Owens Mortgage Investment Fund A Calif LTD Partnership (OMIF) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2011

OR

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

For the transition period from ________ to __________

Commission file number 000-17248

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

(Exact Name of Registrant as Specified In Its Charter)

California	68-0023931
(State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)
2221 Olympic Boulevard
Walnut Creek, California	94595
(Address of principal executive offices)	(Zip Code)
(925) 935-3840
Registrant’s telephone number, including area code

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

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

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

1

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

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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

Yes [   ] No [X]

2

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 4.	Controls and Procedures	52
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 6.	Exhibits	53

Exhibit 31.1

Exhibit 31.2

Exhibit 32

Exhibit 101

3

 Part I - Item 1. FINANCIAL STATEMENTS

OWENS MORTGAGE INVESTMENT FUND,

 a California Limited Partnership

Consolidated Balance Sheets

June 30, 2011 and December 31, 2010

(UNAUDITED)

	June 30,		December 31,
	2011		2010
ASSETS
Cash and cash equivalents (1)	$	17,724,576	$	5,375,060
Certificates of deposit		492,181		2,003,943
Loans secured by trust deeds, net of allowance for losses of $26,219,516 in 2011 and $36,068,515 in 2010		82,371,110		121,596,980
Interest and other receivables		2,445,337		4,493,614
Vehicles, equipment and furniture, net of accumulated depreciation of $377,061 in 2011 and $309,676 in 2010		347,619		387,975
Other assets, net of accumulated amortization of $707,483 in 2011 and $675,398 in 2010		1,164,585		1,036,146
Investment in limited liability company		2,153,863		2,141,971
Real estate held for sale (1)		29,738,196		15,132,847
Real estate held for investment, net of accumulated depreciation and amortization of $6,999,244 in 2011 and $5,887,910 in 2010 (1)		109,987,147		81,933,352
Total Assets	$	246,424,614	$	234,101,888
LIABILITIES AND PARTNERS’ CAPITAL
LIABILITIES:
Accrued distributions payable	$	—	$	46,014
Due to general partner		398,750		682,231
Accounts payable and accrued liabilities (1)		2,790,705		2,387,087
Deferred gains		1,462,340		1,475,220
Note payable		10,318,209		10,393,505
Total Liabilities		14,970,004		14,984,057
PARTNERS’ CAPITAL (units subject to redemption):
General partner		2,239,578		2,259,916
Limited partners		215,159,035		216,841,448
Total Owens Mortgage Investment Fund partners’ capital		217,398,613		219,101,364
Noncontrolling interests		14,055,997		16,467
Total partners’ capital		231,454,610		219,117,831
Total Liabilities and Partners’ Capital	$	246,424,614	$	234,101,888

The accompanying notes are an integral part of these consolidated financial statements.

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(1) The following table presents information on assets and liabilities related to a Variable Interest Entity (VIE) that is consolidated by the Partnership. The difference between total VIE assets and liabilities represents the Partnership’s interest in that entity, which was eliminated in consolidation. The assets of the consolidated VIE will be used to settle the liabilities of that entity and, except for the Partnership’s interest in the VIE, are not available to the creditors of the Partnership.

	June 30,		December 31,
	2011		2010
ASSETS
Cash and cash equivalents	$	330,159	$	—
Real estate held for sale		12,480,000		—
Real estate held for investment, net of accumulated depreciation of $249,224		21,830,776		—
TOTAL ASSETS	$	34,640,935	$	—
LIABILITIES
Accounts payable and accrued liabilities	$	589,200	$	—
TOTAL LIABILITIES	$	589,200	$	—

5

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2011 and 2010

(UNAUDITED)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
REVENUES:
Interest income on loans secured by trust deeds	$	1,359,906		$	1,917,769		$	2,802,655		$	4,329,965
Gain on sale of real estate, net		6,504			279			12,880			188,933
Rental and other income from real estate properties		3,181,346			2,036,890			5,734,145			3,641,451
Income from investment in limited liability company		37,205			39,744			76,892			72,790
Other income		1,962			4,118			4,973			8,296
Total revenues		4,586,923			3,998,800			8,631,545			8,241,435
EXPENSES:
Management fees to general partner		530,604			480,906			1,285,835			1,055,317
Servicing fees to general partner		73,554			127,289			155,915			259,778
Administrative/accounting		48,996			15,000			111,205			30,000
Legal and professional		91,655			98,959			283,667			249,189
Rental and other expenses on real estate properties		3,538,358			2,201,297			6,433,857			4,176,843
Interest expense		132,392			542,205			263,820			1,110,511
Provision for loan losses		486,932			1,510,680			788,730			1,847,748
Impairment losses on real estate properties		291,602			465,294			291,602			465,294
Other		44,315			42,229			53,877			50,433
Total expenses		5,238,408			5,483,859			9,668,508			9,245,113
Net loss	$	(651,485	)	$	(1,485,059	)	$	(1,036,963	)	$	(1,003,678	)
Less: Net loss (income) attributable to non-controlling interests		82,519			(623	)		107,377			(804	)
Net loss attributable to Owens Mortgage Investment Fund	$	(568,966	)	$	(1,485,682	)	$	(929,586	)	$	(1,004,482	)
Net loss allocated to general partner	$	(5,451	)	$	(14,515	)	$	(11,871	)	$	(9,503	)
Net loss allocated to limited partners	$	(563,515	)	$	(1,471,167	)	$	(917,715	)	$	(994,979	)
Net loss allocated to limited partners per weighted average limited partnership unit	$	(.003	)	$	(.006	)	$	(.004	)	$	(.004	)
Weighted average limited partnership units		216,084,000			240,854,000			214,933,000			241,215,000

The accompanying notes are an integral part of these consolidated financial statements.

6

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Consolidated Statements of Partners’ Capital

For the Six Months Ended June 30, 2011 and 2010

(UNAUDITED)

	General			Limited partners						Total OMIF						Total
										Partners’				Noncontrolling		Partners'
	partner			Units			Amount			capital				interests		capital
Balances, December 31, 2009	$	2,512,399			241,534,226		$	241,338,206		$	243,850,605		$	34,656		$	243,885,261
Net (loss) income		(9,503	)		(994,979	)		(994,979	)		(1,004,482	)		804			(1,003,678	)
Partners’ distributions		(14,448	)		(1,017,079	)		(1,017,079	)		(1,031,527	)		(10,890	)		(1,042,417	)
Balances, June 30, 2010	$	2,488,448			239,522,168		$	239,326,148		$	241,814,596		$	24,570		$	241,839,166
Balances, December 31, 2010	$	2,259,916			217,037,468		$	216,841,448		$	219,101,364		$	16,467		$	219,117,831
Net loss		(11,871	)		(917,715	)		(917,715	)		(929,586	)		(107,377	)		(1,036,963	)
Noncontrolling interests of     newly consolidated VIE		—			—			—			—			14,020,191			14,020,191
Contribution from noncontrolling interest		—			—			—			—			135,944			135,944
Partners’ distributions		(8,467	)		(764,698	)		(764,698	)		(773,165	)		(9,228	)		(782,393	)
Balances, June 30, 2011	$	2,239,578			215,355,055		$	215,159,035		$	217,398,613		$	14,055,997		$	231,454,610

The accompanying notes are an integral part of these consolidated financial statements.

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OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010

(UNAUDITED)

	June 30,			June 30,
	2011			2010
CASH FLOWS FROMOPERATING ACTIVITIES:
Net loss	$	(1,036,963	)	$	(1,003,678	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Gain on sale of real estate, net		(12,880	)		(188,933	)
Income from investment in limited liability company		(76,892	)		(72,790	)
Provision for loan losses		788,730			1,847,748
Bad debt expense		2,024			—
Impairment losses on real estate properties		291,602			465,294
Depreciation and amortization		1,454,125			841,407
Changes in operating assets and liabilities:
Interest and other receivables		(491,887	)		(954,555	)
Other assets		(161,869	)		(308,271	)
Accounts payable and accrued liabilities		(2,577,253	)		301,323
Due to general partner		(283,481	)		51,580
Net cash (used in) provided by operating activities		(2,104,744	)		979,125
CASH FLOWS FROMINVESTING ACTIVITIES:
Investment in loans secured by trust deeds		—			(1,162,366	)
Principal collected on loans		14,242,623			3,941,011
Investment in real estate properties		(570,339	)		(348,124	)
Net proceeds from disposition of real estate properties		—			646,258
Purchases of vehicles, equipment and furniture		(27,027	)		(5,649	)
Maturities of certificates of deposit		1,511,762			—
Purchases of certificates of deposit		—			(1,598,313	)
Distribution received from investment in limited liability company		65,000			65,000
Net cash provided by investing activities		15,222,019			1,537,817
CASH FLOWS FROMFINANCING ACTIVITIES:
Repayments on line of credit payable		—			(4,044,931	)
Repayments on note payable		(75,296	)		(34,553	)
Distributions to noncontrolling interests		(9,228	)		(10,890	)
Contribution from noncontrolling interest		135,944			—
Partners’ cashdistributions		(819,179	)		(957,371	)
Net cash used in financing activities		(767,759	)		(5,047,745	)
Net increase (decrease) in cash and cash equivalents		12,349,516			(2,530,803	)
Cash and cash equivalents at beginning of period		5,375,060			7,530,272
Cash and cash equivalents at end of period	$	17,724,576		$	4,999,469
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest	$	265,602		$	1,165,070

See notes 2, 3, 5 and 6 for supplemental disclosure of non-cash investing activities.

The accompanying notes are an integral part of these consolidated financial statements.

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OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of the management of Owens Mortgage Investment Fund, a California Limited Partnership, (the “Partnership”) the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. Certain information and footnote disclosures presented in the Partnership’s annual consolidated financial statements are not included in these interim financial statements.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2011. The Partnership evaluates subsequent events up to the date it files its Form 10-Q with the SEC. 

Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and its majority- and wholly-owned limited liability companies (see notes 4, 5 and 6) and those variable interest entities (“VIEs”) for which the Partnership is the primary beneficiary, as discussed below in “Significant Accounting Policies”. All significant inter-company transactions and balances have been eliminated in consolidation.  The Partnership is in the business of providing mortgage lending services and manages its business as one operating segment.

On January 1, 2010, the Partnership adopted new consolidation accounting guidance related to VIEs. The new guidance eliminated the concept of qualified special purpose entities (“QSPEs”) that were previously exempt from consolidation, and introduced a new framework for determining the primary beneficiary of a VIE. The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. Under the new guidance, the primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Certain reclassifications, not affecting previously reported net income or total partner capital, have been made to the previously issued consolidated financial statements to conform to the current year presentation.

Management Estimates

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 periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, the valuation of real estate held for sale and investment, and the estimate of the environmental remediation liability (see note 4).  Actual results could differ significantly from these estimates.

Significant Accounting Policies

Income Taxes

No provision for federal and state income taxes is made in the consolidated financial statements since the Partnership is not a taxable entity.  Accordingly, any income or loss is included in the tax returns of the partners.

9

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

In accordance with the provisions of ASC 740-10, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Partnership has elected to record interest and penalties related to unrecognized tax benefits, if any, in other expenses. The total amount of unrecognized tax benefits, including interest and penalties, at June 30, 2011 is zero. The amount of tax benefits that would impact the effective rate, if recognized, is expected to be zero. The Partnership does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months. With few exceptions, the Partnership is no longer subject to federal and state income tax examinations by tax authorities for years before 2006.

Variable Interest Entities

A variable interest entity (VIE) is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets. These entities: lack sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; have equity owners who either do not have voting rights or lack the ability to make significant decisions affecting the entity’s operations; and/or have equity owners that do not have an obligation to absorb the entity’s losses or the right to receive the entity’s returns.

In June 2009, the FASB issued amended accounting principles that changed the accounting for VIEs which became effective for the Company as of January 1, 2010. These principles were codified as ASU No. 2009-16, “Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets” and ASU No. 2009-17, “Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amended the VIEs Subsections of ASC Subtopic 810-10 to require former qualified special purpose entities (QSPEs) to be evaluated for consolidation and also changed the approach to determining a VIE’s primary beneficiary (“PB”) and required companies to more frequently reassess whether they must consolidate VIEs. Under the new guidance, the PB is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

To assess whether the Partnership has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Partnership considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers, collateral managers, servicers, or owners of call options or liquidation rights over the VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Partnership has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Partnership considers all of its economic interests, including debt and equity investments, servicing fees, and derivative or other arrangements deemed to be variable interests in the VIE. This assessment requires that the Partnership apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Partnership.

The Partnership performs on-going reassessments of: (1) whether any entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Partnership’s involvement with a VIE cause the Partnership’s consolidation conclusion regarding the VIE to change.

10

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The Partnership evaluates its interest in each VIE. When the Partnership is considered the primary beneficiary, the VIE’s assets, liabilities and noncontrolling interests are consolidated and included in the Consolidated Financial Statements. See Note 6 — Real Estate Held for Investment for further details on the Partnership’s consolidated VIE.

Loans Secured by Trust Deeds

Loans secured by trust deeds are stated at the principal amount outstanding. The Partnership’s portfolio consists primarily of commercial real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.

Allowance for Loan Losses

The allowance for loan losses is an estimate of credit losses inherent in the Partnership’s loan portfolio that have been incurred as of the balance-sheet date.  The allowance is established through a provision for loan losses which is charged to expense.  Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired.

A loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement.  Loans determined to be impaired are individually evaluated for impairment.  When a loan is impaired, the Partnership measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.

A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Partnership for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDR’s are considered impaired and measured for impairment as described above.

The determination of the general reserve for loans that are not impaired is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Partnership’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Partnership’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Partnership maintains a separate allowance for each portfolio segment (loan type).  These portfolio segments include commercial real estate, improved and unimproved land, condominium, and single-family (1-4 units) loans.   The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Partnership’s overall allowance, which is included on the consolidated balance sheet.

11

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

Real Estate Held for Sale and Investment

Real estate held for sale and investment includes real estate acquired through foreclosure and is initially stated at the property’s estimated fair value, less estimated costs to sell.

Depreciation of real estate properties held for investment is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements (5-39 years). Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases. Costs related to the improvement of real estate held for sale and investment are capitalized, whereas those costs related to holding the property are expensed.

The Partnership periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value.

The Partnership reclassifies real estate properties from held for investment to held for sale in the period in which all of the following criteria are met: 1) Management commits to a plan to sell the property; 2) The property is available for immediate sale in its present condition; 3) An active program to locate a buyer has been initiated; 4) The sale of the property is probable and the transfer of the property is expected to qualify for recognition as a completed sale, within one year; and 5) Actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.

If circumstances arise that previously were considered unlikely, and, as a result, the Partnership decides not to sell a real estate property classified as held for sale, the property is reclassified to held for investment. The property is then measured individually at the lower of its carrying amount, adjusted for depreciation or amortization expense that would have been recognized had the property been continuously classified as held for investment, or its fair value at the date of the subsequent decision not to sell.

Recently Issued Accounting Standards

ASU No. 2011-01

In January 2011, the FASB issued ASU No. 2011-01, “Receivables (Topic 310) – Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”.  The amendments in this ASU temporarily delayed the effective date of the disclosures about troubled debt restructuring in ASU No. 2010-20 for public entities. The delay was intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring were addressed in ASU no. 2011-02.

ASU No. 2011-02

In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”. The amendments in this ASU state that in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that the restructuring constitutes a concession and the debtor is experiencing financial difficulties and further clarifies when these conditions have been met. In addition, the amendments clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.

12

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

ASU No. 2011-04

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820)”.  The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards.  It changes the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements, among several other less significant changes.  This ASU is effective during interim and annual periods beginning after December 15, 2011.  Early application is not permitted.

NOTE 2 - LOANS SECURED BY TRUST DEEDS

Loans secured by trust deeds as of June 30, 2011 and December 31, 2010 are as follows:

	2011		2010
By Property Type:
Commercial	$	46,515,991	$	69,024,479
Condominiums		14,546,722		41,037,978
Single family homes (1-4 units)		250,000		325,125
Improved and unimproved land		47,277,913		47,277,913
	$	108,590,626	$	157,665,495
By Deed Order:
First mortgages	$	91,132,472	$	139,169,446
Second and third mortgages		17,458,154		18,496,049
	$	108,590,626	$	157,665,495

Scheduled maturities of loans secured by trust deeds as of June 30, 2011 and the interest rate sensitivity of such loans are as follows: 

	Fixed		Variable
	Interest		Interest
	Rate		Rate		Total
Year ending June 30:
2011 (past maturity)	$	73,480,445	$	—	$	73,480,445
2012		17,423,678		—		17,423,678
2013		1,100,000		2,000,000		3,100,000
2014		600,000		9,000,000		9,600,000
2015		—		—		—
Thereafter (through 2016)		—		4,986,503		4,986,503
	$	92,604,123	$	15,986,503	$	108,590,626

Variable rate loans use as indices the one-year, five-year and 10-year Treasury Constant Maturity Index (0.19%, 1.76% and 3.18%, respectively, as of June 30, 2011), the prime rate (3.25% as of June 30, 2011) or the weighted average cost of funds index for Eleventh District savings institutions (1.34% as of June 30, 2011) or include terms whereby the interest rate is adjusted at a specific later date. Premiums over these indices have varied from 2.0% to 6.5% depending upon market conditions at the time the loan is made.

13

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The following is a schedule by geographic location of loans secured by trust deeds as of June 30, 2011 and December 31, 2010:

	June 30, 2011		Portfolio	December 31, 2010		Portfolio
	Balance		Percentage	Balance		Percentage
Arizona	$	7,535,000	6.94%	$	7,535,000	4.78%
California		55,999,893	51.57%		80,608,323	51.12%
Colorado		15,828,102	14.58%		15,828,102	10.04%
Florida		—	0%		26,257,122	16.65%
Hawaii		2,000,000	1.84%		2,000,000	1.27%
Idaho		2,200,000	2.03%		2,200,000	1.40%
Nevada		1,087,700	1.00%		1,087,700	0.69%
New York		10,500,000	9.67%		10,500,000	6.66%
Oregon		—	0%		75,125	0.05%
Pennsylvania		4,021,946	3.70%		1,922,003	1.22%
Utah		3,511,722	3.23%		3,745,857	2.38%
Washington		5,906,263	5.44%		5,906,263	3.74%
	$	108,590,626	100.00%	$	157,665,495	100.00%

As of June 30, 2011 and December 31, 2010, the Partnership’s loans secured by deeds of trust on real property collateral located in Northern California totaled approximately 47% ($50,925,000) and 39% ($60,854,000), respectively, of the loan portfolio. The Northern California region (which includes Monterey, Fresno, Kings, Tulare and Inyo counties and all counties north) is a large geographic area which has a diversified economic base. The ability of borrowers to repay loans is influenced by the economic strength of the region and the impact of prevailing market conditions on the value of real estate. In addition, as of June 30, 2011, approximately 60% of the Partnership’s mortgage loans were secured by real estate located in the states of California, Arizona and Nevada, which have experienced dramatic reductions in real estate values over the past three years.

During the six months ended June 30, 2011, the Partnership extended, by one year or less, the maturity dates of two loans with aggregate principal balances totaling $3,494,000. During the six months ended June 30, 2010, the Partnership extended to December 31, 2011 the maturity date of one loan with a principal balance of $800,000.

As of June 30, 2011 and December 31, 2010, approximately $98,529,000 (90.7 %) and $147,451,000 (93.5%) of Partnership loans are interest-only and require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. To the extent that a borrower has an obligation to pay mortgage loan principal in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial cash amount. As a result, these loans involve a higher risk of default than fully amortizing loans. Borrowers occasionally are not able to pay the full amount due at the maturity date.  The Partnership may allow these borrowers to continue making the regularly scheduled monthly interest payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default.  These loans for which the principal is due and payable, but the borrower has failed to make such payment of principal are referred to as “past maturity loans”. As of June 30, 2011 and

December 31, 2010, the Partnership had twenty-three and twenty-seven past maturity loans totaling approximately $73,480,000 and $122,402,000, respectively.

As of June 30, 2011 and December 31, 2010, the Partnership had twenty-five and twenty-four loans, respectively, that were impaired, delinquent in monthly payments greater than ninety days and/or in the process of foreclosure totaling approximately $79,826,000 (74%) and $121,565,000 (77%), respectively.  This included twenty-two past maturity loans totaling $72,790,000 (67%) and $119,084,000 (76%), respectively. In addition, one and five loans totaling approximately $690,000 (0.6%) and $3,318,000 (2%), respectively, were past maturity but current in monthly payments as of June 30, 2011 and December 31, 2010, respectively (combined total of impaired and past maturity loans of $80,516,000 (74%) and $124,883,000 (79%),

14

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

respectively). Of the impaired and past maturity loans, approximately $26,948,000 (25%) and $46,078,000 (29%), respectively, were in the process of foreclosure and $29,278,000 (27%) and $53,606,000 (34%), respectively, involved borrowers who were in bankruptcy as of June 30, 2011 and December 31, 2010. During the quarter ended June 30, 2011, one delinquent Partnership loan was partially paid down by the borrower in the amount of $12,580,000.

During the six months ended June 30, 2011 and 2010, the Partnership foreclosed on four loans and one loan, respectively, with aggregate principal balances totaling approximately $34,832,000 and $9,592,000, respectively, and obtained the properties via the trustee’s sales.

During the quarter ended June 30, 2011, the Partnership assigned two first mortgage loans secured by the same property with an aggregate principal balance totaling $3,500,000 to a new wholly owned LLC entity (Broadway & Commerce, LLC). These loans were then foreclosed upon by the new LLC entity in July 2011 (subsequent to quarter end) and the property was obtained via the trustee’s sale. In addition, during the quarter ended June 30, 2011, the Partnership assigned one first mortgage loan that was purchased by the Partnership at a discount in 2010, with a principal balance of approximately $602,000, to a new wholly owned LLC entity (Bensalem Primary Fund, LLC).

NOTE 3 – ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011			2010
Balance, beginning of period	$	25,732,584	$	28,730,006		$	36,068,515		$	28,392,938
Provision		486,932		1,510,680			788,730			1,847,748
Charge-off		—		(5,121,806	)		(10,637,729	)		(5,121,806	)
Balance, end of period	$	26,219,516	$	25,118,880		$	26,219,516		$	25,118,880

As of June 30, 2011 and December 31, 2010, there was a general allowance for loan losses of $3,209,000 and $3,746,000, respectively, and a specific allowance for loan losses on thirteen and thirteen loans in the total amount of $23,010,516 and $32,322,515, respectively.

15

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The following tables show the allocation of the allowance for loan losses as of and for the three and six months ended June 30, 2011 and as of and for the year ended December 31, 2010 by portfolio segment and by impairment methodology:

		Commercial Real Estate		Condo-miniums		Single Family Homes		Improved and Unimproved Land
2011										Total
Allowance for loan losses:
	Three Months Ended June 30, 2011
Beginning balance	$	4,080,561	$	5,527,517	$	—	$	16,124,506	$	25,732,584
Provision		(107,636)		2,956		—		591,612		486,932
Ending Balance	$	3,972,925	$	5,530,473	$	—	$	16,716,118	$	26,219,516
	Six Months Ended June 30, 2011
Beginning balance	$	4,453,677	$	15,706,726	$	—	$	15,908,112	$	36,068,515
Charge-offs		—		(10,637,729)		—		—		(10,637,729)
Provision		(480,752)		461,476		—		808,006		788,730
Ending balance	$	3,972,925	$	5,530,473	$	—	$	16,716,118	$	26,219,516
Ending balance: individually evaluated for impairment	$	763,925	$	5,530,473	$	—	$	16,716,118	$	23,010,516
Ending balance: collectively evaluated for impairment	$	3,209,000	$	—	$	—	$	—	$	3,209,000
Loans:
Ending balance	$	46,515,991	$	14,546,722	$	250,000	$	47,277,913	$	108,590,626
Ending balance: individually evaluated for impairment	$	17,751,788	$	14,546,722	$	250,000	$	47,277,913	$	79,826,423
Ending balance: collectively evaluated for impairment	$	28,764,203	$	—	$	—	$	—	$	28,764,203

16

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

		Commercial Real Estate		Condo-miniums		Apartments		Single Family Homes		Improved and Unimproved Land
2010												Total
Allowance for loan losses:
Beginning balance	$	12,617,784	$	13,977,684	$	—	$	6,622	$	1,790,848	$	28,392,938
Charge-offs		(4,988,010)		(3,761,680)		(94,633)		—		—		(8,844,323)
Provision		(3,176,097)		5,490,722		94,633		(6,622)		14,117,264		16,519,900
Ending balance	$	4,453,677	$	15,706,726	$	—	$	—	$	15,908,112	$	36,068,515
Ending balance: individually evaluated for impairment	$	752,297	$	15,706,726	$	—	$	—	$	15,863,492	$	32,322,515
Ending balance: collectively evaluated for impairment	$	3,701,380	$	—	$	—	$	—	$	44,620	$	3,746,000
Loans:
Ending balance	$	69,024,479	$	41,037,978	$	—	$	325,125	$	47,277,913	$	157,665,495
Ending balance: individually evaluated for impairment	$	33,354,222	$	41,037,978	$	—	$	325,125	$	46,847,913	$	121,565,238
Ending balance: collectively evaluated for impairment	$	35,670,257	$	—	$	—	$	—	$	430,000	$	36,100,257

The following tables show an aging analysis of the loan portfolio by the time past due as of June 30, 2011 and December 31, 2010:

		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due
								Total Past Due Loans		Current Loans		Total Loans
June 30, 2011
Commercial  real estate	$	—	$	334,851	$	17,416,937	$	17,751,788	$	28,764,203	$	46,515,991
Condominiums		—		—		14,546,722		14,546,722		—		14,546,722
Single family homes		—		—		250,000		250,000		—		250,000
Improved and unimproved land		—		—		47,277,913		47,277,913		—		47,277,913
	$	—	$	334,851	$	79,491,572	$	79,826,423	$	28,764,203	$	108,590,626

17

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

		Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due
								Total Past Due Loans		Current Loans		Total Loans
December 31, 2010
Commercial  real estate	$	2,000,000	$	4,492,715	$	33,354,222	$	39,846,937	$	29,177,542	$	69,024,479
Condominiums		—		—		41,037,978		41,037,978		—		41,037,978
Single family homes		—		—		325,125		325,125		—		325,125
Improved and unimproved land		—		—		46,847,913		46,847,913		430,000		47,277,913
	$	2,000,000	$	4,492,715	$	121,565,238	$	128,057,953	$	29,607,542	$	157,665,495

All of the loans that are 90 or more days past due as listed above are on non-accrual status as of June 30, 2011 and December 31, 2010.

The following tables show information related to impaired loans as of and for the three and six months ended June 30, 2011 and as of and for the year ended December 31, 2010:

		As of June 30, 2011
		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial Real Estate	$	16,076,192	$	16,338,185	$	—
Condominiums		3,540,459		3,511,722		—
Single family homes		250,180		250,000		—
Improved and unimproved land		2,849,248		5,046,974		—
With an allowance recorded:
Commercial Real Estate		2,167,312		1,413,603		763,925
Condominiums		11,568,874		11,035,000		5,530,473
Single family homes		—		—		—
Improved and unimproved land		42,319,477		42,230,939		16,716,118
Total:
Commercial Real Estate	$	18,243,504	$	17,751,788	$	763,925
Condominiums	$	15,109,333	$	14,546,722	$	5,530,473
Single family homes	$	250,180	$	250,000	$	—
Improved and unimproved land	$	45,168,725	$	47,277,913	$	16,716,118

18

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	22,566,627	$	400,383	$	25,398,983	$	801,479
Condominiums		3,537,378		90,000		3,534,667		90,000
Single family homes		250,180		4,584		275,462		11,460
Improved and unimproved land		2,284,767		—		73,817		—
With an allowance recorded:
Commercial Real Estate		1,078,847		5,570		1,135,460		22,281
Condominiums		11,567,086		70,313		16,265,946		178,989
Single family homes		—		—		—		—
Improved and unimproved land		46,129,865		64,094		48,399,058		106,094
Total:
Commercial Real Estate	$	23,645,474	$	405,953	$	26,534,443	$	823,760
Condominiums	$	15,104,464	$	160,313	$	19,800,613	$	268,989
Single family homes	$	250,180	$	4,584	$	275,462	$	11,460
Improved and unimproved land	$	48,414,632	$	64,094	$	48,472,875	$	106,094

19

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

		As of December 31, 2010					Year Ended December 31, 2010
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate	$	30,592,387	$	30,176,681	$	—	$	40,078,123	$	2,449,101
Condominiums		3,758,642		3,745,857		—		3,764,720		69,026
Apartments		—		—		—		—		—
Single family homes		325,980		325,125		—		313,948		13,451
Improved and unimproved land		18,657,499		18,028,102		—		15,895,534		—
With an allowance recorded:
Commercial Real Estate		3,182,057		3,177,542		752,297		6,174,450		55,703
Condominiums		39,753,600		37,292,121		15,706,726		54,645,622		64,466
Apartments		—		—		—		3,326,308		245,583
Single family homes		—		—		—		—		—
Improved and unimproved land		28,972,550		28,819,811		15,863,492		27,943,631		46,435
Total:
Commercial Real Estate	$	33,774,444	$	33,354,222	$	752,297	$	46,252,573	$	2,504,804
Condominiums	$	43,512,242	$	41,037,978	$	15,706,726	$	58,410,342	$	133,492
Apartments	$	—	$	—	$	—	$	3,326,308	$	245,583
Single family homes	$	325,980	$	325,125	$	—	$	313,948	$	13,451
Improved and unimproved land	$	47,630,048	$	46,847,913	$	15,863,492	$	43,839,165	$	46,435

The Partnership does not have commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings.

The Partnership’s average recorded investment in impaired loans (including loans delinquent in payments greater than 90 days) was approximately $153,785,000 as of June 30, 2010.  Interest income recognized on impaired loans totaled approximately $713,000 for the three months ended June 30, 2010 and $1,526,000 for the six months ended June 30, 2010.  Interest income received on impaired loans totaled approximately $969,000 for the three months ended June 30, 2010 and $2,138,000 for the six months ended June 30, 2010.

NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY

During 2008, the Partnership entered into an Operating Agreement of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party.  The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that were owned by the Partnership. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Partnership, as seller, and Nanook, as buyer.  During the course of due diligence under the Sale Agreement, it was discovered that the property is contaminated and that remediation and monitoring may be required.  The

20

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture.  At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC that are wholly owned by 1850. The Partnership and Nanook are the Members of 1850 and NV Manager, LLC is the Manager. (See Note 12 for further discussion of the Partnership’s environmental remediation obligation with respect to the properties owned by 1850.)

The Partnership received capital distributions from 1850 of approximately $65,000 during the three months ended June 30, 2011 and 2010, respectively, and $65,000 during the six months ended June 30, 2011 and 2010, respectively. The net income to the Partnership from its investment in 1850 De La Cruz was approximately $37,000 and $40,000 during the three months ended June 30, 2011 and 2010, respectively, and $77,000 and $73,000 during the six months ended June 30, 2011 and 2010, respectively.

NOTE 5 - REAL ESTATE HELD FOR SALE

Real estate properties held for sale as of June 30, 2011 and December 31, 2010 consists of the following properties acquired through foreclosure:

	2011		2010
Manufactured home subdivision development, Ione, California	$	347,730	$	347,730
Commercial building, Roseville, California		204,803		204,804
Office condominium complex (16 units), Roseville, California		7,320,738		7,312,518
Industrial building, Sunnyvale, California (held within Wolfe Central, LLC)		3,383,205		3,376,827
Commercial buildings, Sacramento, California		3,890,968		3,890,968
Manufactured home subdivision development, Lake Charles, Louisiana (held within Dation, LLC)		2,025,493		—
Apartment building, Miami, Florida (held within TOTB Miami, LLC) – see Note 6		12,480,000		—
1/7th interest in single family home, Lincoln City, Oregon		85,259		—
	$	29,738,196	$	15,132,847

During the six months ended June 30, 2011, the Partnership foreclosed on a first mortgage loan secured by a 1/7th interest in a single family home located in Lincoln City, Oregon in the amount of approximately $75,000 and obtained the property via the trustee’s sale.  In addition, accrued interest and advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $10,000 were capitalized to the basis of the property. The property is classified as held for sale as it is listed for sale and the Partnership expects to complete a sale within the next year.

Dation, LLC

Dation, LLC (“Dation”) was formed in 2001 between the Partnership and an unrelated developer for the purpose of developing and selling lots in a manufactured home park located in Lake Charles, Louisiana, which were acquired by the Partnership via a deed in lieu of foreclosure. The Partnership advances funds to Dation as needed. The Partnership owns 50% of Dation and is the sole general manager of Dation (pursuant to an amendment to the Partnership Agreement executed in October 2007). Pursuant to the Operating Agreement, the Partnership is to receive 50% of Dation’s profits and losses after receipt of all interest on the original loan and priority return on partner contributions allocated at the rate of 12% per annum. The Partnership has recorded 100% of Dation’s net income and losses since inception because it has the majority of the risks and rewards of ownership. The assets, liabilities, income and expenses of Dation have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.

21

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The Partnership received repayment of capital contributions of $84,000 during the three months ended June 30, 2010.

The net operating loss to the Partnership from Dation was approximately $10,000 and $7,000 for the three months ended June 30, 2011 and 2010, respectively, and $24,000 and $26,000 for the six months ended June 30, 2011 and 2010, respectively.

During the first quarter of 2011, the Partnership transferred Dation from real estate held for investment to real estate held for sale as it is now listed for sale and the Partnership expects to complete a sale within the next year.

During the quarter ended June 30, 2010, the Partnership sold one house in the manufactured home subdivision development located in Ione, California for net sales proceeds of approximately $88,000, resulting in a loss to the Partnership of approximately $6,000.

During the quarter ended June 30, 2010, the Partnership recorded an impairment loss of approximately $465,000 on 8 units in the office condominium complex located in Roseville, California based on updated sales data obtained, which is reflected in losses on real estate properties in the accompanying consolidated statements of income. During the six months ended June 30, 2010, the Partnership sold one commercial building located in Roseville, California for net sales proceeds of approximately $359,000, resulting in a gain to the Partnership of approximately $183,000.

22

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6 - REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment is comprised of the following properties as of June 30, 2011 and December 31, 2010:

	2011		2010
Light industrial building, Paso Robles, California	$	1,520,827	$	1,544,866
Commercial buildings, Roseville, California		605,575		617,768
Retail complex, Greeley, Colorado (held within 720 University, LLC)		12,434,760		12,627,695
Undeveloped residential land, Madera County, California		720,000		720,000
Manufactured home subdivision development, Lake Charles, Louisiana (held within Dation, LLC)		—		2,048,643
Undeveloped residential land, Marysville, California		403,200		403,200
Golf course, Auburn, California (held within DarkHorse Golf Club, LLC)		1,925,624		1,843,200
75 improved residential lots, Auburn, California, (held within Baldwin Ranch Subdivision, LLC)		5,913,600		5,913,600
Undeveloped industrial land, San Jose, California		2,044,800		2,044,800
Undeveloped commercial land, Half Moon Bay, California		1,468,800		1,468,800
Storage facility/business, Stockton, California		5,079,685		5,141,275
Two improved residential lots, West Sacramento, California		510,944		510,944
Undeveloped residential land, Coolidge, Arizona		2,099,816		2,099,816
Eight townhomes, Santa Barbara, California (held within Anacapa Villas, LLC)		10,060,619		10,232,525
Marina with 30 boat slips and 11 RV spaces, Oakley, California (held within The Last Resort and Marina, LLC)		454,011		459,580
Nineteen condominium units, San Diego, California (held within 33rd Street Terrace, LLC)		1,652,044		1,669,318
Golf course, Auburn, California (held within Lone Star Golf, LLC)		1,997,795		2,015,683
133 condominium units, Phoenix, Arizona (held within 54th Street Condos, LLC)		5,688,639		5,760,719
Medical office condominium complex, Gilbert, Arizona (held within AMFU, LLC)		4,987,605		4,990,566
61 condominium units, Lakewood, Washington (held within Phillips Road, LLC)		6,505,298		6,536,677
Apartment complex, Ripon, California (held within 550 Sandy Lane, LLC)		4,302,810		4,359,070
45 condominium units, Oakland, California (held within 1401 on Jackson, LLC)		8,789,049		8,924,607
Industrial building, Chico, California		8,990,869		—
168 condominium units, Miami, Florida (held within TOTB Miami, LLC)		21,830,776		—
	$	109,987,147	$	81,933,352

23

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The balances of land and the major classes of depreciable property for real estate held for investment as of June 30, 2011 and December 31, 2010 are as follows:

	2011			2010
Land	$	36,143,489		$	30,450,217
Buildings and improvements		80,842,902			57,339,490
Other		—			31,555
		116,986,391			87,821,262
Less: Accumulated depreciation		(6,999,244	)		(5,887,910	)
	$	109,987,147		$	81,933,352

The acquisition of certain real estate properties through foreclosure (including real estate held for sale- see Note 5) resulted in the following non-cash activity for the six months ended June 30, 2011 and 2010, respectively:

	2011			2010
Increases:
Real estate held for sale and investment	$	43,733,719		$	5,040,000
Noncontrolling interests		(14,020,191	)		—
Accounts payable and accrued liabilities		(2,980,871	)		—
Decreases:
Loans secured by trust deeds, net of allowance for loan losses		(24,194,517	)		(4,603,768	)
Interest and other receivables		(2,538,140	)		(436,232	)

It is the Partnership’s intent to sell the majority of its real estate properties held for investment, but expected sales are not probable to occur within the next year.

Depreciation expense was approximately $734,000 and $378,000 for the three months ended June 30, 2011 and 2010, respectively, and $1,421,000 and $721,000 for the six months ended June 30, 2011 and 2010, respectively.

During the quarter ended June 30, 2011, the Partnership recorded an impairment loss of approximately $292,000 on the condominium complex located in Phoenix, Arizona (held within 54th Street Condos, LLC), based on contracts executed during the quarter to complete unfinished units within the complex. The aggregate contract amounts are higher than previously estimated at the time of foreclosure of the related loan in December 2009. The additional impairment is reflected in losses on real estate properties in the accompanying consolidated statements of income.

During the six months ended June 30, 2011, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Chico, California in the amount of $8,500,000 and obtained the property via the trustee’s sale.  In addition, advances made on the loan (for items such as legal fees and delinquent property taxes) in the total amount of approximately $588,000 were capitalized to the basis of the property. The carrying value of this property of $9,088,000 at the time of foreclosure approximated its then current fair value less estimated selling costs. The property is classified as held for investment as a sale is not expected in the next one year period.

During the six months ended June 30, 2011, the Partnership foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Partnership of approximately $26,257,000 and obtained an undivided interest in the properties with the other two lenders (which included the General Partner) via the trustee’s sale. The Partnership and other lenders formed a new limited liability company, TOTB Miami, LLC (“TOTB”), to own and operate the complex. The complex consists of three buildings, two of which have been renovated and are being leased, and in which 168 units remain unsold (the “Point” and “South” buildings), and one which contains 160 vacant units that have not been renovated (the “North” building). Based on a new appraisal obtained in September 2010, it was determined that the fair value of the property was lower than the Partnership’s total investment in the loan (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately

24

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

$450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000). The Point and South building units are classified as held for investment as sales are not expected in the next one year period. The North building is classified as held for sale as it is being actively marketed and a sale is expected within the next year (see Note 5). See further details below under TOTB Miami, LLC.

During the quarter ended June 30, 2010, the Partnership obtained a deed in lieu of foreclosure from the borrower on a first mortgage loan secured by a medical office condominium complex located in Gilbert, Arizona in the amount of approximately $9,592,000 and obtained the property. It was determined that the fair value of the property was lower than the Partnership’s investment in the loan and a specific loan allowance was established for this loan in the total amount of approximately $4,914,000 as of March 31, 2010. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure in May 2010, along with an additional charge to bad debt expense of approximately $74,000 for additional delinquent property taxes paid.  The property is classified as held for investment as a sale is not expected to be completed in the next one year period. The Partnership formed a new, wholly-owned limited liability company, AMFU, LLC, to own and operate the complex.

720 University, LLC

The Partnership has an investment in a limited liability company, 720 University, LLC (“720 University”), which owns a commercial retail property located in Greeley, Colorado. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.

The net operating (loss) income to the Partnership from 720 University was approximately $(6,000) and $27,000 (including depreciation and amortization of $112,000 and $139,000) for the three months ended June 30, 2011 and 2010, respectively, and $7,000 and $35,000 (including deprecation and amortization of $230,000 and $275,000) for the six months ended June 30, 2011 and 2010, respectively. The noncontrolling interest of the joint venture partner of approximately $8,000 and $16,000 as of June 30, 2011 and December 31, 2010, respectively, is reported in the accompanying consolidated balance sheets. The Partnership’s investment in 720 University real property and improvements was approximately $12,435,000 and $12,628,000 as of June 30, 2011 and December 31, 2010, respectively.

DarkHorse Golf Club, LLC

DarkHorse Golf Club, LLC (“DarkHorse”) is a California limited liability company formed for the purpose of operating the DarkHorse golf course located in Auburn, California, which was acquired by the Partnership via foreclosure in August 2007. The golf course was placed into DarkHorse via a grant deed on the same day that the trustee’s sale was held. The Partnership is the sole member in DarkHorse. The assets, liabilities, income and expenses of DarkHorse have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.  The golf course is being operated and managed by an unrelated company.

The Partnership advanced approximately $112,000 and $88,000 to DarkHorse during the three months ended June 30, 2011 and 2010, respectively, for operations and improvements. The net operating loss to the Partnership from DarkHorse was approximately $72,000 and $93,000 (including depreciation of $42,000 and $30,000) for the three months ended June 30, 2011 and 2010, respectively, and $259,000 and $307,000 (including depreciation of $85,000 and $63,000) for the six months ended June 30, 2011 and 2010, respectively. Continued operation of DarkHorse may result in additional losses to the Partnership and may require the Partnership to provide funds for operations and capital improvements.

25

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

Lone Star Golf, LLC

Lone Star Golf, LLC (“Lone Star”) is a California limited liability company formed for the purpose of owning and operating a golf course and country club located in Auburn, California, which was acquired by the Partnership via foreclosure in June 2009. The Partnership is the sole member in Lone Star. The assets, liabilities, income and expenses of Lone Star have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.  The golf course is being operated and managed by an unrelated company.

The Partnership advanced approximately $94,000 and $101,000 to Lone Star during the three months ended June 30, 2011 and 2010, respectively, for operations. The net operating loss to the Partnership from Lone Star was approximately $15,000 and $4,000 (including depreciation of $12,000 and $11,000) for the three months ended June 30, 2011 and 2010, respectively, and $125,000 and $106,000 (including depreciation of $23,000 and $22,000) for the six months ended June 30, 2011 and 2010, respectively. Continued operation of Lone Star may result in additional losses to the Partnership and may require the Partnership to provide funds for operations and capital improvements.

TOTB Miami, LLC

TOTB Miami, LLC (“TOTB���) is a Florida limited liability company formed for the purpose of owning and operating 168 condominium units and a 160 unit apartment building in a complex located in Miami, Florida which were acquired by the Partnership, the General Partner and Potomac Capital (who were co-lenders in the subject loan) via foreclosure in February 2011. Pursuant to the Operating Agreement, the Partnership is to receive an allocation of the profits and losses of TOTB based on the allocation of the distribution priorities contained in the agreement (approximately 57% as of June 30, 2011). It was determined that the Partnership is the primary beneficiary of TOTB due to the Partnership’s power to direct the management, operations and sale of all or a portion of the properties and the Partnership’s obligation to absorb future losses of TOTB, which may be significant, and thus, the assets, liabilities, income and expenses of TOTB have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership. The noncontrolling interests of the other members of TOTB totaled approximately $14,048,000 as of June 30, 2011.

The net operating loss to the Partnership from TOTB was approximately $104,000 and $137,000 (including depreciation of $150,000 and $249,000) for the three and six months ended June 30, 2011, respectively.

26

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The approximate net operating income (loss) from Partnership real estate properties held within wholly-owned limited liability companies and other investment properties with significant operating results, for the six months ended June 30, 2011 and 2010 were as follows:

	2011			2010
Anacapa Villas, LLC	$	(108,000	)	$	(136,000	)
Baldwin Ranch Subdivision, LLC		(44,000	)		(98,000	)
The Last Resort and Marina, LLC		(16,000	)		(12,000	)
33rd Street Terrace, LLC		9,000			(1,000	)
54th Street Condos, LLC		(193,000	)		(184,000	)
Wolfe Central, LLC		199,000			187,000
AMFU, LLC		22,000			(39,000	)
Phillips Road, LLC		54,000			—
550 Sandy Lane, LLC		92,000			—
1401 on Jackson, LLC		(10,000	)		—
Light industrial building, Paso Robles, California		104,000			117,000
Undeveloped industrial land, San Jose, California		(68,000	)		(70,000	)
Office condominium complex, Roseville, California		(53,000	)		(61,000	)
Storage facility/business, Stockton, California		118,000			29,000
Industrial building, Chico, California		(218,000	)		—

Certain of the Partnership’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to fifteen years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to June 30, 2011 and thereafter is as follows:

Year ending June 30:
2012	$	4,635,622
2013		2,160,041
2014		1,789,809
2015		1,438,424
2016		1,214,526
Thereafter (through 2026)		4,221,605
	$	15,460,027

NOTE 7 - TRANSACTIONS WITH AFFILIATES

In consideration of the management services rendered to the Partnership, Owens Financial Group, Inc. (“OFG”), the General Partner, is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans.

All of the Partnership’s loans are serviced by OFG, in consideration for which OFG receives up to 0.25% per annum of the unpaid principal balance of the loans.

OFG, at its sole discretion may, on a monthly basis, adjust the management and servicing fees as long as they do not exceed the allowable limits calculated on an annual basis. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than

27

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

the stated limits. Management fees amounted to approximately $531,000 and $481,000 for the three months ended June 30, 2011 and 2010, respectively, and $1,286,000 and $1,055,000 for the six months ended June 30, 2011 and 2010, respectively, and are included in the accompanying consolidated statements of operations. Servicing fees amounted to approximately $74,000 and $127,000 for the three months ended June 30, 2011 and 2010, respectively, and $156,000 and $260,000 for the six months ended June 30, 2011 and 2010, respectively, and are included in the accompanying consolidated statements of operations. As of June 30, 2011 and December 31, 2010, the Partnership owed management and servicing fees to OFG in the amount of approximately $399,000 and $157,000, respectively.

The maximum servicing fees were paid to the General Partner during the three and six months ended June 30, 2011 and 2010. If the maximum management fees had been paid to the General Partner during the three and six months ended June 30, 2011, the management fees would have been $809,000 (increase of $278,000) and $1,715,000 (increase of $429,000), respectively, which would have increased net loss allocated to limited partners by approximately 48.9% and 46.3%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.004 and $.006, respectively, from a loss of $.003 and $.004, respectively. If the maximum management fees had been paid to the General Partner during the three and six months ended June 30, 2010, the management fees would have been $1,400,000 (increase of $919,000) and $2,858,000 (increase of $1,802,000), respectively, which would have increased net loss allocated to limited partners by approximately 62% and 179%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.010 and $.012, respectively, from a loss of $.006 and $.004, respectively.

In determining the yield to the partners and hence the management fees, OFG may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. OFG expects that the management fees it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that OFG will again receive less than the maximum management fees in the future. However, if OFG chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced.

Pursuant to the Partnership Agreement, OFG receives all late payment charges from borrowers on loans owned by the Partnership, with the exception of loans participated with outside entities. The amounts paid to or collected by OFG for such charges totaled approximately $322,000 and $0 for the three months ended June 30, 2011 and 2010, respectively, and $774,000 and $128,000 for the six months ended June 30, 2011 and 2010, respectively. In addition, the Partnership remits other miscellaneous fees to OFG, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). Such fees remitted to OFG totaled approximately $0 and $3,000 for the three months ended June 30, 2011 and 2010, respectively, and $8,000 and $7,000 for the six months ended June 30, 2011 and 2010, respectively.

OFG originates all loans the Partnership invests in and receives loan origination and extension fees from borrowers. Such fees paid to OFG amounted to approximately $90,000 and $0 on loans originated or extended of approximately $2,406,000 and $0 for the three months ended June 30, 2011 and 2010, respectively, and $168,000 and $32,000 on loans originated or extended of approximately $10,240,000 and $800,000 for the six months ended June 30, 2011 and 2010, respectively. A loan fee paid to OFG in the amount of $78,000 during the six months ended June 30, 2011 was collected from the borrower upon payoff of the related loan in December 2010 and remitted to OFG in January 2011.

OFG is reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities and the salary and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). The amounts reimbursed to OFG by the Partnership were $156,000 and $15,000 during the three months ended June 30, 2011 and 2010, respectively, and $318,000 and $31,000 during the six months ended June 30, 2011 and 2010, respectively.

28

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

As of June 30, 2011 and 2010, the General Partner held second and fourth deeds of trust in the total amount of approximately $853,000 secured by the same property (and to the same borrower) on which the Partnership has a first deed of trust in the amount of $2,200,000 at an interest rate of 12% per annum.  Approximately $517,000 of the General Partner’s second deed of trust is an exit fee included in the deed of trust at the time of loan origination in 2006. The interest rate on the General Partner’s loan is 17% per annum. The loans to the Partnership and the General Partner are greater than ninety days delinquent and past maturity as of June 30, 2011.

NOTE 8 - NOTE PAYABLE

The Partnership has a note payable with a bank through its investment in 720 University (see Note 6), which is secured by the retail development located in Greeley, Colorado. The remaining principal balance on the note was approximately $10,318,000 and $10,394,000 as of June 30, 2011 and December 31, 2010, respectively. The note required monthly interest-only payments until March 1, 2010 at a fixed rate of 5.07% per annum. Commencing April 1, 2010, the note became amortizing and monthly payments of $56,816 are now required, with the balance of unpaid principal due on March 1, 2015. Interest expense was approximately $132,000 and $134,000 for the three months ended June 30, 2011 and 2010, respectively, and $264,000 and $267,000 for the six months ended June 30, 2011 and 2010, respectively.  The following table shows maturities by year on this note payable as of June 30, 2011:

Year ending June 30:
2012	$	154,987
2013		163,145
2014		171,732
2015		9,828,345
	$	10,318,209

NOTE 9 - LINE OF CREDIT PAYABLE

The Partnership had a line of credit agreement with a group of banks, which provided interim financing on mortgage loans invested in by the Partnership. All assets of the Partnership were pledged as security for the line of credit. The line of credit was guaranteed by the General Partner. The line of credit was fully repaid by the Partnership in December 2010. Interest expense was approximately $408,000 and $843,000 for the three and six months ended June 30, 2010, respectively.

NOTE 10 – PARTNERS’ CAPITAL

The Partnership originally registered 200,000,000 Units under Registration No. 333-69272 of which 90,241,162 Units remained available for sale, at a purchase price of $1.00 per Unit, as of March 31, 2008. The Partnership filed a registration statement with the SEC on Form S-11, file number 333-150248, that was declared effective on April 30, 2008.  Subsequently, the Partnership filed a new registration statement with the SEC on Form S-11, file number 333-173249, that was declared effective on May 2, 2011. The new registration statement registered 80,043,274 Units that were previously registered and unsold pursuant to registration statement No. 333-150248.

The Partnership experienced a significant increase in limited partner capital withdrawal requests in late 2008 and 2009. Prior to October 13, 2009, the Partnership Agreement permitted only 10% of limited partner capital to be withdrawn in any calendar year, and effective October 13, 2009 (with the adoption of amendments to the Partnership Agreement), this annual 10% limitation applies to the aggregate of limited partner withdrawals and distributions of net proceeds.  As a consequence of the annual 10% limitation, the Partnership was required to suspend approximately $5,000,000 in December 2008 withdrawal requests until January 2009.  All 2009, 2010 and 2011 (through June 30) scheduled withdrawals in the total amount of approximately $80,000,000 were not made because the Partnership has not had sufficient available cash to make such withdrawals and needed to have funds in reserve to pay down its line of credit and for operations.  Also, pursuant to the October 2009 modified line of credit agreement, the Partnership was prohibited from making capital distributions to partners until the line of credit was fully repaid. The line of credit was repaid in full by the Partnership in December 2010, and therefore, its restrictions no longer apply. Thus, when funds become

29

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

available for distribution from net proceeds, the General Partner anticipates causing the Partnership to make a pro rata distribution to partners of up to 10% of the Partnership’s capital, which will prevent any limited partner withdrawals during the same calendar year. In July 2011, the Partnership made a pro rata capital distribution to all partners of approximately $8,588,000, which was approximately 3.07% of total partners’ capital.

In April 2011, the General Partner temporarily suspended the Distribution Reinvestment Plan (the “Plan”) for all limited partners, in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement.  The Partnership Agreement requires that 86.5% of capital contributions to the Partnership be committed to mortgage loan investments, but also limits the Partnership’s ability to make additional investments in mortgage loans while the Partnership has pending unpaid limited partner withdrawal requests.  In recent years, Partnership liquidity issues have limited the Partnership’s ability to honor withdrawal requests, which has restricted the Partnership’s additional mortgage lending activities.

NOTE 11 – FAIR VALUE

The Partnership accounts for its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures.  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1       Quoted prices in active markets for identical assets or liabilities

Level 2       Observable inputs other than Level 1 prices, such as quoted prices for similar assets or

liabilities; quoted prices in active markets that are not active; or other inputs that are

observable or can be corroborated by observable market data for substantially the full

term of the assets or liabilities

Level 3       Unobservable inputs that are supported by little or no market activity, such as the

Partnership’s own data or assumptions.

Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The following is a description of the Partnership’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a recurring and nonrecurring basis.

30

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

Impaired Loans

The Partnership does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  A loan is considered impaired when, based on current information and events, it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35.  The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent.  The fair value of the loan’s collateral is determined by third party appraisals, broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At June 30, 2011, the majority of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data, the Partnership records the impaired loan as nonrecurring Level 2.  When an appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value or there is no observable market data included in a current appraisal, the Partnership records the impaired loan as nonrecurring Level 3.

Real Estate Held for Sale and Investment

Real estate held for sale and investment includes properties acquired through foreclosure of the related loans. When property is acquired, any excess of the Partnership’s recorded investment in the loan and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for credit losses. Subsequently, real estate properties are carried at the lower of carrying value or fair value less costs to sell. The Partnership periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations (including third party appraisals) for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. As fair value is generally based upon the future undiscounted cash flows, the Partnership records the impairment on real estate properties as nonrecurring Level 3. 

31

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The following tables present information about the Partnership’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of June 30, 2011 and December 31, 2010:

		Fair Value Measurements Using
	Carrying Value	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
2011
Nonrecurring:
Impaired loans:
Commercial	$        691,200	—	—	$         691,200
Condominiums	6,038,400	—	—	6,038,400
Improved and     unimproved land	28,334,007	—	—	28,334,007
Total	$   35,063,607	—	—	$    35,063,607
Real estate properties:
Commercial	$   14,799,713	—	—	$   14,799,713
Condominiums	18,168,639	—	—	18,168,639
Single family homes	2,458,482	—	—	2,458,482
Improved and     unimproved land	10,550,400	—	—	10,550,400
Total	$   45,977,234	—	—	$   45,977,234
2010
Nonrecurring:
Impaired loans:
Commercial	$     1,766,400	—	—	$       1,766,400
Condominiums	24,046,874	—	—	24,046,874
Improved and     unimproved land	14,579,177			14,579,177
Total	$   40,392,451	—	—	$     40,392,451
Real estate properties:
Commercial	$     16,628,315			$     16,628,315
Single family homes	347,730			347,730
Improved and     unimproved land	10,550,400			10,550,400
Total	$   27,526,445	—	—	$     27,526,445

During the six months ended June 30, 2011 and 2010, there were no transfers in or out of Levels 1 and 2.

32

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

The following is a reconciliation of the beginning and ending balances of nonrecurring fair value measurements recognized in the accompanying consolidated balance sheet using significant unobservable (Level 3) inputs:

		Impaired Loans			Real Estate Properties
Balance, January 1, 2011	$	40,392,451		$	27,526,445
Total realized and unrealized gains and losses:      Included in net loss		(1,325,730	)		(291,602	)
Foreclosures		(17,558,939	)		43,733,719
Loan payoffs		(1,408,514	)		—
Real estate sales		—			—
Transfers in and/or out of Level 3		14,964,339			(24,991,328	)
Balance, June 30, 2011	$	35,063,607		$	45,977,234
Balance, January 1, 2010	$	38,581,158		$	27,733,449
Total realized and unrealized gains and losses: Included in net loss		(3,114,748	)		(465,294	)
Foreclosures		(5,040,000	)		5,040,000
Loan payoffs		(3,353,374	)		—
Real estate sales		—			(93,953	)
Transfers in and/or out of Level 3		26,527,907			4,499,548
Balance, June 30, 2010	$	53,600,943		$	36,713,750

The following methods and assumptions were used to estimate the fair value of financial instruments not recognized at fair value in the accompanying consolidated balance sheets pursuant to ASC 825-10.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents of approximately $17,725,000 and $5,375,000 as of June 30, 2011 and December 31, 2010, respectively, approximates the fair value because of the relatively short maturity of these instruments.

Certificates of Deposit

Certificates of deposit are held in several federally insured depository institutions and have original maturities greater than three months. These investments are held to maturity.  The carrying value of the Partnership’s certificates of deposit of approximately $492,000 and $2,004,000 as of June 30, 2011 and December 31, 2010, respectively, approximates the fair value. Fair value measurements are estimated using a matrix based on interest rates.

33

OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

Loans Secured by Trust Deeds

The carrying value of loans secured by trust deeds (net of allowance for loan losses) of approximately $82,371,000 and $121,597,000 as of June 30, 2011 and December 31, 2010, respectively, other than those analyzed under ASC 310-10-35 and ASC 820 above, approximates the fair value. The fair value is estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans would be made by the Partnership. The applicable amount of accrued interest and advances related thereto has also been considered in evaluating the fair value versus the carrying value.

Investment in Limited Liability Company

The carrying value of the Partnership’s investment in limited liability company of approximately $2,154,000 and $2,142,000 as of June 30, 2011 and December 31, 2010, respectively, approximates fair value.

Note Payable

The fair value of the Partnership’s note payable with a carrying value of approximately $10,318,000 and $10,394,000 as of June 30, 2011 and December 31, 2010, respectively, is estimated to be approximately $10,419,000 and $10,446,000 as of June 30, 2011 and December 31, 2010, respectively. The fair value is estimated based upon comparable market indicators of current pricing for the same or similar issue or on the current rate offered to the Partnership for debt of the same remaining maturity.

Other Financial Instruments

The carrying values of the following financial instruments as of June 30, 2011 and December 31, 2010 are estimated to approximate fair values due to the short term nature of these instruments.

	2011		2010
Interest and other receivables	$	2,445,337	$	4,493,614
Due to general partner	$	398,750	$	682,231
Accrued interest payable (included in accounts payable and accrued liabilities)	$	43,594	$	45,376

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Environmental Remediation Obligation

The Partnership has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850 (see Note 4).  As part of the Operating Agreement executed by the Partnership and its joint venture partner in 1850, Nanook, the Partnership has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. During 2008, the Partnership accrued approximately $762,000 as an estimate of the expected costs to monitor and remediate the contamination on the properties based on a third party consultant’s estimate. As of June 30, 2011 and December 31, 2010, approximately $480,000 and $550,000, respectively, of this obligation remains accrued on the Partnership’s books. The Partnership has estimated the amount to be paid under this guarantee based on the information available at this time. If additional amounts are required to monitor and remediate the contamination, it will be an obligation of the Partnership, as the Operating Agreement does not limit the obligations of the Partnership.

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OWENS MORTGAGE INVESTMENT FUND,

a California Limited Partnership

Notes to Consolidated Financial Statements (Unaudited)

Contractual Obligation

In June 2011, 54th Street Condos, LLC (wholly owned by the Partnership) signed a $2,484,000 construction contract for completion of the remaining condominium units on the property owned by it in Phoenix, Arizona. Construction is expected to begin during the third quarter of 2011 and should be completed within six to nine months.

Legal Proceedings

The Partnership is involved in various legal actions arising in the normal course of business.  In the opinion of management, such matters will not have a material effect upon the financial position of the Partnership.

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PART I – Item 2.

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

Forward Looking Statements

Some of the information in this Form 10-Q may contain forward-looking statements. Such statements can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss expectations, hopes, intentions, beliefs and strategies regarding the future, contain projections of results of operations or of financial conditions or state other forward-looking information. When considering such forward-looking statements you should keep in mind the risk factors and other cautionary statements in the Partnership’s Form 10-Q and in the most recent Form 10-K. Forward-looking statements include, among others, statements regarding future interest rates and economic conditions and their effect on the Partnership and its assets, trends in real estate markets in which the Partnership does business, effects of competition, estimates as to the allowance for loan losses and the valuation of real estate held for sale and investment, estimates of future limited partner withdrawals, additional foreclosures in 2011 and their effects on liquidity, and recovering certain values for properties through sale. Although management of the Partnership believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors, in addition to these risk factors and cautioning statements, such as unexpected changes in general economic conditions or interest rates, local real estate conditions, including a continued downturn in the real estate markets where the Partnership has made loans, adequacy of reserves, the impact of competition and competitive pricing, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements.  All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.

Critical Accounting Policies

In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral; (2) the valuation of real estate held for sale and investment; and (3) the estimate of environmental remediation liabilities. At June 30, 2011, the Partnership owned thirty real estate properties, including sixteen within majority- or wholly-owned limited liability companies. The Partnership also has a 50% ownership interest in a limited liability company that owns property located in Santa Clara, California.

Loans and related accrued interest and advances are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. Provisions are made to adjust the allowance for loan losses and real estate held for sale to an amount considered by management to be adequate, with consideration to original collateral values at loan inception and to provide for unrecoverable accounts receivable, including impaired and other loans, accrued interest, and advances on loans.

Recent trends in the economy have been taken into consideration in the aforementioned process of arriving at the allowance for loan losses and real estate losses. Actual results could vary from the aforementioned provisions for losses. If the probable ultimate recovery of the carrying amount of a loan is less than amounts due according to the contractual terms of the loan agreement, the carrying amount of the loan is reduced to the present value of future cash flows discounted at the loan’s effective interest rate. If a loan is collateral dependent, it is valued by management at the estimated fair value of the related collateral, less estimated selling costs. Estimated collateral fair values are determined based on third party appraisals, opinions of fair value from third party real estate brokers and/or comparable third party sales.

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If events and/or changes in circumstances cause management to have serious doubts about the collectability of the contractual payments or when monthly payments are delinquent greater than ninety days, a loan is categorized as impaired and interest is no longer accrued. Any subsequent payments received on impaired loans are first applied to reduce any outstanding accrued interest, and then are recognized as interest income, except when such payments are specifically designated principal reduction or when management does not believe the Partnership’s investment in the loan is fully recoverable.

Real estate held for sale includes real estate acquired through foreclosure and is stated at the lower of the recorded investment in the loan, inclusive of any senior indebtedness, or at the property’s estimated fair value, less estimated costs to sell.

Real estate held for investment includes real estate purchased or acquired through foreclosure (including thirteen properties within consolidated limited liability companies) and is initially stated at the lower of cost or the recorded investment in the loan, or the property’s estimated fair value.  Depreciation of buildings and improvements is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements.  Depreciation of tenant improvements is provided on the straight-line method over the lives of the related leases.  Costs related to the improvement of real estate held for sale and investment are capitalized, whereas those related to holding the property are expensed.

The Partnership periodically compares the carrying value of real estate held for investment to expected undiscounted future cash flows, as determined by internally or third-party generated valuations, for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.

The Partnership’s environmental remediation liability related to the property located in Santa Clara, California was estimated based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.

Related Parties

The General Partner of the Partnership is Owens Financial Group, Inc. (“OFG” or the “General Partner”).  All Partnership business is conducted through the General Partner, which arranges, services, and maintains the loan portfolio for the benefit of the Partnership.  The fees received by the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner, subject to the limitations imposed by the Partnership Agreement. In the past, the General Partner has elected not to take the maximum compensation in order to maintain return to the limited partners at historical levels.  There can be no assurance that the General Partner will continue to do this in the future. The following is a list of various Partnership activities for which related parties are compensated.

·   Management Fees - In consideration of the management services rendered to the Partnership, the General Partner is entitled to receive from the Partnership a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Partnership’s mortgage loans at the end of each month in the calendar year.Management fees amounted to approximately $531,000 and $481,000 for the three months ended June 30, 2011 and 2010, respectively.

·   Servicing Fees – All of the Partnership’s loans are serviced by the General Partner, in consideration for which the General Partner is entitled to receive from the Partnership a monthly fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed or up to 0.25% per annum of the unpaid principal balance of the loans at the end of each month.Servicing fees amounted to approximately $74,000 and $127,000 for the three months ended June 30, 2011 and 2010, respectively.

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·   Acquisition and Origination Fees – The General Partner is entitled to receive and retain all acquisition and origination fees paid or payable by borrowers for services rendered in connection with the evaluation and consideration of potential investments of the Partnership (including any selection fee, mortgage placement fee, nonrecurring management fee, and any origination fee, loan fee, or points paid by borrowers). The acquisition and origination fees are paid by borrowers, and thus, are not an expense of the Partnership. Such fees paid to OFG amounted to approximately $90,000 and $0 on loans originated or extended of approximately $2,406,000 and $0 for the three months ended June 30, 2011 and 2010, respectively.

·   Late Payment Charges – The General Partner is entitled to receive all late payment charges by borrowers on delinquent loans held by the Partnership (including additional interest and late payment fees).  The late payment charges are paid by borrowers and collected by the Partnership with regular monthly loan payments or at the time of loan payoff.  These are recorded as a liability (Due to General Partner) when collected and are not recognized as an expense of the Partnership. The amounts paid to or collected by OFG for such charges totaled approximately $322,000 and $0 for the three months ended June 30, 2011 and 2010, respectively.

·   Other Miscellaneous Fees - The Partnership remits other miscellaneous fees to the General Partner, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). Such fees remitted to OFG totaled approximately $0 and $3,000 for the three months ended June 30, 2011 and 2010, respectively.

·   Partnership Expenses – The General Partner is entitled to be reimbursed by the Partnership for the actual cost of goods, services and materials used for or by the Partnership and obtained from unaffiliated entities. The General Partner is also entitled to reimbursement for the salaries and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Partnership which could be performed by independent parties (subject to certain limitations in the Partnership Agreement).  The amounts reimbursed to the General Partner by the Partnership were approximately $156,000 and $15,000 during the three months ended June 30, 2011 and 2010, respectively.

·   Carried Interest and Contributed Capital – The General Partner is required to contribute capital to the Partnership in the amount of 0.5% of the limited partners’ aggregate capital accounts and, together with its carried interest; the General Partner has an interest equal to 1% of the limited partners’ capital accounts. This carried interest of the General Partner of up to 1/2 of 1% is recorded as an expense of the Partnership and credited as a contribution to the General Partner’s capital account as additional compensation. As of June 30, 2011, the General Partner has made cash capital contributions of $1,496,000 to the Partnership. The General Partner is required to continue cash capital contributions to the Partnership in order to maintain its required capital balance.There was no carried interest expense charged to the Partnership for the three months ended June 30, 2011 and 2010, respectively.

Results of Operations

Overview

The Partnership invests in mortgage loans on real property located in the United States that are primarily originated by the General Partner. The Partnership’s primary objective is to generate monthly income from its investment in mortgage loans. The Partnership’s focus is on making mortgage loans to owners and developers of real property whose financing needs are often not met by traditional mortgage lenders. These include borrowers that traditional lenders may not normally consider because of perceived credit risks based on ratings or experience levels, and borrowers who require faster loan decisions and funding. One of the Partnership’s competitive advantages has been the ability to approve loan applications and fund more quickly than traditional lenders.

The Partnership will originate loans secured by very diverse property types. In addition, the Partnership will occasionally lend to borrowers whom traditional lenders will not normally lend to because of a variety of factors including their credit ratings and/or experience. Due to these factors, the Partnership may make mortgage loans that are riskier than mortgage loans made by commercial banks and other institutional lenders. To compensate for those potential risks, the Partnership seeks to make loans at higher interest rates and with more

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protection from the underlying real property collateral, such as with lower loan to value ratios. The Partnership is not presently originating new mortgage loans, as it must first either satisfy withdrawal requests of limited partners and/or make capital distributions pro rata to its limited partners of up to 10% of limited partners’ capital per calendar year with net proceeds from loan payoffs, real estate sales and/or capital contributions, as funds become available.

Due to the declining economy and reductions in real estate values beginning in 2008, the Partnership has experienced increased delinquent loans and foreclosures which have created substantial losses to the Partnership. In addition, the Partnership now owns significantly more real estate than in the past, which has reduced cash flow and net income. As of June 30, 2011, approximately 74% of Partnership loans are impaired, greater than 90 days delinquent in payments and/or past maturity. In addition, the Partnership now owns approximately $140,000,000 of real estate held for sale or investment.

It is highly likely that the Partnership will continue to experience losses in the future. Management expects that, as non-delinquent Partnership loans are paid off by borrowers, interest income received by the Partnership will be reduced. In addition, the Partnership will likely foreclose on more delinquent loans, thereby obtaining ownership of more real estate that may create larger operating losses. Management will attempt to sell many of these properties but may need to sell them for losses or wait until market values recover in the future. Due to the large amount of unfulfilled withdrawal requests by limited partners, the Partnership will be unable to take advantage of current favorable lending opportunities which could help to increase net income to the Partnership (until 10% of limited partner capital is distributed in any given calendar year).

The Partnership’s operating results are affected primarily by:

·   the amount of cash available to invest in mortgage loans;

·   the amount of borrowing to finance mortgage loan investments and the Partnership’s cost of funds on such borrowing;

·   the level of real estate lending activity in the markets serviced;

·   the ability to identify and lend to suitable borrowers;

·   the interest rates the Partnership is able to charge on loans;

·   the level of delinquencies on mortgage loans;

·   the level of foreclosures and related loan and real estate losses experienced; and

·   the income or losses from foreclosed properties prior to the time of disposal.

From 2007 to 2010, the U.S. economy deteriorated due to a combination of factors including a substantial decline in the housing market, liquidity issues in the lending market, and increased unemployment. The national unemployment rate increased substantially from 5.0% in December 2007 to 9.4% in December 2008. However, it declined to 9.2% in June 2011. The California unemployment rate increased from 6.1% in December 2007 to 11.8% in June 2011. The growth of the Gross Domestic Product slowed from 1.9% (revised) in 2007 to 0% (revised) in 2008 and declined 2.6% (revised) in 2009. The Gross Domestic Product increased by an annualized rate of 3.7%, 1.7%, 2.6% and 3.1%  in the four quarters of 2010, respectively. In the first and second quarters of 2011, the GDP increased by an annual rate of 0.4% (revised) and 1.3% (estimate), respectively. The Federal Reserve decreased the federal funds rate from 4.25% as of December 31, 2007 to 0.25% as of December 31, 2008, where it remains as of June 30, 2011.

The Partnership has experienced increased loan delinquencies and foreclosures over the past three years.  The General Partner believes that this has primarily been the result of the depressed economy, lack of availability of credit and the slowing real estate market in California and other parts of the nation. The increased loan delinquencies and foreclosures have resulted in a substantial reduction in Partnership income over the past three years. In addition, due to the state of the economy and depressed real estate values, the Partnership has had to increase its loan loss reserves and take write-downs on certain real estate properties which, in turn, have resulted in losses to the Partnership.

Although currently the General Partner believes that only thirteen of the Partnership's delinquent loans will result in loss to the Partnership (and has caused the Partnership to record specific allowances for loan losses on such loans), real estate values could decrease further. The Partnership continues to perform frequent evaluations of such collateral values using internal and external sources, including the use of updated independent appraisals.  As a result of these evaluations, the allowance for loan losses and the Partnership’s investments in real estate could change in the near term, and such changes could be material.

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The Partnership experienced a significant increase in limited partner capital withdrawal requests in late 2008 and 2009 and a decreased ability to meet those requests. Prior to October 13, 2009, the Partnership Agreement permitted only 10% of limited partner capital to be withdrawn in any calendar year, and effective October 13, 2009 (with the adoption of amendments to the Partnership Agreement), this annual 10% limitation applies to the aggregate of limited partner withdrawals and distributions of net proceeds.  As a consequence of the annual 10% limitation, the Partnership was required to suspend approximately $5,000,000 in December 2008 withdrawal requests until January 2009.  All 2009, 2010 and 2011 (to June 30) scheduled withdrawals of approximately $80,000,000 have not been made because the Partnership has not had sufficient available cash to make such withdrawals and needed to have funds in reserve to pay down its line of credit and for operations.  Also, pursuant to the October 2009 modified line of credit agreement, the Partnership was prohibited from making capital distributions to partners until the line of credit is fully repaid. The line of credit was paid in full in December 2010. Thus, when funds become available for distribution from net proceeds, the General Partner anticipates causing the Partnership to make a pro rata distribution to partners of up to 10% of limited partner capital, which will prevent any limited partner withdrawals during the same calendar year. In July 2011, the Partnership made a pro rata capital distribution to all partners of approximately $8,588,000, which was approximately 3.07% of total partners’ capital.

Although it appears that the U.S. economy has recently experienced positive growth, continued unemployment could negatively affect the values of real estate held by the Partnership and real estate securing Partnership loans. This could potentially lead to even greater delinquencies and foreclosures, further reducing the liquidity and net income (yield) of the Partnership, decreasing the cash available for distribution in the form of net income and capital redemptions, and increase real estate held by the Partnership.

Historically, the General Partner has focused its operations on California and certain Western states. Because the General Partner has a significant degree of knowledge with respect to the real estate markets in such states, it is likely most of the Partnership’s loans will be concentrated in such states. As of June 30, 2011, 46.9% of loans were secured by real estate in Northern California, while 4.7%, 14.6%, 9.7%, 6.9% and 5.4% were secured by real estate in Southern California, Colorado, New York, Arizona and Washington, respectively. Such geographical concentration creates greater risk that any downturn in such local real estate markets could have a significant adverse effect upon results of operations.

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Summary of Financial Results

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Total revenues	$	4,586,923		$	3,998,800		$	8,631,545		$	8,241,435
Total expenses		5,238,408			5,483,859			9,668,508			9,245,113
Net loss	$	(651,485	)	$	(1,485,059	)	$	(1,036,963	)	$	(1,003,678	)
Less: Net loss (income) attributable to noncontrolling interests		82,519			(623	)		107,377			(804	)
Net loss attributable to Owens Mortgage Investment Fund	$	(568,966	)	$	(1,485,682	)	$	(929,586	)	$	(1,004,482	)
Net loss allocated to limited partners	$	(563,515	)	$	(1,471,167	)	$	(917,715	)	$	(994,979	)
Net loss allocated to limited partners per weighted average limited partnership unit	$	(0.003	)	$	(0.006	)	$	(0.004	)	$	(0.004	)
Annualized rate of return to limited partners (1)		(1.1)	%		(2.5)	%		(0.9)	%		(0.8)	%
Distribution per partnership unit (yield) (2)		0.50	%		0.84	%		(6.1)	%		0.97	%
Weighted average limited partnership units		216,084,000			240,854,000			214,933,000			241,215,000

(1) The annualized rate of return to limited partners is calculated based upon the net loss allocated to limited partners per weighted average limited partnership unit as of June 30, 2011 and 2010 divided by the number of months during the period and multiplied by twelve (12) months.

(2) Distribution per partnership unit (yield) is the annualized average of the monthly yield paid to the partners for the periods indicated. The monthly yield is calculated by dividing the total monthly cash distribution to partners by the prior month’s ending partners’ capital balance.

Three and Six Months Ended June 30, 2011 Compared to Three and Six Months Ended June 30, 2010

Total Revenues

Interest income on loans secured by trust deeds decreased $558,000 (29.1%) and $1,527,000 (35.3%) during the three and six months ended June 30, 2011, respectively, as compared to the same periods in 2010, primarily due to a decrease in the weighted average balance of the loan portfolio of approximately 42% and 40% during the three and six months ended June 30, 2011 as compared to the same periods in 2010.

Gain on sales of real estate decreased $176,000 (93.2%) during the six months ended June 30, 2011, as compared to the same period in 2010. During the six months ended June 30, 2011, the Partnership recognized $13,000 in deferred gain related to the sale of the Bayview Gardens property in 2006.  During the six months ended June 30, 2010, the Partnership sold a commercial building in the complex located in Roseville, California for a gain of approximately $183,000 and a house in the manufactured home subdivision development in Ione, California for a loss of approximately $6,000, and also recognized $12,000 in deferred gain related to the sale of the Bayview Gardens property in 2006.

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Total Expenses

Management fees to the General Partner increased $50,000 (10.3%) and $231,000 (21.8%) during the three and six months ended June 30, 2011, respectively, as compared to the same periods in 2010.  For the six months ended June 30, 2011, while the General Partner did not collect the maximum management fees, it collected management fees equal to the minimum amount that the General Partner determined it needed to be paid in fees from the Partnership to enable it to cover its overhead and operating costs as the General Partner.

Servicing fees to the General Partner decreased $54,000 (42.2%) and $104,000 (40.0%) during the three and six months ended June 30, 2011, respectively, as compared to the same periods in 2010. This was the result of a decrease in the weighted average balance of the loan portfolio of approximately 42% and 40% during the three and six months ended June 30, 2011, respectively.

The maximum servicing fees were paid to the General Partner during the three and six months ended June 30, 2011 and 2010. If the maximum management fees had been paid to the General Partner during the three and six months ended June 30, 2011, the management fees would have been $809,000 (increase of $278,000) and $1,715,000 (increase of $429,000), respectively, which would have increased net loss allocated to limited partners by approximately 49% and 46%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.004 and $.006, respectively, from a loss of $.003 and $.004, respectively. If the maximum management fees had been paid to the General Partner during the three and six months ended June 30, 2010, the management fees would have been $1,400,000 (increase of $919,000) and $2,858,000 (increase of $1,802,000), respectively, which would have increased net loss allocated to limited partners by approximately 62% and 179%, respectively, and net loss allocated to limited partners per weighted average limited partner unit by the same percentages to a loss of $.010 and $.012, respectively, from a loss of $.006 and $.004, respectively.

The maximum management fee permitted under the Partnership Agreement is 2 ¾% per year of the average unpaid balance of mortgage loans. For the years 2008, 2009 and 2010 and the six months ended June 30, 2011 (annualized), the management fees were 1.53%, 0.89%, 1.00% and 2.06% of the average unpaid balance of mortgage loans, respectively. Although management fees as a percentage of mortgage loans have increased significantly between 2010 and 2011, the total amount of management and servicing fees combined has only increased approximately $127,000 (9.6%) between the six months ended June 30, 2010 and 2011 because the weighted average balance of the loan portfolio has decreased by approximately 40% between the six months ended June 30, 2010 and 2011.

In determining the management fees and hence the yield to the partners, the General Partner may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that the General Partner will again receive less than the maximum management fees in the future. However, if the General Partner chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced.

Administrative/accounting expense increased $34,000 and $81,000 and real estate management/operations expense increased $99,000 and $191,000 (included in rental and other expenses on real estate properties in the statement of operations) during the three and six months ended June 30, 2011, as compared to the same periods in 2010.  The Partnership Agreement provides that the Partnership may reimburse the General Partner for the salaries and related salary expenses of the General Partner’s non-management and non-supervisory personnel performing services which could be performed by independent parties (subject to certain limitations in the Partnership Agreement). Because of increased loan delinquencies and the resulting foreclosures by the Partnership in the past few years, owned real estate has comprised a greater percentage of the Partnership’s assets than has historically been the case.  As a result, the General Partner has been required to devote more personnel resources to the administration and operation of the Partnership’s real estate assets. While the General Partner has chosen in the past not to seek reimbursement for its personnel costs associated with the real estate owned by the Partnership, the General Partner has determined that it is

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appropriate and reasonable to do so beginning in 2011, in light of these increased burdens being placed on the General Partner.  As permitted by the Partnership Agreement, the costs that are being reimbursed by the Partnership are for the actual salary and related salary costs of certain non-management and non-supervisory personnel providing administrative, accounting and real estate management/operations services, with respect to the Partnership’s real estate assets.

Legal and professional expenses increased $34,000 (13.8%) during the six months ended June 30, 2011, as compared to the same period in 2010, primarily due to increased legal and appraisal costs incurred on delinquent loans and loans in the process of foreclosure during 2011 that were not incurred during the same period in 2010.

Interest expense decreased $410,000 (75.6%) and $847,000 (76.2%) during the three and six months ended June 30, 2011, as compared to the same periods in 2010, due to the full repayment of the Partnership’s line of credit in December 2010. Thus, no interest expense was incurred by the Partnership on the line of credit during the three and six months ended June 30, 2011.

The provisions for loan losses of $487,000 and $789,000 during the three and six months ended June 30, 2011, respectively, were the result of analyses performed on the loan portfolio. The general loan loss allowance decreased $259,000 and $537,000 during the three and six months ended June 30, 2011 due primarily to an increase in impaired loans that were analyzed for a specific allowance and a lesser amount of non-delinquent loans in the Partnership’s portfolio in 2011. The specific loan loss allowance increased $746,000 and $1,326,000 during the three and six months ended June 30, 2011, as reserves were increased or established on thirteen loans. The Partnership also charged-off $10,638,000 from the allowance for two loans that were foreclosed upon by the Partnership during the six months ended June 30, 2011. The Partnership recorded a provision for loan losses of $1,511,000 and $1,848,000 during the three and six months ended June 30, 2010, respectively.

The impairment losses on real estate properties of $292,000 and $465,000 during the three and six months ended June 30, 2011 and 2010, respectively, were the result of updated appraisals or other valuation information obtained on certain Partnership real estate properties.

Net Loss from Rental and Other Real Estate Properties

Net loss from rental and other real estate properties increased $193,000 (117.2%) and $164,000 (30.7%) during the three and six months ended June 30, 2011, as compared to the same periods in 2010. The increased losses during the three and six months ended June 30, 2011 as compared to 2010 were due primarily to additional net losses incurred on real estate foreclosed in the past six months and depreciation incurred on several of the Partnership’s real estate properties held for investment.

Financial Condition

June 30, 2011 and December 31, 2010

Loan Portfolio

The number of Partnership mortgage investments decreased from 39 to 34, and the average loan balance decreased from $4,043,000 to $3,194,000, between December 31, 2010 and June 30, 2011.

As of June 30, 2011 and December 31, 2010, the Partnership had twenty-five and twenty-four loans, respectively, that were impaired, delinquent in monthly payments greater than ninety days and/or in the process of foreclosure totaling approximately $79,826,000 (74%) and $121,565,000 (77%), respectively.  This included twenty-two past maturity loans totaling $72,790,000 (67%) and $119,084,000 (76%), respectively. In addition, one and five loans totaling approximately $690,000 (0.6%) and $3,318,000 (2%), respectively, were past maturity but current in monthly payments as of June 30, 2011 and December 31, 2010, respectively (combined total of impaired and past maturity loans of $80,516,000 (74%) and $124,883,000 (79%), respectively). Of the impaired and past maturity loans, approximately $26,948,000 (25%) and $46,078,000 (29%), respectively, were in the process of foreclosure and $29,278,000 (27%) and $53,606,000 (34%), respectively, involved borrowers who were in bankruptcy as of June 30, 2011 and December 31, 2010.  During the quarter ended June 30, 2011, one delinquent Partnership loan was partially paid down by the borrower in the amount of $12,580,000.

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During the six months ended June 30, 2011 and 2010, the Partnership foreclosed on four loans and one loan, respectively, with aggregate principal balances totaling approximately $34,832,000 and $9,592,000, respectively, and obtained the properties via the trustee’s sales.

As of June 30, 2011 and December 31, 2010, the Partnership held the following types of mortgages:

	2011		2010
By Property Type:
Commercial	$	46,515,991	$	69,024,479
Condominiums		14,546,722		41,037,978
Single family homes (1-4 units)		250,000		325,125
Improved and unimproved land		47,277,913		47,277,913
	$	108,590,626	$	157,665,495
By Deed Order:
First mortgages	$	91,132,472	$	139,169,446
Second and third mortgages		17,458,154		18,496,049
	$	108,590,626	$	157,665,495

As of June 30, 2011 and December 31, 2010, approximately 47% and 39% of the Partnership’s mortgage loans were secured by real property in Northern California. In addition, approximately 60% of the Partnership’s mortgage loans as of June 30, 2011 were secured by real estate located in the states of California, Arizona and Nevada, which have experienced dramatic reductions in real estate values over the past three years.

The Partnership’s investment in loans decreased by $49,075,000 (31.1%) during the six months ended June 30, 2011 as a result of foreclosures and loan payoffs. The Partnership is not presently able to originate new loans due to cash flow constraints.

The General Partner decreased the allowance for loan losses by $9,849,000 and $3,274,000 (provision net of charge-offs) during the six months ended June 30, 2011 and 2010, respectively.  The General Partner believes that this allowance is sufficient given the estimated underlying collateral values of impaired loans. There is no precise method used by the General Partner to predict delinquency rates or losses on specific loans.  The General Partner has considered the number and amount of delinquent loans, loans in the process of foreclosure and loans in bankruptcy in determining the allowance for loan losses, but there can be no absolute assurance that the allowance is sufficient.  Because any decision regarding allowances for loan losses reflects judgment about the probability of future events, there is an inherent risk that such judgments will prove incorrect.  In such event, actual losses may exceed (or be less than) the amount of any reserve.  To the extent that the Partnership experiences losses greater than the amount of its reserves, the Partnership may incur a charge to earnings that will adversely affect operating results and the amount of any distributions payable to Limited Partners.

Changes in the allowance for loan losses for the six months ended June 30, 2011 and 2010 were as follows:

	2011			2010
Balance, beginning of period	$	36,068,515		$	28,392,938
Provision		788,730			1,847,748
Charge-offs		(10,637,729	)		(5,121,806	)
Balance, end of period	$	26,219,516		$	25,118,880

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The Partnership’s allowance for loan losses was $26,219,516 and $36,068,515 as of June 30, 2011 and December 31, 2010, respectively. As of June 30, 2011 and December 31, 2010, there was a general allowance for loan losses of $3,209,000 and $3,746,000, respectively, and a specific allowance for loan losses on thirteen loans in the total amount of $23,010,516 and $32,322,515, respectively.

Real Estate Properties Held for Sale and Investment

As of June 30, 2011, the Partnership held title to thirty properties that were acquired through foreclosure with a total carrying amount of approximately $139,725,000 (including properties held in fifteen limited liability companies), net of accumulated depreciation of $6,999,000. As of June 30, 2011, properties held for sale total $29,738,000 and properties held for investment total $109,987,000. When the Partnership acquires property by foreclosure, it typically earns less income on those properties than could be earned on mortgage loans and may not be able to sell the properties in a timely manner.

Changes in real estate held for sale and investment during the six months ended June 30, 2011 and 2010 were as follows:

	2011			2010
Balance, beginning of period	$	97,066,199		$	79,888,536
Real estate acquired through foreclosure, net of specific loan loss allowance		43,733,719			5,040,000
Investments in real estate properties		570,338			348,124
Sales of real estate properties		—			(469,218	)
Impairment losses on real estate properties		(291,602	)		(465,294	)
Depreciation of properties held for investment		(1,353,311	)		(720,780	)
Balance, end of period	$	139,725,343		$	83,621,368

Eleven of the Partnership’s thirty properties do not currently generate revenue. Expenses from real estate properties have increased from approximately $4,177,000 to $6,434,000 (54%) for the six months ended June 30, 2010 and 2011, respectively, and revenues associated with these properties have increased from $3,641,000 to $5,734,000 (58%), thus generating a net loss from real estate properties of $700,000 during the six months ended June 30, 2011 (compared to $535,000 for the same period in 2010).

During the six months ended June 30, 2011, the Partnership foreclosed on a first mortgage loan secured by a 1/7th interest in a single family home located in Lincoln City, Oregon in the amount of approximately $75,000 and obtained the property via the trustee’s sale.  In addition, accrued interest and advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $10,000 were capitalized to the basis of the property. The property is classified as held for sale as it is listed for sale and the Partnership expects to complete a sale within the next year.

During the six months ended June 30, 2011, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Chico, California in the amount of $8,500,000 and obtained the property via the trustee’s sale.  In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $588,000 were capitalized to the basis of the property. The carrying value of this property of $9,088,000 at the time of foreclosure approximated its then current fair value less estimated selling costs. The property is classified as held for investment as a sale is not expected in the next one year period.

During the six months ended June 30, 2011, the Partnership foreclosed on a participated, first mortgage loan secured by a condominium complex located in Miami, Florida with a principal balance to the Partnership of approximately $26,257,000 and obtained an undivided interest in the properties with the other two lenders (which included the General Partner) via the trustee’s sale. The Partnership and other lenders formed a new, wholly-owned limited liability company, TOTB Miami, LLC, to own and operate the complex (see Note 6). The complex consists of three buildings, two of which have been renovated and are being leased, and in which 168 units remain unsold (the “Point” and “South” buildings), and one which contains

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160 vacant units that have not been renovated (the “North” building). Based on a new appraisal obtained in September 2010, it was determined that the fair value of the property was lower than the Partnership’s total investment in the loans (including a previously established loan loss allowance of $10,188,000) and an additional charge to provision for loan losses of approximately $450,000 was recorded at the time of foreclosure during the first quarter of 2011 (total charge-off of $10,638,000). The Point and South building units are classified as held for investment as sales are not expected in the next one year period. The North building is classified as held for sale as it is being actively marketed and a sale is expected within the next year.

During the quarter ended June 30, 2010, the Partnership sold one house in the manufactured home subdivision development located in Ione, California for net sales proceeds of approximately $88,000, resulting in a loss to the Partnership of approximately $6,000.

During the quarter ended June 30, 2010, the Partnership recorded an impairment loss of approximately $465,000 on 8 units in the office condominium complex located in Roseville, California based on updated sales data obtained, which is reflected in losses on real estate properties in the accompanying consolidated statements of income.

During the six months ended June 30, 2010, the Partnership sold one commercial building located in Roseville, California for net sales proceeds of approximately $359,000, resulting in a gain to the Partnership of approximately $183,000.

During the quarter ended June 30, 2010, the Partnership obtained a deed in lieu of foreclosure from the borrower on a first mortgage loan secured by a medical office condominium complex located in Gilbert, Arizona in the amount of approximately $9,592,000 and obtained the property. It was determined that the fair value of the property was lower than the Partnership’s investment in the loan and a specific loan allowance was established for this loan in the total amount of approximately $4,914,000 as of March 31, 2010. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure in May 2010, along with an additional charge to bad debt expense of approximately $74,000 for additional delinquent property taxes paid.  The property is classified as held for investment as a sale is not expected to be completed in the next one year period. The Partnership formed a new, wholly-owned limited liability company, AMFU, LLC, to own and operate the complex.

720 University, LLC

The Partnership has an investment in a limited liability company, 720 University, LLC (“720 University”), which owns a commercial retail property located in Greeley, Colorado. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.

The net operating (loss) income to the Partnership from 720 University was approximately $(6,000) and $27,000 (including depreciation and amortization of $112,000 and $139,000) for the three months ended June 30, 2011 and 2010, respectively, and $7,000 and $35,000 (including deprecation and amortization of $230,000 and $275,000) for the six months ended June 30, 2011 and 2010, respectively. The noncontrolling interest of the joint venture partner of approximately $8,000 and $16,000 as of June 30, 2011 and December 31, 2010, respectively, is reported in the accompanying consolidated balance sheets. The Partnership’s investment in 720 University real property and improvements was approximately $12,435,000 and $12,628,000 as of June 30, 2011 and December 31, 2010, respectively.

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Dation, LLC

Dation, LLC (“Dation”) was formed in 2001 between the Partnership and an unrelated developer for the purpose of developing and selling lots in a manufactured home park located in Lake Charles, Louisiana, which were acquired by the Partnership via a deed in lieu of foreclosure. The Partnership advances funds to Dation as needed. The Partnership owns 50% of Dation and is the sole general manager (pursuant to an amendment to the Operating Agreement executed in October 2007). Pursuant to the Operating Agreement, the Partnership is to receive 50% of Dation’s profits and losses after receipt of all interest on the original loan and priority return on partner contributions allocated at the rate of 12% per annum. The Partnership has recorded 100% of Dation’s net income and losses since inception because it has the majority of the risks and rewards of ownership. The assets, liabilities, income and expenses of Dation have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.

The net operating loss to the Partnership from Dation was approximately $10,000 and $7,000 for the three months ended June 30, 2011 and 2010, respectively, and $24,000 and $26,000 for the six months ended June 30, 2011 and 2010, respectively.

DarkHorse Golf Club, LLC

DarkHorse Golf Club, LLC (“DarkHorse”) is a California limited liability company formed for the purpose of operating the DarkHorse golf course located in Auburn California, which was acquired by the Partnership via foreclosure in August 2007. The golf course was placed into DarkHorse via a grant deed on the same day that the trustee’s sale was held. The Partnership is the sole member in DarkHorse. The assets, liabilities, income and expenses of DarkHorse have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.  The golf course is being operated and managed by an unrelated company.

The Partnership advanced approximately $112,000 and $88,000 to DarkHorse during the three months ended June 30, 2011 and 2010, respectively, for operations and improvements. The net operating loss to the Partnership from DarkHorse was approximately $72,000 and $93,000 (including depreciation of $42,000 and $30,000) for the three months ended June 30, 2011 and 2010, respectively, and $259,000 and $307,000 (including depreciation of $85,000 and $63,000) for the six months ended June 30, 2011 and 2010, respectively. Continued operation of DarkHorse may result in additional losses to the Partnership and may require the Partnership to provide funds for operations and capital improvements.

Lone Star Golf, LLC

Lone Star Golf, LLC (“Lone Star”) is a California limited liability company formed for the purpose of owning and operating a golf course and country club located in Auburn, California, which was acquired by the Partnership via foreclosure in June 2009. The Partnership is the sole member in Lone Star. The assets, liabilities, income and expenses of Lone Star have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership.  The golf course is being operated and managed by an unrelated company.

The Partnership advanced approximately $94,000 and $101,000 to Lone Star during the three months ended June 30, 2011 and 2010, respectively, for operations. The net operating loss to the Partnership from Lone Star was approximately $15,000 and $4,000 (including depreciation of $12,000 and $11,000) for the three months ended June 30, 2011 and 2010, respectively, and $125,000 and $106,000 (including depreciation of $23,000 and $22,000) for the six months ended June 30, 2011 and 2010, respectively. Continued operation of Lone Star may result in additional losses to the Partnership and may require the Partnership to provide funds for operations and capital improvements.

TOTB Miami, LLC

TOTB Miami, LLC (“TOTB”) is a Florida limited liability company formed for the purpose of owning and operating 168 condominium units and a 160 unit apartment building in a complex located in Miami, Florida which were acquired by the Partnership, the General Partner and Potomac Capital (who were co-lenders in the subject loan) via foreclosure in February 2011. Pursuant to the Operating Agreement, the Partnership is to receive an allocation of the profits and losses of TOTB based on the allocation of the distribution priorities contained in the

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Agreement (approximately 57% as of June 30, 2011). It was determined that the Partnership is the primary beneficiary of TOTB due to the Partnership’s power to direct the management, operations and sale of all or a portion of the properties and the Partnership’s obligation to absorb future losses of TOTB, which may be significant, and thus, the assets, liabilities, income and expenses of TOTB have been consolidated into the accompanying consolidated balance sheet and statement of operations of the Partnership. The noncontrolling interests of the other members of TOTB totaled approximately $14,048,000 as of June 30, 2011.

The net operating loss to the Partnership from TOTB was approximately $104,000 and $137,000 (including depreciation of $150,000 and $249,000) for the three and six months ended June 30, 2011, respectively.

The approximate net operating income (loss) from Partnership real estate properties held within wholly-owned limited liability companies and other investment properties with significant operating results, for the six months ended June 30, 2011 and 2010 were as follows:

	2011			2010
Anacapa Villas, LLC	$	(108,000	)	$	(136,000	)
Baldwin Ranch Subdivision, LLC		(44,000	)		(98,000	)
The Last Resort and Marina, LLC		(16,000	)		(12,000	)
33rd Street Terrace, LLC		9,000			(1,000	)
54th Street Condos, LLC		(193,000	)		(184,000	)
Wolfe Central, LLC		199,000			187,000
AMFU, LLC		22,000			(39,000	)
Phillips Road, LLC		54,000			—
550 Sandy Lane, LLC		92,000			—
1401 on Jackson, LLC		(10,000	)		—
Light industrial building, Paso Robles, California		104,000			117,000
Undeveloped industrial land, San Jose, California		(68,000	)		(70,000	)
Office condominium complex, Roseville, California		(53,000	)		(61,000	)
Storage facility/business, Stockton, California		118,000			29,000
Industrial building, Chico, California		(218,000	)		—

Cash, Cash Equivalents and Certificates of Deposit

Cash, cash equivalents and certificates of deposit increased from approximately $7,379,000 as of December 31, 2010 to approximately $18,217,000 as of June 30, 2011 (increase of $10,838,000 or 146.9%) due primarily to a partial loan payoff received by the Partnership in June 2011 on one delinquent loan in the amount of $12,580,000.

Interest and Other Receivables

Interest and other receivables decreased from approximately $4,494,000 as of December 31, 2010 to $2,445,000 as of June 30, 2011 ($2,048,000 or 45.6%) due primarily to foreclosures that resulted in certain receivables being reclassified to real estate held for sale and/or investment.

Accrued Distributions Payable

Accrued distributions payable decreased from approximately $46,000 as of December 31, 2010 to $0 as of June 30, 2011 because there was no tax basis net income distributed to partners in July 2011 (for June 2011 activity). In July 2011, a net loss of approximately $184,000 was allocated to partners’ accounts.

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Due to General Partner

Due to General Partner decreased from approximately $682,000 as of December 31, 2010 to approximately $399,000 as of June 30, 2011, ($283,000 or 41.6%) due primarily to additional interest, late charges and an extension fee in the aggregate amount of approximately $519,000 collected on a delinquent Partnership loan that paid off in full in December 2010, and which was not disbursed to the General Partner until January 2011. Accrued management and service fees due to the General Partner as of June 30, 2011 increased approximately $241,000, as compared to December 31, 2010. These fees are paid pursuant to the Partnership Agreement (see “Results of Operations” above) and can fluctuate from month to month.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities increased from approximately $2,387,000 as of December 31, 2010 to approximately $2,791,000 as of June 30, 2011 ($404,000 or 16.9%) due primarily to an increase in accrued expenses on Partnership real estate acquired through foreclosure in 2011.

Noncontrolling Interests

Noncontrolling interests increased from approximately $16,000 as of December 31, 2010 to approximately $14,056,000 as of June 30, 2011, due to the foreclosure of a loan during the six months ended June 30, 2011 and the acquisition by a new LLC entity (TOTB Miami, LLC or “TOTB”) of the property securing the foreclosed loan. The loan had been subject to a co-lending agreement with two other lenders (one of which was the General Partner) who are now members in TOTB along with the Partnership. The consolidation of TOTB into the Partnership’s books and records gave rise to noncontrolling interests held by the other members of the LLC in the total amount of approximately $14,020,000.

Asset Quality

A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time, depending on the risk characteristics of the loan portfolio as affected by economic conditions and the financial experiences of borrowers.  Many of these factors are beyond the control of the General Partner. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on specific loans or on segments of the loan portfolio.

The conclusion that a Partnership loan may become uncollectible, in whole or in part, is a matter of judgment. Although institutional lenders are subject to regulations that, among other things, require them to perform ongoing analyses of their loan portfolios (including analyses of loan-to-value ratios, reserves, etc.), and to obtain current information regarding their borrowers and the securing properties, the Partnership is not subject to these regulations and has not adopted these practices. Rather, management of the General Partner, in connection with the quarterly closing of the accounting records of the Partnership and the preparation of the financial statements, evaluates the Partnership’s mortgage loan portfolio. The allowance for loan losses is established through a provision for loan losses based on the General Partner’s evaluation of the risk inherent in the Partnership’s loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which the General Partner determines that full collectability may not be reasonably assured, considers among other matters:

· prevailing economic conditions;

· the Partnership’s historical loss experience;

· the types and dollar amounts of loans in the portfolio;

· borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;

· evaluation of industry trends;

· review and evaluation of loans identified as having loss potential; and

· estimated net realizable value or fair value of the underlying collateral.

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Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover probable losses of the Partnership. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. As of June 30, 2011, management believes that the allowance for loan losses of approximately $26,220,000 is adequate in amount to cover probable losses. Because of the number of variables involved, the magnitude of swings possible and the General Partner’s inability to control many of these factors, actual results may and do sometimes differ significantly from estimates made by the General Partner. As of June 30, 2011, twenty-five loans totaling $79,826,000 were impaired, delinquent in monthly payments greater than ninety days and/or in the process of foreclosure. This includes twenty-two past maturity loans totaling $72,790,000. In addition, one loan totaling $690,000 was also past maturity but current in monthly payments as June 30, 2011 (combined total of $80,516,000). The Partnership recorded a charge-off against the allowance for loan losses of approximately $10,638,000 for two foreclosed loans during the six months ended June 30, 2011 and after the General Partner’s evaluation of the loan portfolio recorded an additional provision for loan losses of approximately $789,000 for losses that are estimated to have likely occurred, which resulted in a net decrease to the allowance of approximately $9,849,000.  The General Partner believes that the allowance for loan losses is sufficient given the estimated fair value of the underlying collateral values of impaired and past maturity loans.

Liquidity and Capital Resources

During the six months ended June 30, 2011, cash flows used in operating activities approximated $2,105,000, as approximately $2,583,000 of Partnership cash was used to pay delinquent property taxes for the recently acquired real estate properties held within TOTB Miami, LLC. Investing activities provided approximately $15,222,000 of net cash during the six months, as approximately $15,754,000 was received from the payoff of loans and maturity of certificates of deposit, net of approximately $597,000 used for investing in real estate and equipment.  Approximately $768,000 was used in financing activities, as approximately $75,000 was used to repay the note payable and $819,000 was distributed to partners in the form of income distributions, net of approximately $136,000 of capital contributions from noncontrolling interests. The General Partner believes that the Partnership will have sufficient cash flow to sustain operations over the next year.

The Partnership experienced a significant increase in limited partner capital withdrawal requests in late 2008 and 2009. Prior to October 13, 2009, the Partnership Agreement permitted only 10% of limited partner capital to be withdrawn in any calendar year, and effective October 13, 2009 (with the approval of the amendments to the Partnership Agreement by limited partners on such date), this annual 10% limitation applies to the aggregate of limited partner withdrawals and distributions of net proceeds.  As a consequence of the annual 10% limitation, the Partnership was required to suspend approximately $5,000,000 in December 2008 withdrawal requests until January 2009.  All 2009, 2010 and 2011 (through June 30) scheduled withdrawals in the total amount of approximately $80,000,000 were not made because the Partnership has not had sufficient available cash to make such withdrawals and needed to have funds in reserve to pay down its line of credit and for operations.  Also, pursuant to the October 2009 modified line of credit agreement, the Partnership was prohibited from making capital distributions to partners until the line of credit was fully repaid. The line of credit was repaid in full by the Partnership in December 2010, and as a result, the Partnership is no longer subject to the collateral requirements, payment obligations, restrictions on partner distributions and repurchases, and other restrictions imposed by the line of credit agreement. Thus, when funds become available for distribution from net proceeds, the General Partner anticipates causing the Partnership to make a pro rata distribution to all partners up to 10% of Partnership capital, which will prevent any limited partner withdrawals during the same calendar year. In July 2011, the Partnership made a pro rata capital distribution to all partners of approximately $8,588,000, which was approximately 3.07% of total partners’ capital.

The limited partners may withdraw capital from the Partnership, either in full or partially, subject to the following limitations, among others:

·   The withdrawing limited partner is required to provide written notice of withdrawal to the General Partner, and the distribution to the withdrawing limited partner will not be made until 61 to 91 days after delivery of such notice of withdrawal.

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·   No withdrawal of capital with respect to Units is permitted until the expiration of one year from the date of purchase of such Units, other than Units received under the Partnership’s Reinvested Distribution Plan.

·   Any such payments are required to be made only from net proceeds and capital contributions (as defined).

·   A maximum of $100,000 per limited partner may be withdrawn during any calendar quarter.

·   The General Partner is not required to establish a reserve fund for the purpose of funding withdrawals.

·   No more than 10% of the aggregate capital accounts of limited partners can be paid to limited partners through any combination of distributions of net proceeds and withdrawals during any calendar year, except upon a plan of dissolution of the Partnership.

Under normal market conditions, sales of Units to investors, reinvestment of limited partner distributions, portfolio loan payoffs, and advances on the Partnership’s line of credit (which has been fully repaid) provide the capital for new mortgage investments. If general market interest rates were to increase substantially, investors might turn to interest-yielding investments other than Partnership Units, which would reduce the liquidity of the Partnership and its ability to make additional mortgage investments to take advantage of the generally higher interest rates. In addition, an increase in delinquencies on Partnership loans (including an increase in past maturity loans) could also have the effect of reducing liquidity which could reduce the cash available to invest in new loans and distribute to limited partners.  In contrast, a significant increase in the dollar amount of loan payoffs and additional limited partner investments without the origination of new loans of the same amount would increase the liquidity of the Partnership. This increase in liquidity could result in a decrease in the yield paid to limited partners as the Partnership would be required to invest the additional funds in lower yielding, short term investments.

Limited partner capital decreased by approximately $1,682,000 during the six months ended June 30, 2011. Two large components of the decrease in limited partner capital during 2011 were an increase in the allowance for loan losses in the amount of approximately $789,000 and an impairment loss on a real estate property of approximately $292,000. Reinvested distributions from limited partners electing to reinvest were $56,000 and $380,000 for the six months ended June 30, 2011 and 2010, respectively. There were no limited partner withdrawals for the six months ended June 30, 2011 and 2010. Limited partner withdrawal percentages have been 4.70%, 6.34%, 10.00%, 2.01% and 0.00% for the years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively. These percentages are the annual average of the limited partners’ capital withdrawals in each calendar quarter divided by the total limited partner capital as of the end of each quarter.

In April 2011, the General Partner temporarily suspended the Distribution Reinvestment Plan (the “Plan”) for all limited partners, in an effort to ensure the Partnership’s ability to continue to operate in compliance with the requirements of the Partnership Agreement.  The Partnership Agreement requires that 86.5% of capital contributions to the Partnership be committed to mortgage loan investments, but also limits the Partnership’s ability to make additional investments in mortgage loans while the Partnership has pending unpaid limited partner withdrawal requests.  In recent years, Partnership liquidity issues have limited the Partnership’s ability to honor withdrawal requests, which restricts the Partnership’s additional mortgage lending activities.

The total amount of indebtedness incurred by the Partnership cannot exceed the sum of 50% of the aggregate fair market value of all Partnership loans. Until December 2010, the Partnership had a line of credit agreement with a group of three banks that provided interim financing on mortgage loans invested in by the Partnership. The line of credit was repaid in full by the Partnership in December 2010. Because of such repayment, various restrictions on the Partnership’s capital resources imposed by the line of credit agreement no longer apply.

The Partnership has a note payable with a bank through its investment in 720 University, LLC with a balance of $10,318,000 and $10,394,000 as of June 30, 2011 and December 31, 2010, respectively. The note required monthly interest-only payments until March 1, 2010 at a fixed rate of 5.07% per annum. Commencing April 1, 2010, the note became amortizing and monthly payments of $56,816 are now required, with the balance of unpaid principal due on March 1, 2015.

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Although the Partnership previously had commitments under construction and rehabilitation loans, no such commitments remained as of June 30, 2011.

It was determined subsequent to foreclosure of the applicable loans in November 2009 that additional renovation costs in the total amount of approximately $2,300,000 will be required to complete certain of the condominium units located in Phoenix, Arizona owned by the Partnership so that these units may be leased or sold. The funds to pay for these capitalized costs will likely come from either cash reserves or new borrowings securing the property. In June 2011, 54th Street Condos, LLC (wholly owned by the Partnership) signed a $2,484,000 construction contract for completion of the remaining condominium units. Thus, the total estimated cost to complete these units is now estimated to be approximately $2,800,000 (including approximately $300,000 already capitalized as of June 30, 2011). Construction is expected to begin during the third quarter of 2011 and should be completed within six to nine months. The Partnership recorded an additional impairment loss of approximately $292,000 as of June 30, 2011 as a result of the higher anticipated costs.

Contingency Reserves

The Partnership is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of at least 1-1/2% of the capital accounts of the limited partners to cover expenses in excess of revenues or other unforeseen obligations of the Partnership. The cash capital contributions of OFG (amounting to $1,496,000 as of June 30, 2011), up to a maximum of 1/2 of 1% of the limited partners’ capital accounts may be maintained as additional contingency reserves, if considered necessary by the General Partner.  Although the General Partner believes the contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Partnership.

PART I - Item 4. CONTROLS AND PROCEDURES

The General Partner of the Partnership carried out an evaluation, under the supervision and with the participation of the General Partner’s management, including the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer of the General Partner concluded that, as of June 30, 2011, which is the end of the period covered by this quarterly report on Form 10-Q, the Partnership’s disclosure controls and procedures are effective.

There have been no changes in the Partnership’s internal control over financial reporting in the fiscal quarter ending June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust.  None of these actions would typically be of any material importance.  As of the date hereof, the Partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.

Item 1A. Risk Factors

There have been no material changes in the Partnership’s risk factors as previously disclosed in the Partnership’s Annual Report on Form 10-K as of and for the year ended December 31, 2010.

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Item 6. Exhibits

(a)Exhibits

  31.1     Section 302 Certification of William C. Owens

  31.2     Section 302 Certification of Bryan H. Draper

  32        Certifications pursuant to 18 U.S.C. Section 1350

101        Financial statements from this quarterly report on Form 10-Q, formatted in XBRL: (i) the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) the   Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iii) the Consolidated Statements of Partners’ Capital for the six months ended June 30, 2011 and 2010, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (v) the Notes to such Consolidated Financial Statements.

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.

Dated:           August 15, 2011	OWENS MORTGAGE INVESTMENT FUND, a California Limited Partnership
	By:	OWENS FINANCIAL GROUP, INC., GENERAL PARTNER
Dated:           August 15, 2011	By:	/s/ William C. Owens
		William C. Owens, President
Dated:           August 15, 2011	By:	/s/ Bryan H. Draper
		Bryan H. Draper, Chief Financial Officer
Dated:           August 15, 2011	By:	/s/ Melina A. Platt
		Melina A. Platt, Controller

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