion		7.49	%
Immediately prior to restructuring	$1.93 billion		7.71	%

(1) Includes the Unrestructured Debt.

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     Pursuant to the Forbearance Agreements, the bank is not required to provide any additional advances, except for those under the revolving credit or letter of credit portions of Tranche D.

     Cash Flow.The Forbearance Agreements with respect to Franklin Credit, on the one hand, and Tribeca, on the other, provide a waterfall with respect to cash flow received in respect of collateral pledged in support of the related restructured indebtedness, net of approved, reimbursable operating expenses. Such cash flow is applied in the following order:

• to pay interest in respect of Tranche A advances, Tranche B advances and, in the case of Franklin Credit, Tranche D advances, in that order;

• to pay fees related to the Company’s letters of credit from the bank;

• to pay the minimum required principal payments in respect of Tranche A advances and Tranche B advances, in that order;

• to prepay outstanding Tranche A advances;

• to prepay outstanding Tranche B advances;

• to prepay Unrestructured Debt (excluding that owed to BOS);

• in the case of Franklin Credit, to repay Tranche D advances, any letter of credit exposure, and any obligations in respect of any interest rate hedge agreements with the bank;

• in the case of Franklin Credit, 90% of the available cash flow to repay interest and then principal of the Tranche C advances if Franklin Credit is acting as servicer of the underlying collateral, or 100% otherwise; and,

• in the case of Franklin Credit and Tribeca, to pay any advances then outstanding in respect of the other’s indebtedness to the bank, other than for Unrestructured Debt.

     Covenants; Events of Default.The Forbearance Agreements contain affirmative and negative covenants customary for restructurings of this type, including covenants relating to reporting obligations. The affirmative and negative covenants under all of the credit agreements between the Company and the bank, other than those under the Franklin Master Credit Agreement and under the Tribeca Master Credit and Security Agreement, dated as of February 28, 2006, as amended, were superseded by the covenants in the Forbearance Agreements. Additionally, any provisions of any of the credit agreements between the Company and the bank that conflict with or are subject of a discrepancy with the provisions of the Forbearance Agreements will be superseded by the conflicting provision in the Forbearance Agreements. The Forbearance Agreements include covenants requiring that:

• the Company’s reimbursable expenses in the ordinary course of business during each of the first two months after the date of the agreement will not exceed $2.5 million, excluding reimbursement of certain bank expenses after the date of the Restructuring, and thereafter, an amount provided for in an approved budget;

• the Company will not originate or acquire mortgage loans or other assets, perform due diligence or servicing, broker loans, or participate in off-balance sheet joint ventures and special purpose vehicles, without the prior consent of the bank;

• the Company will use its best efforts to obtain interest rate hedges acceptable to the bank in respect of the $1 billion of Tranche A indebtedness;

• the Company will not make certain restricted payments to its stockholders or certain other related parties;

• the Company will not engage in certain transactions with affiliates;

• the Company will not incur additional indebtedness other than trade payables and subordinated indebtedness;

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• the Company together will maintain a minimum consolidated net worth of at least $5 million, plus a certain percentage, to be mutually agreed upon, of any equity investment in the Company after the date of the Restructuring;

• the Company will together maintain a minimum liquidity of $5 million;

• the Company will maintain prescribed interest coverage ratios based on EBITDA (as defined) to Interest Expense (as defined);

• the Company will not enter into mergers, consolidations or sales of assets (subject to certain exceptions);

• the Company will not, without the bank’s consent, enter into any material change in its capital structure that the bank or a nationally recognized independent public accounting firm determine could cause a consolidation of its assets with other persons under relevant accounting regulations; and,

• the Company shall maintain and comply in all material respects with all governmental licenses and authorizations to hold and service mortgage loans (as defined) and OREO properties (as defined).

     The Forbearance Agreements contain events of default customary for facilities of this type, although they generally provide for no or minimal grace and cure periods.

     Servicing.Franklin Credit will continue to service the collateral pledged by the Company under the Forbearance Agreements, subject to the bank’s right to replace Franklin Credit as servicer in the event of a default under the Forbearance Agreements or if the bank determines that Franklin Credit is not servicing the collateral in accordance with accepted servicing practices, as defined in the Forbearance Agreements. Franklin Credit may also, with the bank’s consent, and plans to, provide to third parties servicing of their portfolios, and other related services, on a fee-paying basis.

     Security.The Company’s obligations with respect to the restructured Franklin Credit indebtedness are secured by a first priority lien on all of the assets of Franklin Credit and its subsidiaries, other than those of Tribeca and Tribeca’s subsidiaries, and those securing the Unrestructured Debt. The Company’s obligations with respect to the restructured Tribeca indebtedness are secured by a first priority lien on all of the assets of Tribeca and Tribeca’s subsidiaries, except for those assets securing the Unrestructured Debt. In addition, pursuant to a lockbox arrangement, the bank controls substantially all sums payable to the bank in respect of any of the collateral.

     Gain on Debt Forgiveness.The forgiveness of $300 million of the Company’s indebtedness to the bank resulted in the recognition of a $284.2 million net gain in the quarter ended December 31, 2007.

March 2008 Modifications to Forbearance Agreements and Refinancing of BOS Loan

     On March 31, 2008, the Company entered into a series of agreements with the bank, which amended the Forbearance Agreements, which are referred to as the Forbearance Agreement Amendments.

     Pursuant to the Forbearance Agreement Amendments, the bank extended an additional $43.3 million under Tribeca’s Tranche A and Tranche B facilities, (the “Additional Payoff Indebtedness”), to fund the complete payoff of the BOS Loan. Simultaneously, BOS acquired from the bank a participation interest in Tribeca’s Tranche A facility equal in amount to the Additional Payoff Indebtedness. The effect of these transactions was to roll Tribeca’s indebtedness to BOS into the Forbearance Agreements, to terminate any obligations of Tribeca under the BOS Loan and to BOS directly, and to transfer the benefit of the collateral interests previously securing the BOS Loan to secure the obligations under the Forbearance Agreements. As a result of the Forbearance Agreement Amendments, Tribeca’s indebtedness as of March 31, 2008, was $410,860,000 and $98,774,000 for Tranche A and Tranche B,

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respectively. In connection with the increased debt outstanding under the Amended Forbearance Agreements, Tribeca’s required monthly principal amortization amount under the Tranche A Facility was increased from $3,600,000 to $3,900,000 and that under the Tranche B Facility was increased from $250,000 to $275,000.

     In addition, the Forbearance Amendment Agreements modified the Forbearance Agreements with respect to the Franklin Master Credit Facility (the “Franklin Forbearance Agreement”):

• to provide that Tranche C interest shall not accrue until the first business day after all outstanding amounts under the Tranche A facility have been paid in full;

• to increase the Tranche C interest rate to 20% from and after such time it begins to accrue;

• to extend an additional period of forbearance through July 31, 2008, from May 15, 2008, in respect of the remaining Unrestructured Loans; and,

• to increase the maximum availability under the Tranche D line of credit to $10,000,000 for working capital and general corporate purposes to enable the Company to purchase real property in which it may have a lien, and for purposes of meeting licensing requirements.

     The modifications of the terms of the Tranche C debt of $125 million from an interest rate of 10% to 0% (at least until the maturity of the Forbearance Agreements in May 2009) resulted in a savings of approximately $9.5 million in accrued interest expense for the nine months ended September 30, 2008.

     Additionally, the Forbearance Agreement Amendments modified the Forbearance Agreements to (a) join additional subsidiaries of the Company as borrowers and parties to the forbearance agreements and other loan documents; and (b) extend the time periods or modify the requirements for the Company and the Company’s other subsidiaries to satisfy certain requirements of the Forbearance Agreements.

     After giving effect to the Forbearance Agreement Amendments, the waterfall of payments has been adjusted to provide that periodic amounts constituting additional periodic payments of interest required under any interest hedging agreement may be paid after interest on the Tranche A and Tranche B advances, payments of interest and principal with respect to Tranche C advance shall be deferred until after payment of the Tranche D advance, and to provide for cash payment reserves for certain contractual obligations, taxes and $10,000,000 of cash payment reserves in the aggregate for fees, expenses, required monthly principal amortization and interest owing to the Bank.

     The bank also waived any defaults under the Forbearance Agreements for the period through and including March 31, 2008, and consented to the origination by the Company of certain mortgage loans to refinance existing mortgage loans which the bank has approved for purchase and subsequent sale in the secondary market or which the bank determines are qualified for purchase by Fannie Mae or Freddie Mac.

August 2008 Modification to Forbearance Agreements

     The Company entered into additional amendments to the Forbearance Agreements, effective August 15, 2008, whereby, among other things, (a) the minimum net worth covenant was eliminated, (b) the prescribed interest coverage ratios based on EBITDA were changed to ratios based on actual cash flows, (c) cash flows available for debt service shall include all of the Company’s cash receipts, including its cash revenues from providing subservicing and other services for third parties, and (d) the existing extension of an additional period of forbearance through July 31, 2008 in respect of the remaining Unrestructured Debt was extended to December 31, 2008, and absent the occurrence of an event of

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default, the bank agreed not to initiate collection proceedings against the Company in respect of any of the Unrestructured Debt. In addition, all identified forbearance defaults, including the minimum net worth covenant, that existed at the time of the August 2008 Modification were waived. As a result, the Company currently is in compliance with all of the terms of the Forbearance Agreements, with the exception of the minimum debt service payments with regards to the Unrestructured Debt and the failure of the Company to comply with minimum net worth requirements under certain governmental licenses to hold and service mortgage loans.

Unrestructured Debt

     The Company has failed to make the minimum monthly debt service payments due on July 5, 2008 through November 5, 2008 in the aggregate amount of $789,000 from the cash flows received from the collateral supporting the Unrestructured Debt, as required by the Master Credit Agreement in respect of the Unrestructured Debt (remaining debt due to a participant bank that is not a party to the Forbearance Agreements). The Company, however, has made the required minimum payments from its own cash account.

Master Credit Facilities – Term Loans

     The summary that follows describes the terms of the Company’s credit facilities in effect prior to entering into the Forbearance Agreements on December 28, 2007 described above, which substantially modified such facilities, except for the Unrestructured Debt.

     General.In October 2004, the Company, and its finance subsidiaries, excluding Tribeca, entered into a master credit and security agreement (the “Franklin Master Credit Facility”) with Huntington National Bank, an Ohio banking corporation, which we refer to as the bank, our lender or Huntington. Under this master credit facility, we requested term loans to finance the purchase of residential mortgage loans or refinance existing outstanding loans under this facility. The facility did not include a commitment to additional lendings or a commitment to refinance existing outstanding term loans when they matured, which were therefore subject to our lender’s discretion as well as any regulatory limitations to which our lender was subject. At September 30, 2008, $41.2 million remained outstanding under this facility (the remaining portion of the Unrestructured Debt), and the interest rate continues to be based on the Federal Home Loan Bank of Cincinnati 30-day advance rate plus margins of 2.60% and 2.75%.

     In February 2006, Tribeca and certain of its subsidiaries entered into the Tribeca Master Credit Facility with Huntington, pursuant to which certain Tribeca subsidiaries borrowed term loans to finance their origination of loans Tribeca previously financed under its warehouse line of credit with Huntington and consolidate and refinance prior term loans made by Huntington to such subsidiaries. The facility did not include a commitment for additional lendings or a commitment to refinance existing outstanding term loans when they matured, which were subject to our lender’s discretion, as well as any regulatory limitations to which Huntington was subject. At both September 30, 2008 and December 31, 2007, $0 remained outstanding under this facility.

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     Interest Rates and Fees.Interest on the term loans, up to December 28, 2007, was payable monthly at a floating rate equal to the highest Federal Home Loan Bank of Cincinnati 30-day advance rate as published daily by Bloomberg under the symbol FHL5LBRI, or the “30-day advance rate,” plus the applicable margin in effect prior to August 2006 as follows:

	For Loans Funded
	Prior to July 1, 2005	On or After July 1, 2005
If the 30-day advance rate is	the applicable margin is	the applicable margin is
Less than 2.26%	350 basis points	300 basis points
2.26 to 4.50%	325 basis points	275 basis points
Greater than 4.50%	300 basis points	250 basis points

August 2006 Modifications to Huntington National Bank Financing Arrangements

     In August 2006, the master credit facilities were modified to reduce the interest rate on all debt originated under the master credit facilities before July 1, 2005 by 25 basis points effective October 1, 2006. This rate was lowered by an additional 25 basis points effective January 1, 2007.

December 2006 Modifications to Huntington National Bank Financing Arrangements

     In December 2006, the master credit facilities were modified to change the interest rate on term loans funded under the master credit facilities after November 14, 2006 for loans originated by Tribeca and purchases of second mortgages by the Company to the Federal Home Loan Bank of Cincinnati 30-day advance rate as published daily by Bloomberg under the symbol FHL5LBRI (the “30-day advance rate”), plus the applicable margin as follows:

If the 30-day advance rate is	the applicable margin is
Less than 2.26%	300 basis points
2.26 to 4.50%	260 basis points
Greater than 4.50%	235 basis points

     Additionally, the interest rate payable to Huntington National Bank on term loans funded under the Franklin Master Credit Facility after November 14, 2006 in respect of purchases of first mortgages by the Company was the 30-day advance rate, plus the applicable margin as follows:

If the 30-day advance rate is	the applicable margin is
Less than 2.26%	300 basis points
2.26 to 4.50%	225 basis points
Greater than 4.50%	200 basis points

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     As a result of these modifications, effective January 1, 2007, and up to December 28, 2007, the interest rate on term borrowings under our Master Credit Facilities was based on a floating rate equal to the 30-day advance rate, plus the applicable margin as follows:

For Loans Funded
		On or After November 15, 2006
		Purchase of First	Tribeca Originated Loans/
Prior to November 15, 2006		Mortgages	Second Mortgage Purchases
If the 30-day advance rate is	the applicable margin is	the applicable margin is	the applicable margin is
Less than 2.26%	300 basis points	300 basis points	300 basis points
2.26 to 4.50%	275 basis points	225 basis points	260 basis points
Greater than 4.50%	250 basis points	200 basis points	235 basis points

     Upon each closing of a loan after June 23, 2006, we were required to pay an origination fee equal to 0.50% of the amount of the loan unless otherwise agreed to by our lender. For loans funded between July 1, 2005 and June 23, 2006, under the Franklin Master Credit Facility, the origination fee paid was 0.75% of the amount of the loan (0.50% for loans funded under the Tribeca Master Credit Facility), and for loans funded prior to July 1, 2005, the origination fee paid was 1% of the amount of the loan unless otherwise agreed to by our lender.

     Principal; Prepayments; Termination of Commitments.The unpaid principal balance of each loan was amortized over a period of twenty years, but matured three years after the date the loan was made. Historically, our lender had agreed to extend the maturities of such loans for additional three-year terms upon their maturity. We were required to make monthly payments of the principal on each of our outstanding loans.

     In the event there was a material and adverse breach of the representations and warranties with respect to a pledged mortgage loan that was not cured within 30 days after notice by our lender, we would have been required to repay the loan with respect to such pledged mortgage loan in an amount equal to the price at which such mortgage loan could readily be sold (as determined by our lender).

     Covenants; Events of Default.The Master Credit Facilities contain affirmative, negative and financial covenants customary for financings of this type, including, among other things, a covenant under the Franklin Master Credit Facility that we and our subsidiaries together maintain a minimum net worth of at least $10 million; and, a covenant under the Tribeca Master Credit Facility that Tribeca and its subsidiaries, together, maintain a minimum net worth of at least $3.5 million and rolling four-quarter pre-tax net income of at least $750,000. These master credit facilities contain events of default customary for facilities of this type (with customary grace and cure periods, as applicable).

     Security.Our obligations under the Franklin Master Credit Facility are secured by a first priority lien on loans that are financed by proceeds of loans made to us under the facility. The collateral securing each loan cross-collateralizes all other loans made under this facility. In addition, pursuant to a lockbox arrangement, our lender is entitled to receive substantially all sums payable to us in respect of any of the collateral. Tribeca’s and its subsidiary borrowers’ obligations under the Tribeca Master Credit Facility are secured by a first priority lien on loans originated by Tribeca or such subsidiary that are financed or refinanced by proceeds of loans made to Tribeca or its borrowers under the facility. The collateral securing each loan cross-collateralizes all other loans made under this facility. In addition, pursuant to a lockbox arrangement, Huntington is entitled to receive substantially all sums payable to Tribeca and any subsidiary borrower in respect of any of the collateral.

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Bank of Scotland Term Loan

     In March 2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary Borrower”) entered into a $100 million Master Credit and Security Agreement (the “BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. $98.2 million of proceeds of the BOS Loan were used to consolidate and refinance prior term loans made to certain Tribeca subsidiaries. Interest on the BOS Loan up to March 31, 2008 was payable monthly at a floating rate equal to the 30-day advance rate plus an applicable margin as follows:

If the 30-day advance rate is	the applicable margin is
Less than 2.26%	300 basis points
2.26 to 4.50%	275 basis points
Greater than 4.50%	250 basis points

     The unpaid principal balance of the BOS Loan was amortized over a period of 20 years, but had a maturity date in March 2009. The Tribeca Subsidiary Borrower was required to make monthly amortization payments and payments of interest on the BOS Loan. The facility did not include a commitment to additional lendings or a commitment to refinance the remaining outstanding balance of the loan at its maturity. Pursuant to the Forbearance Agreement Amendments, the outstanding balance of this indebtedness to BOS was rolled into the Forbearance Agreements effective March 31, 2008. The outstanding balance of the BOS Loan, therefore, was $0 at September 30, 2008.

Warehouse Facilities

     Tribeca Warehouse.In October 2005, Tribeca entered into a Warehousing Credit and Security Agreement (the “Tribeca Warehouse Facility”) with our lender, which modified previous warehouse lending agreements. In April 2006, our lender increased the commitment to $60 million. Interest on advances was payable monthly at a rate per annum equal to the greater of (i) a floating rate equal to the Wall Street Journal Prime Rate minus 50 basis points or (ii) 5%. As of December 28, 2007, this facility was terminated.

     Flow Warehouse.In August 2006, we entered into a new $40 million Flow Warehousing Credit and Security Agreement (the “Flow Warehouse Facility”) for a term of one year with our lender to accumulate loans acquired by the Company on a flow basis prior to consolidating such loans into term debt. This warehouse facility was renewed in August 2007 by Huntington for $20 million and for a term of one year. Interest on advances was payable monthly at a rate per annum equal to a floating rate equal to the Wall Street Journal Prime Rate minus 50 basis points. As of December 28, 2007, this facility was terminated.

Interest Rate Caps

     On August 29, 2006, the Company purchased a $300 million (notional amount) one-month LIBOR cap with a strike price of 5.75% at a price of $101,000, and on August 30, 2006, the Company purchased a $500 million (notional amount) one-month LIBOR cap with a strike price of 6.0% at a price of $60,000. Both cap agreements expired on August 31, 2007.

     On September 5, 2007, the Company purchased a $200 million (notional amount) one-month LIBOR cap with a strike price of 5.75% at a price of $102,000, and on September 6, 2007, the Company purchased a $400 million (notional amount) one-month LIBOR cap with a strike price of 6.0% at a price of $90,000. Both cap agreements are non-amortizing and will be in effect for one year. The cap resets match the interest rate resets on a portion of the Company’s term debt. These caps will limit the

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Company’s exposure to increased borrowing costs on $200 million of term debt should the one-month LIBOR rate exceed 5.75%, and on a total of $600 million of term debt should such rate exceed 6.0%. The interest rate caps are not designated as hedging instruments for accounting purposes; therefore, a change in the fair market value of the caps is recognized as gain or loss in earnings in the current period. These cap agreements expired on September 30, 2008.

Interest Rate Swaps

     Effective February 27, 2008, the Company entered into $725 million (notional amount) of fixed-rate interest rate swaps in order to effectively stabilize the future interest payments on a portion of its interest-sensitive borrowings. The fixed-rate swaps are for periods ranging from one to four years, are non-amortizing, and are in effect for the respective full terms of each swap agreement. These swaps will effectively fix the Company’s interest costs on a portion of its borrowings regardless of increases or decreases in one-month LIBOR. The interest rate swaps were executed with the Company’s lead lending bank and are for the following terms: $220 million notional amount for one year at a fixed rate of 2.62%; $390 million notional amount for two-years at a fixed rate of 2.79%; $70 million notional amount for three years at a fixed rate of 3.11%; and, $45 million notional amount for four years at a fixed rate of 3.43%.

     Effective April 30, 2008, the Company entered into an additional $275 million (notional amount) of fixed-rate interest rate swaps in order to effectively stabilize the future interest payments on a portion of its interest-sensitive borrowings. The fixed-rate swaps are for a period of three years, are non-amortizing, and at a fixed rate of 3.47%. These swaps will reduce further the Company’s exposure to future increases in interest costs on a portion of its borrowings due to increases in one-month LIBOR during the remaining terms of the swap agreements. The interest rate swaps were executed with the Company’s lead lending bank.

     Under these swap agreements, the Company will make interest payments to its lead lending bank at fixed rates and will receive interest payments from its lead lending bank on the same notional amounts at variable rates based on LIBOR. Effective December 28, 2007, the Company pays interest on its interest-sensitive borrowings, principally based on one-month LIBOR plus applicable margins. Accordingly, Franklin established a fixed rate plus applicable margins on $1.00 billion of its borrowings, which at the time of entering into the swap agreements ranged from one year to four years. The weighted average fixed rate of the total $1.00 billion of swaps is approximately 2.99%.

     The following table presents the notional and fair value amounts of the interest rate swaps at September 30, 2008.

Notional Amount		Term	Maturity Date	Fixed Rate			Estimated Fair Value*
$	220,000,000	1 year	March 5, 2009		2.62	%	$	814,857
	390,000,000	2 years	March 5, 2010		2.79	%		1,836,644
	275,000,000	3 years	March 5, 2011		3.47	%		(338,480	)
	70,000,000	3 years	March 5, 2011		3.11	%		451,585
	45,000,000	4 years	March 5, 2012		3.43	%		315,370
$	1,000,000,000						$	3,079,976

* Determined in accordance with SFAS 157 based upon a “Level 2” valuation methodology.

     The net effect of the interest rate swaps for the three and nine months ended September 30, 2008 was $1.3 million and $1.8 million, respectively, which increased our interest expense. The estimated fair

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value of the swaps at September 30, 2008 was $3.1 million, which increased stockholders’ equity (other comprehensive income). The fair value of the interest-rate swaps in the future will fluctuate as LIBOR interest rates change and as the remaining term of the swaps becomes shorter.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, real estate, delinquency and default risk of the loans in our portfolios, and changes in corporate tax rates. A material change in these risks or rates could adversely affect our operating results and cash flows.

Impact of Inflation

     The Company measures its financial condition and operating results in historical dollars without considering changes in the purchasing power of money over time due to inflation, although the impact of inflation is reflected in increases in the costs of our operations. Substantially all of the Company’s assets and liabilities are monetary in nature, and therefore, interest rates have a greater impact on our performance than the general effects of inflation. Because a substantial portion of the Company’s borrowings are sensitive to changes in short-term interest rates, any increase in inflation, which often gives rise to increases in interest rates, could materially impact the Company’s financial performance.

Interest Rate Risk

     Interest rate fluctuations can adversely affect our operating results and present a variety of risks, including the risk of a mismatch between the repricing of interest-earning assets and borrowings, variances in the yield curve and changing prepayment rates on the Company’s portfolios of notes receivable and loans held for investment.

     Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond our control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse effect on our business, financial condition and results of operations.

     In addition to the performance of the loans in our portfolios, the Company’s operating results depend in large part on differences between the interest earned on its assets and the interest paid on its borrowings. Most of the Company’s assets, consisting primarily of mortgage notes receivable, generate fixed returns and have remaining contractual maturities in excess of five years, while the majority of originated loans held for investment generate fixed returns for the first two years and six-month adjustable returns thereafter. As of December 28, 2007, the effective date of the Forbearance Agreements, our borrowings are based on one-month LIBOR. Prior to December 28, 2007, we funded the origination and acquisition of these assets with borrowings that had interest rates based on the monthly Federal Home Loan Bank of Cincinnati (“FHLB”) 30-day advance rate. In most cases, the interest income from our assets will respond more slowly to interest rate fluctuations than the cost of our borrowings, creating a mismatch between interest earned on our interest-yielding assets and the interest paid on our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, will significantly impact our net interest income and, therefore, net income. Our borrowings bear interest at rates that fluctuate with one-month LIBOR. We currently use interest-rate derivatives, essentially interest-rate swaps, to hedge our interest rate exposure by converting a significant portion of our highly interest-sensitive borrowings from variable-rate payments to fixed-rate payments. Based on approximately $340.2 million of unhedged interest-rate sensitive borrowings outstanding at September

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30, 2008, a 1% instantaneous and sustained increase in the one-month LIBOR rate could increase quarterly interest expense by as much as approximately $850,000, pre-tax, during the remaining terms of the swap agreements, which would negatively impact our quarterly after-tax net income. Due to the unprecedented turmoil in the credit markets in September, which caused one-month LIBOR to rapidly and dramatically rise during the month of September, the LIBOR rate set for our borrowed funds for the month of October increased approximately 156 basis points. The impact of this increase on the cost of our unhedged interest-sensitive borrowings will be approximately $442,000 for the month of October. Due to our liability-sensitive balance sheet, increases in these rates will decrease both net income and the market value of our net assets. If the Company’s existing swap contracts expire, and they are not renewed, a 1% instantaneous and sustained increase in the one-month LIBOR rate would have the effect of increasing quarterly interest expense by approximately $3.4 million, pre-tax. See “Management’s Discussion and Analysis – Borrowings.”

     The value of our assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty. When we originated and purchased mortgage loans, we expected that such mortgage loans would have a measure of protection from prepayment in the form of prepayment lockout periods or prepayment penalties. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments. During 2007 and the first nine months of 2008, due to declining housing prices in general and a rapid and severe credit tightening throughout the industry, portfolio payoffs through borrower refinancing have been declining as it has become more difficult for borrowers, particularly borrowers with any type of credit deficiency, to refinance their loans.

Real Estate Risk

     Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions, which may be adversely affected by industry slowdowns and other factors, and local real estate conditions (such as the supply of housing or the rapid increase in home values). Decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could cause us to suffer losses on the ultimate disposition of foreclosed properties.

     We purchased and originated principally fixed and adjustable rate residential mortgage loans, which are secured primarily by the underlying single-family properties. Because the vast majority of our loans are to non-prime borrowers, delinquencies and foreclosures are substantially higher than those of prime mortgage loans, and if not serviced actively and effectively could result in an increase in losses on dispositions of properties acquired through foreclosure. In addition, a decline in real estate values would reduce the value of the residential properties securing our loans, which could lead to an increase in borrower defaults, reductions in interest income and increased losses on the disposition of foreclosed properties. Residential real estate values have been declining in almost all markets and it is expected that housing price depreciation will continue in most markets in the near term.

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     During the first nine months of 2008, the deterioration in the housing and subprime mortgage markets, particularly declining home values, continued. Additionally, the significant tightening of credit availability throughout the mortgage lending industry, and particularly in the subprime segment of the industry, continued unabated. These market events of approximately the past eighteen months have increased, and are expected to continue to increase delinquencies, defaults and losses on residential 1-4 family loans.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

     There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We are involved in routine litigation matters generally incidental to our business, which primarily consist of legal actions related to the enforcement of our rights under mortgage loans we hold, none of which is individually or in the aggregate material. In addition, because we originate and service mortgage loans throughout the country, we must comply with various state and federal lending laws, rules and regulations and we are routinely subject to investigation and inquiry by regulatory agencies, some of which arise from complaints filed by borrowers, none of which is individually or in the aggregate material.

     On February 6, 2008, the Company commenced an action in the Supreme Court of the State of New York, County of New York styledFranklin Credit Management Corporation v. WMC Mortgage LLC, successor to WMC Mortgage Corp., (the “First WMC Litigation”). The First WMC Litigation arises from the Company’s purchase of approximately $170 million of second mortgages from WMC Mortgage Corp. (“WMC”), an affiliate of General Electric Corporation. Through the First WMC Litigation, the Company seeks damages in an amount not less than $35.5 million resulting from breaches of the representations and warranties contained in the loan purchase agreements entered into between the Company and WMC. The Defendant has served an Answer to the Complaint generally denying the allegations. Discovery has commenced. No trial date has been set.

     On August 15, 2008, the Company commenced a second action in the Supreme Court of the State of New York, County of New York styledFranklin Credit Management Corporation v. WMC Mortgage LLC, successor to WMC Mortgage Corp., (the “Second WMC Litigation”) seeking damages, with respect to second mortgages purchased from WMC during 2006, which were not subject of the First WMC Litigation, in an amount not less than $36.8 million resulting from breaches of representations and warranties contained in the loan purchase agreements entered into between the Company and WMC. The Defendant has served an Answer to the Complaint generally denying the allegations.

     The court has directed that the parties file a stipulation consolidating the First WMC Litigation and the Second WMC Litigation. On October 1, 2008, a stipulation was filed with the New York County clerk’s office consolidating the two actions for all purposes.

     On February 13, 2008, the Company commenced an action in the Supreme Court of the State of New York styledFranklin Credit Management Corporation v. Decision One Mortgage Company, LLC and HSBC Finance Corporation, seeking not less than $7.5 million for breaches of certain loan purchase agreements based on a failure of Decision One Mortgage Company, LLC (“Decision One”) to repurchase loans it sold to the Company and for which an early payment default occurred. HSBC Finance Corporation (“HSBC”) has guaranteed Decision One’s obligations with respect to certain of the loans. In that connection, the Company seeks not less than $4.4 million from HSBC. On March 25, 2008, the defendants served their answer generally denying the Company’s allegations; included as part of the answer were counterclaims by Decision One for attorneys’ fees and indemnification under the subject loan purchase agreements. The case remains in its preliminary stages.

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ITEM 1A. RISK FACTORS

     Except as reflected in this Form 10-Q, there have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.

Uncertain Continued Viability

The adverse developments in the mortgage industry and credit markets have adversely affected our business, our cash flows and our stock price, and raise substantial doubt about our financial viability.

     During the past year, and particularly in recent months, the mortgage industry has come under enormous pressure due to the adverse housing industry environment, the nearly complete shutdown of credit markets and other adverse economic factors. Numerous companies operating in the mortgage sector have failed, including several well regarded banks and Wall Street firms, and other companies are facing serious operating and financial challenges. The Company also faced significant mortgage-related and financial challenges that began during the second half of 2007 that have deepened through 2008 due to these adverse conditions, and we expect to continue to face these challenges as these conditions may not improve or may worsen for the foreseeable future.

     Our ability to continue to operate our business, to maintain state licenses necessary to continue to service loans and to meet our debt service obligation requirements depends on our performance under the Forbearance Agreements with our lead lending bank, to successfully renew the Forbearance Agreements, or enter into new credit facilities with our lead lending bank prior to the scheduled maturity of the Forbearance Agreements in May 2009. Due to our significant financial distress, including a stockholders’ deficit of $263.3 million at September 30, 2008 and continuing operating losses, other sources of funding are unlikely to be available to us. In addition, our failure to comply with any of the terms of the existing credit facilities, as amended by the Forbearance Agreements, with our lender, including our current non-compliance with certain covenants therein described elsewhere in this Quarterly Report on Form 10-Q, could result in an earlier default and entitle the bank to declare the Company’s indebtedness immediately due and payable and result in a transfer of our servicing to a third-party servicer. As a result, we would not be able to continue some of our operations or continue at all.

Operating Losses

     The continuing deterioration in the U.S. housing market, including generally continuing housing price declines and the severe contraction of available mortgage credit for consumers without excellent credit histories, and most recently coupled with a slowing economy with rising unemployment, may continue to widen the mismatch of the Company’s excess of interest-bearing borrowings over interest-paying loans and further negatively impact the credit quality of the Company’s portfolios, which could result in decreased net interest income and additional significant provisions for loan losses resulting in increased operating losses in future quarters.

Stockholders’ Deficit

     The Company had a net loss of $18.0 million and $305.9 million for the three and nine months ended September 30, 2008, respectively. As a result, the Company had deficit stockholders’ equity of $263.3 million at September 30, 2008. Deficit stockholders’ equity could seriously limit our operations, particularly our authority to service our loans and loans for third parties, our recent efforts to provide services for third parties, on a fee-paying basis, which are directly related to our servicing operations and

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our portfolio acquisition experience with residential mortgage loans, and affect our ability to maintain state mortgage and collection agency licenses.

Licenses to Service Loans

     The requirements imposed by state mortgage finance licensing laws vary considerably. Many mortgage licensing laws impose a licensing obligation to service residential mortgage loans and certain state collection agency licensing laws require entities collecting on delinquent or defaulted loans for others or to acquire such loans to be licensed as well. Once these licenses are obtained, state regulators impose additional ongoing obligations on licensees, such as maintaining certain minimum net worth or line of credit requirements. If the Company does not, among other things, meet these minimum net worth or line of credit requirements, the regulators may revoke or suspend the Company’s licenses and prevent the Company from continuing to service loans, which would adversely affect the Company’s operations and financial condition and ability to attract new servicing customers. The Company’s deficit net worth at September 30, 2008 has resulted in the Company’s non-compliance with the requirements to maintain certain licenses in approximately 21 states, and consequently, the regulators in all or some of these states may take a number of possible corrective actions in response to the Company’s non-compliance, including license revocation or suspension, requiring the Company to file a corrective action plan, fine assessment, denial of an application for renewal of a license, or a combination of the same, in which case the Company’s business would be adversely affected. In October 2008, the Company was notified of such non-compliance by the state of West Virginia and, as a result, has entered into an Assurance of Voluntary Compliance with the state’s Commissioner of Banking that, as of November 30, 2008, the Company will meet the state’s statutory minimum net worth requirement of $250,000. If the Company is unable to meet this requirement, the Company has agreed to either surrender its license to act as a servicer or receive an Order revoking its license. In addition, the Company’s Forbearance Agreements with The Huntington National Bank, which are described below, contain affirmative covenants that the Company maintain and comply in all material respects with all governmental licenses and authorizations to hold and service mortgage loans and real estate owned properties. If the Company breaches such covenants, which it has breached by not complying with the minimum net worth requirements of certain states, or The Huntington National Bank determines that there has been a material adverse affect on the Company’s business and, in either instance, notice of the same is provided to the Company by The Huntington National Bank, which the Huntington National Bank has not as of the date of this filing provided to the Company, any such noticed event would be a Forbearance Default under the Forbearance Agreements, which would entitle The Huntington National Bank to declare the Company’s indebtedness immediately due and payable and transfer the Company’s rights as servicer to a third party.

     The Company is currently evaluating various options and corporate structures to address the required minimum net worth situation, to help preserve the good standing of the Company’s licenses and to ensure that the Company is able to continue to service loans. These options include changes to the Company’s corporate structure so that the Company’s servicing operations would be segregated into one or two wholly-owned subsidiaries. While the Company believes that the required consent and cooperation of The Huntington National Bank for any changes the Company determines to implement, that would enable the Company to retain its servicing and debt collection licenses with all or most states, would be obtained, there can be no assurance that the Company will identify and successfully implement a viable option to enable the Company to retain these licenses.

Delisting – The Nasdaq Capital Market

     Our common stock as of November 3, 2008 is quoted under the stock symbol “FCMC.PK” on the “Pink Sheets,” a centralized quotation service for over-the counter securities, following its delisting from The Nasdaq Capital Market, and the Company is seeking to encourage brokers to arrange for its common

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stock to be quoted on the Over-The-Counter Bulletin Board (“OTCBB”). Prior to November 3, 2008, the Company’s common stock traded on The Nasdaq Capital Market.

     The Company attended a hearing before the Nasdaq Hearings Panel (the “Panel”) on October 23, 2008 and requested for various reasons that its pending delisting be delayed. On October 30, 2008, the Company received a letter from Nasdaq stating that the Panel had denied the Company’s request for continued listing on Nasdaq due to the failure of Franklin to maintain a minimum of $2,500,000 in stockholders’ equity as required by Nasdaq Marketplace Rule 4310(c)(3), and trading of Franklin’s shares was suspended effective as of the open of business on Monday, November 3, 2008.

     The delisting of our shares from the Nasdaq Capital Market will likely reduce the liquidity of our common stock and could lead to a drop in the market price of our common stock. Because of the relatively small number of shares that are traded on the OTCBB and the Pink Sheets, share prices may be volatile and it may be difficult to find a purchaser for shares of our common stock. As a result, investors should consider the potential lack of liquidity and the long-term nature of an investment in our stock prior to investing.

     In addition to the matters discussed above, the Company is subject to various risks, including the following, many of which are also discussed in greater detail in the Company’s Form 10-K.

Risks Related to Our Business

• We may experience higher loan losses than we have reserved for in our financial statements.

• A prolonged economic slowdown or a lengthy or severe recession could harm our operations, particularly if it results in a decline in the real estate market.

• Our credit facilities require us to observe certain covenants, and our failure to satisfy such covenants could render us insolvent.

• If our lenders fail to renew our loans for additional terms or provide us with refinancing opportunities, our indebtedness will become due and payable in May 2009.

• If we do not comply with certain minimum servicing standards in the Forbearance Agreements with the bank, the bank can transfer our rights as servicer to a third party.

• Our ability to fund operating expenses depends on our principal lender continuing to provide an adequate operating allowance.

• Our business is sensitive to, and can be materially affected by, changes in interest rates.

• The bank may prevent our pursuing future business opportunities.

• We use estimates for recognizing revenue on a majority of our portfolio investments and our earnings would be reduced if actual results are less than our estimates.

• When we acquired S&D loans, the price we paid was based on a number of assumptions. Material differences between the assumptions we used in determining the value of S&D loans we acquired and our actual experience could harm our financial position.

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• If we do not obtain and maintain the appropriate state licenses, we will not be allowed to service, acquire, sell or broker mortgage loans in some states, which would adversely affect our operations.

• A significant amount of our loans held for portfolio are secured by property in California, New York, New Jersey and Florida, and our operations could be harmed by economic downturns or other adverse events in these states.

• We may not be adequately protected against the risks inherent in subprime residential mortgage loans.

• A number of our second lien mortgage loans are subordinated to ARM or interest-only mortgages that may be subject to monthly payment increases, which may result in delinquencies and increase our risk of loss on these loans.

• We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, sellers of loans we acquired, vendors and our employees.

• We may not be successful in entering into or implementing our planned business of providing servicing and other mortgage related services for other entities on a fee-paying basis.

• The success and growth of our servicing business will depend on our ability to adapt to and implement technological changes, and any failure to do so could result in a material adverse effect on our business.

• If we do not manage the changes in our businesses effectively, our financial performance could be harmed.

• The inability to attract and retain qualified employees could significantly harm our business.

• An interruption in or breach of our information systems may result in lost business and increased expenses.

• We are exposed to the risk of environmental liabilities with respect to properties to which we take title.

• A loss of our Chairman may adversely affect our operations.

Risks Related to Our Financial Statements

• We may become subject to liability and incur increased expenditures as a result of the restatement in 2006 of certain previously issued financial statements.

• We may become subject to liability and incur increased expenditures as a result of our assessments of our allowance for loan losses.

• Failures in our internal controls and disclosure controls and procedures could lead to material errors in our financial statements and cause us to fail to meet our reporting obligations.

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Risks Related to the Regulation of Our Industry

• New legislation and regulations directed at curbing predatory lending practices could restrict our ability to price, sell, or finance non-prime residential mortgage loans, which could adversely impact our earnings.

• The broad scope of our operations exposes us to risks of non-compliance with an increasing and inconsistent body of complex laws and regulations at the federal, state and local levels.

• If financial institutions face exposure stemming from legal violations committed by the companies to which they provide financing or underwriting services, this could negatively affect the market for whole-loans and mortgage-backed securities.

• We may be subject to fines or other penalties based upon the conduct of our independent brokers.

• We are subject to reputational risks from negative publicity concerning the subprime mortgage industry.

• We are subject to significant legal and reputational risks and expenses under federal and state laws concerning privacy, use and security of customer information.

• If many of our borrowers become subject to the Servicemembers Civil Relief Act of 2003, which on July 30, 2008, was amended by the Housing and Economic Recovery Act of 2008 to temporarily enhance protections for servicemembers relating to mortgages and mortgage foreclosures until December 31, 2010, by extending the protection period and stay of proceedings from 90 days to 9 months and extending the interest rate limitation on mortgages from the period of military service to the period of military service and one year thereafter, our cash flows and interest income may be adversely affected.

• Legislative action to provide mortgage relief to consumers, including our borrowers, may negatively impact our business.

Risks Related to Our Securities

• Thomas J. Axon effectively controls our company, substantially reducing the influence of our other stockholders.

• Due to the delisting from The Nasdaq Stock Market on November 3, 2008, the price and liquidity of our common stock and our ability to access the capital markets will be adversely affected.

• Our organizational documents, Delaware law and our credit facilities may make it harder for us to be acquired without the consent and cooperation of our board of directors, management and lender.

• Our quarterly operating results may fluctuate and cause our stock price to decline.

• Various factors unrelated to our performance may cause the market price of our common stock to become volatile, which could harm our ability to access the capital markets in the future.

• Future sales of our common stock may depress our stock price.

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• Compliance with the rules of the market in which our common stock trades and proposed and recently enacted changes in securities laws and regulations are likely to increase our costs.

     Additional information on these risk factors is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5. OTHER INFORMATION

     None.

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ITEM 6. EXHIBITS

Exhibit
Number
3.1	Fifth Amended and Restated Certificate of Incorporation. Incorporated by reference to Appendix A to the Registrant’s Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission (the “Commission”) on January 20, 2005.
3.2	Amended and Restated By-laws. Incorporated by reference to Appendix B to the Registrant’s Definitive Information Statement on Schedule 14C, filed with the Commission on January 20, 2005.
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer of the Registrant in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Section 1350 Certification of Chief Executive Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Section 1350 Certification of Chief Financial Officer of the Registrant in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 14, 2008

FRANKLIN CREDIT MANAGEMENT CORPORATION
By:	/s/ ALEXANDER GORDON JARDIN
	Alexander Gordon Jardin
	Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

Signature	Title	Date
/s/ ALEXANDER GORDON JARDIN	Chief Executive Officer	November 14, 2008
Alexander Gordon Jardin
(Principal Executive Officer)
/s/ PAUL D. COLASONO	Executive Vice President	November 14, 2008
Paul D. Colasono	and Chief Financial Officer
(Principal Financial Officer)

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