American Mortgage Acceptance 10Q 2008 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, 2008

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

Commission File Number 0-23972

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AMERICAN MORTGAGE ACCEPTANCE COMPANY

(Exact name of Registrant as specified in its charter)

______________

Massachusetts		13-6972380
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

625 Madison Avenue, New York, New York		10022
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer [ ]		Accelerated filer x
Non- accelerated filer [ ]		Smaller reporting company [ ]

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

Yes [ ] No x

As of July 31, 2008, there were 8,502,702 outstanding common shares of the registrant’s shares of beneficial interest, $0.10 par value.

Table of Contents

AMERICAN MORTGAGE ACCEPTANCE COMPANY

FORM 10-Q

			Page
PART I – FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
	Item 4.	Controls and Procedures	33
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	34
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3.	Defaults Upon Senior Securities	34
	Item 4.	Submission of Matters to a Vote of Security Holders	34
	Item 5.	Other Information	34
	Item 6.	Exhibits	34
SIGNATURES			35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

	June 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Cash and cash equivalents	$	20,703		$	15,844
Restricted cash		5,028			8,783
Investments:
Mortgage loans receivable, net (Note 3)		464,822			529,644
Available-for-sale investments, at fair value (Note 4):
CMBS		43,013			69,269
Mortgage revenue bonds		4,743			4,879
Accounts receivable (Note 6)		22,322			31,066
Deferred charges and other assets, net (Note 7)		6,499			6,914
Total assets	$	567,130		$	666,399
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Liabilities:
CDO notes payable	$	362,000		$	362,000
Repurchase facilities (Note 8)		71,939			136,385
Line of credit – related party (Note 9)		79,877			77,685
Preferred shares of subsidiary (subject to mandatory repurchase)		25,000			25,000
Interest rate derivatives (Note 10)		20,358			26,631
Accounts payable and accrued expenses (Note 11)		16,373			15,764
Due to Advisor and affiliates (Note 16)		3,455			2,000
Dividends payable		308			308
Total liabilities		579,310			645,773

Commitments and contingencies (Note 17)

Shareholders’ (deficit) equity:
7.25% Series A Cumulative Convertible Preferred Shares, no par value; 680 shares issued and outstanding in 2008 and 2007		15,905			15,905
Common shares of beneficial interest; $0.10 par value; 25,000 shares authorized; 8,918 issued and 8,503 outstanding in 2008 and 8,848 issued and 8,433 outstanding in 2007		892			885
Treasury shares of beneficial interest at par; 415 shares in 2008 and 2007		(42	)		(42	)
Additional paid-in capital		128,125			128,087
Accumulated deficit		(139,404	)		(104,956	)
Accumulated other comprehensive loss		(17,656	)		(19,253	)
Total shareholders’ (deficit) equity		(12,180	)		20,626
Total liabilities and shareholders’ (deficit) equity	$	567,130		$	666,399

See accompanying notes to condensed consolidated financial statements.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Revenues:
Interest	$	9,808		$	15,159	$	20,414		$	26,885
Other revenues		3			153		81			928
Total revenues		9,811			15,312		20,495			27,813
Expenses:
Interest		8,808			10,633		16,805			19,128
Interest – distributions to preferred shareholders of subsidiary (subject to mandatory repurchase)		547			554		1,095			1,123
General and administrative		593			542		1,555			1,147
Fees to Advisor and affiliates (Note 16)		540			918		1,274			1,886
Impairment of investments (Notes 3 and 4)		4,470			--		30,968			--
Amortization and other		204			206		446			406
Total expenses		15,162			12,853		52,143			23,690
Other income (loss):
Gain on sale of investments		495			337		456			337
Change in fair value and loss on termination of derivative instruments (Note 10)		--			681		(2,640	)		650
Total other income (loss)		495			1,018		(2,184	)		987
(Loss) income from continuing operations		(4,856	)		3,477		(33,832	)		5,110
Income from discontinued operations, including gain on sale of real estate owned (Note 5)		--			--		--			3,531
Net (loss) income		(4,856	)		3,477		(33,832	)		8,641
7.25% Convertible Preferred dividend requirements		(308	)		--		(616	)		--
Net (loss) income available to common shareholders	$	(5,164	)	$	3,477	$	(34,448	)	$	8,641
Earnings per share (basic and diluted) (Note 15):
(Loss) income from continuing operations	$	(0.61	)	$	0.41	$	(4.08	)	$	0.61
Income from discontinued operations		--			--		--			0.42
Net (loss) income	$	(0.61	)	$	0.41	$	(4.08	)	$	1.03
Dividends per share	$	--		$	0.225	$	--		$	0.450
Weighted average shares outstanding:
Basic and diluted		8,445			8,403		8,439			8,402

See accompanying notes to condensed consolidated financial statements.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net (loss) income	$	(33,832	)	$	8,641
Reconciling items:
Impairment of investments		30,968			--
Change in fair value and loss on termination of derivative instruments		2,640			(650	)
Amortization and accretion		(64	)		197
Other non-cash income, net		(74	)		(512	)
Depreciation expense		--			336
Gain on sale of investments		(456	)		(337	)
Gain on sale of real estate owned		--			(3,611	)
Changes in operating assets and liabilities:
Accounts receivable		754			(2,063	)
Other assets		(28	)		(3	)
Due to Advisor and affiliates		1,455			(124	)
Accounts payable and accrued expenses		608			3,064
Net cash provided by operating activities		1,971			4,938
Cash flows from investing activities:
Principal repayments or sale of mortgage loans		61,686			57,565
Funding and purchase of mortgage loans		(769	)		(238,873	)
Investment in CMBS		--			(106,830	)
Investment in CDO securities		--			(10,062	)
Principal repayments or sale of debt securities		--			2,408
Principal payments on and proceeds from sale of real estate owned		--			12,022
Proceeds from the sale of ARCap investment		495			337
Decrease in restricted cash and escrow receivables		11,746			12,728
Principal repayments of mortgage revenue bonds		91			95
Net cash provided by (used in) investing activities		73,249			(270,610	)
Cash flows from financing activities:
Proceeds from repurchase facilities		445,632			387,649
Repayments of repurchase facilities		(510,078	)		(148,101	)
Proceeds from line of credit – related party		3,443			171,815
Repayments of line of credit – related party		(1,250	)		(129,215	)
Proceed from note payable – related party		4,000			--
Repayment from note payable – related party		(4,000	)		--
Interest rate derivative termination costs		(7,492	)		--
Deferred financing costs		--			(186	)
Dividends paid or payable to shareholders		(616	)		(17,010	)
Net cash (used in) provided by financing activities		(70,361	)		264,952
Net increase (decrease) in cash and cash equivalents		4,859			(720	)
Cash and cash equivalents at the beginning of the year		15,844			7,553
Cash and cash equivalents at the end of the period	$	20,703		$	6,833
Non-cash investing and financing activities
Capitalized interest income	$	263		$	257

See accompanying notes to condensed consolidated financial statements.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Basis of Presentation

The condensed consolidated financial statements include the accounts of American Mortgage Acceptance Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, we herein refer to American Mortgage Acceptance Company and its subsidiaries as “AMAC”, “we”, “us”, “our”, and “our Company”. We operate in one business segment, which focuses on investing in mortgage loans and other debt instruments secured by multifamily and commercial property throughout the United States.

We are externally managed by Centerline AMAC Manager Inc. (the “Advisor”), which acts as our advisor and is a subsidiary of Centerline Holding Company (“Centerline”). Centerline also owns 6.8% of our common shares of beneficial interest (“common shares”) and 41.2% of our 7.25% Series A Cumulative Preferred Shares (“Preferred Shares”) at June 30, 2008, which amounts to an aggregate ownership percentage of over 10%, assuming all Preferred Shares were converted to common shares.

The condensed consolidated financial statements have been prepared without audit. In the opinion of management, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our financial position as of June 30, 2008, and the results of our operations and our cash flows for the periods then ended. However, the operating results for interim periods may not be indicative of the results for the full year.

Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007, which contains a summary of our significant accounting policies. With the exception of the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 157, Fair Value Measurement (“SFAS 157”) (see Note 12), there have been no material changes to these policies since December 31, 2007.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

We have reclassified certain prior year amounts to conform to the current year presentation, in particular the reclassification of certain escrow balances to accounts receivable. These balances were previously classified as restricted cash.

NOTE 2 – Market Conditions and Liquidity

Beginning in 2007 and throughout 2008, developments in the market for many types of mortgage products (including mortgage-backed securities) have resulted in reduced liquidity for these types of financial assets. Widening credit spreads have led to reduced values and the inability to find adequate financing for these assets. This has resulted in an overall reduction in liquidity across the credit spectrum of mortgage products, presenting us with financing challenges. As the credit markets declined, so did the commercial real estate collateralized debt obligation (“CDO”) market, and we decided to temporarily suspend investment activity and not pursue a second CDO securitization. As a result, we agreed to terminate a repurchase facility with Citigroup Global Markets, Inc. (“Citigroup”) that we had used to finance our investment activity and entered into an agreement to repay the entire amount of the facility by selling or refinancing the collateral assets.

During the first quarter of 2008, we repaid $44.3 million of the Citigroup facility by selling certain assets. The outstanding balance of this facility at June 30, 2008 is $37.0 million, partially collateralized by $17.3 million of cash held in escrow at Citigroup (see Note 6). We are currently in negotiations with Citigroup to provide a new credit line that would replace this facility and would enable us to repay the amounts outstanding over time.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prior to December 31, 2007, we paid interest on outstanding borrowings at rates that ranged from 30-day LIBOR plus 0.40% to 30-day LIBOR plus 1.25%. Subsequent to January 1, 2008, interest on the borrowings were increased as follows:

Period		Interest rate range

January 1 – January 31		30-day LIBOR plus 0.75% to 30-day LIBOR plus 1.40%
February 1 – February 29		30-day LIBOR plus 0.95% to 30-day LIBOR plus 1.60%
March 1 – April 30		30-day LIBOR plus 2.00%
Subsequent to April 30		30-day LIBOR plus 2.50%

In connection with the maturity of the original Citigroup facility in December 2007, we terminated all associated interest rate swaps derivatives. See Note 10 for a detailed explanation of costs we paid to terminate these derivatives.

In July 2008, we amended our related party line of credit and entered into a forbearance agreement with Centerline whereby Centerline has agreed not to call the outstanding balance on the line provided we maintain current interest payments and that certain other events do not occur (see Note 9).

During the second quarter of 2008, although no formal notice was received, we were informed that advance rates on our Bear Stearns (now part of JP Morgan) facility will be lowered from 70% to 50% in the near future, which will result in a margin call of approximately $6.9 million. We believe that we may be called upon to repay this facility by September 30, 2008.

Management is currently pursuing financing alternatives for investments currently securing this facility and believes that the credit quality and cash flow performance of the underlying assets are not indicative of the declines in their fair values in recent quarters. We feel that we will be able to locate an alternative financing vehicle for the securities; however, if we are unable to do so before this facility is terminated, we may be forced to sell these assets.

In August of 2008, one mortgage loan receivable was repaid at a discount, which generated $23.0 million of cash to repay debt obligations. We are also evaluating additional strategies that may require us to sell assets or allow accelerated repayments and extinguish any related debt obligations that are secured by these assets. By repaying most of our debt obligations, we believe we can regain adequate financing and stabilize our liquidity for our operating cash needs. However, factors outside of our control, such as the continuing uncertainty of the credit markets, could further restrict our liquidity.

During the first half of 2008, as a result of the continued decline in market conditions and our liquidity constraints as referred to above, we recorded impairment charges resulting from further declines in market values on our commercial mortgage-backed securities (“CMBS”) as a reduction of earnings in our statement of operations (see Note 4).

In April 2008, in order to meet certain margin requirements, we borrowed $4.0 million from an affiliated entity (see Note 16). We subsequently repaid the note with proceeds received from the repayment of a first mortgage loan during April 2008 (see Note 3).

In order to preserve cash, during the second quarter of 2008, we elected to defer distributions on both our preferred shares of subsidiary (subject to mandatory repurchase) and Preferred Shares. Because distributions for both classes are cumulative, we have recorded a liability for the required amounts.

Distributions of our preferred shares of subsidiary (subject to mandatory repurchase) can be deferred for up to 20 quarters and deferment of distributions on our Preferred Shares are unlimited; however, if distributions on our Preferred Shares are deferred more than six quarters, the Preferred Shareholders can exercise certain rights under the offering agreement that would allow them to appoint two members to our board of trustees.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Following is a summary of our investment assets as of June 30, 2008, illustrating the amount of leverage and the amounts of associated debt:

(in thousands)	Carrying amount		Carrying amount pledged as collateral		Amount securing CDO debt(1)		Amount securing repurchase facilities(2)		Associated repurchase debt(2)(3)

Mortgage loans receivable:
First mortgages	$	352,068	$	352,068	$	352,068	$	--	$	--
Variable-rate bridge loans		6,551		--		--		--		--
Fixed-rate mezzanine loans		13,117		8,120		7,069		1,051		889
Variable-rate mezzanine loans		50,655		50,655		12,901		37,754		30,203
Subordinated notes		42,431		41,931		24,814		17,117		12,453
Total mortgage loans receivable		464,822		452,774		396,852		55,922		43,545
CMBS		43,013		43,013		--		43,013		28,394
Mortgage revenue bonds		4,743		--		--		--		--
Total	$	512,578	$	495,787	$	396,852	$	98,935	$	71,939

(1)	$396.9 million of our mortgage loans receivable secure $362.0 million of CDO notes payable, of which, we have hedged $345.9 million (see Note 10).

(2)	Refers to the Citigroup and Bear Stearns repurchase facilities (see Note 8).

(3)	$17.3 million of cash is held in escrow at Citigroup, which will be used, in part, to satisfy repurchase facility debt (see Notes 6 and 8).

NOTE 3 – Investments in Mortgage Loans Receivable, Net

Mortgage loans receivable, net, consisted of two classifications of mortgages as follows:

(in thousands)	June 30, 2008		December 31, 2007

Mortgage loans held for investment	$	457,154	$	467,734
Mortgage loans held for sale		7,668		61,910
Total	$	464,822	$	529,644

Further information relating to investments in mortgage loans is as follows:

(in thousands)	June 30, 2008
Balance at beginning of year	$	529,644
Advances made		769
Loan commitment fees		78
Sales or repayments		(61,725	)
Amortization of costs and fees		212
Impairment losses		(4,419	)
Capitalized interest		263
Balance at end of the period	$	464,822

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the first quarter of 2008, we sold 11 mortgage loans to an affiliate of our Advisor (see Note 16) for total proceeds of $55.0 million. The sales resulted in realized losses of $3.1 million, which were recorded as impairment charges in 2007.

During April 2008, one first mortgage loan in the amount of $6.5 million was repaid at par.

During the first half of 2008, we recognized impairment charges of $4.4 million, of which, $3.4 million was recorded for the three-month period ended June 30, 2008, related to four mortgage loans in our specially serviced portfolio and one loan that was repaid subsequent to June 30, 2008. Impairment of the specially serviced loans ($4.0 million, of which we recorded $3.0 million in the second quarter) was due to deterioration of the operating performance of the underlying properties; the remaining $0.4 million impairment relates to the repayment of a loan in August 2008 for which we did not expect to collect the full principal amount (see Note 18).

At June 30, 2008, $55.9 million of our mortgage loan receivable were pledged as collateral under our repurchase facilities (see Note 8) and $396.9 million were pledged as collateral under our CDO notes payable.

NOTE 4 – Available-for-Sale Investments, at Fair Value

At June 30, 2008, we had CMBS and mortgage revenue bond investments classified as available-for-sale.

CMBS investments we hold were comprised of the following as of June 30, 2008:

(dollars in thousands)	Face amount		Purchase price		Fair value(1)		Percentage of fair value

Security rating:
BBB+	$	4,750	$	4,776	$	2,380		5.5	%
BBB		51,128		47,459		20,331		47.3
BBB-		40,994		34,948		13,105		30.5
BB(2)		9,997		9,997		7,197		16.7
Total	$	106,869	$	97,180	$	43,013		100.0	%
(1) CMBS were written down to their estimated fair value in accordance with FAS 115, Accounting for Certain Investments in Debt Equity Securities at June 30, 2008. The fair value is now considered the cost basis of these investments. (2) One security was downgraded from BBB- to BB in May of 2008.

Information regarding our available-for-sale investments is as follows:

(in thousands)	CMBS		Mortgage revenue bonds		Total
June 30, 2008
Amortized cost	$	43,013	$	4,577	$	47,590
Unrealized gain		--		166		166
Fair value	$	43,013	$	4,743	$	47,756
December 31, 2007
Amortized cost	$	69,269	$	4,668	$	73,937
Unrealized gain		--		211		211
Fair value	$	69,269	$	4,879	$	74,148

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We recognized declines in the fair value of $26.5 million on our CMBS investments as impairment charges during the first half of 2008. The decreases in fair value are due to widening credit spreads resulting from market conditions and are not necessarily reflective of the credit quality and cash flows of the underlying assets. While it is our intention to hold our CMBS investments to maturity, current market conditions could impede our ability to hold these investments to maturity or recovery as further deterioration in market conditions could force us to sell these assets. As such, further declines in fair values of these CMBS could result in additional impairment charges.

At June 30, 2008, all of our CMBS were pledged as collateral under our Bear Stearns repurchase facility (see Notes 2 and 8).

NOTE 5 – Discontinued Operations

During the first quarter of 2007, we sold our economic interest in the Concord portfolio to an affiliated party (see Note 16), resulting in proceeds of $12.0 million and a gain of $3.6 million. Real estate owned property operations included in discontinued operations were as follows:

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2008		2007		2008		2007
Revenues	$	--	$	--	$	--	$	1,815
Gain on sale of real estate owned	$	--	$	--	$	--	$	3,611
Net income	$	--	$	--	$	--	$	3,531

NOTE 6 – Accounts Receivable

Accounts receivable consisted of the following:

(in thousands)	June 30, 2008		December 31, 2007
Escrow receivable (1)	$	17,297	$	25,287
Interest receivable		4,997		5,737
Other		28		42
Total	$	22,322	$	31,066
(1)Escrow balances are being held by Citigroup as collateral, to be released when an asset that collateralizes the facility is sold based on the proceeds of such sales.

NOTE 7 – Deferred Charges and Other Assets, Net

Detail of deferred charges and other assets, net is provided in the table below:

(in thousands)	June 30, 2008		December 31, 2007

Deferred financing charges, net of accumulated amortization of $1,472 in 2008 and $1,030 in 2007	$	6,424	$	6,867
Other assets		75		47
Total	$	6,499	$	6,914

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – Repurchase Facilities

Our repurchase facilities consisted of financing collateralized by investments in mortgage loans, CMBS, bridge notes, mezzanine loans and subordinated notes. They are categorized in the table below by lending institution:

(in thousands)	June 30, 2008			December 31, 2007

Citigroup	$	37,033	(1)	$	81,345
Bear Stearns		34,906			55,040
Total	$	71,939		$	136,385
(1)As of June 30, 2008, $17.3 million of cash is held in escrow at Citigroup, which will be used, in part, to satisfy this liability (see Note 6).

Citigroup Facility

During 2006, we executed a repurchase facility with Citigroup for the purpose of funding investment activity for a planned CDO securitization. Borrowings on this facility had interest rates of 4.96% at June 30, 2008, as compared to 6.18% at December 31, 2007. During 2007, we entered into an agreement to terminate this facility, and are currently in negotiations with Citigroup to provide a new credit line that would replace this facility and enable us to repay the amounts outstanding over time (see Note 2).

Bear Stearns Facility

During 2007, we executed a repurchase facility with Bear Stearns for the purposes of financing investment activity. We also used this facility to refinance our CMBS investments previously financed through other facilities. This facility had borrowings at a weighted average interest rate of 4.84% at June 30, 2008, as compared to 6.26% at December 31, 2007. The borrowings are subject to 30-day settlement terms.

During the second quarter of 2008, although no formal notice was received, we were informed that advance rates on this facility will be lowered from 70% to 50% in the near future, which will result in a margin call of approximately $6.9 million. We believe that it is also Bear Stearns’ intentions to have this facility repaid by September 30, 2008.

$55.9 million of our mortgage loans and all of our CMBS are pledged as collateral in connection with the Citigroup and Bear Stearns repurchase facilities (see Notes 2, 3 and 4).

Banc of America Facility

During 2007, we executed a repurchase agreement with Banc of America Securities, LLC (“Banc of America”) to provide financing for investments in mezzanine loans and subordinated notes. There were no outstanding amounts on this facility as of either December 31, 2007 or June 30, 2008. Advance rates on any future borrowings, which would be determined on an asset-by-asset basis, would be subject to 30-day settlement terms. Interest rates on the borrowings would also be determined on an asset-by-asset basis.

NOTE 9 – Line of Credit – Related Party

During July 2008, our revolving credit facility with Centerline was amended to extend the maturity date to June 2009. A forbearance agreement was also entered into with Centerline whereby Centerline agreed to forbear any remedies under the loan agreement and not call the outstanding balance of the loan provided interest payments remain current and provided that no lenders of debt on any other facility demand repayment due to default. As a result of this agreement, we have agreed to be charged default interest rate of LIBOR plus 7.00%. An additional 4.00% of interest over the contract rate of LIBOR plus 3.00% is compounded monthly retroactively to January 1, 2008, the initial event of default, and payable upon demand. As a result, we have recorded an additional expense of $1.6 million due to default interest charged under the loan agreement. During the forbearance period, no payment of preferred or common dividends is to be made to shareholders as long as this event of default exists, except to preserve our REIT status.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, 2008, we had approximately $79.9 million in borrowings outstanding, bearing interest at a weighted average interest rate of 9.46%, compared to $77.7 million at a rate of 7.60% at December 31, 2007. We are current in our interest payments on this line of credit as of the date of this filing.

We have covenant compliance requirements on our related party line of credit. These covenants include:

·	minimum adjusted net worth;

·	liquidity;

·	debt service coverage;

·	recourse debt to adjusted net worth; and

·	minimum Adjusted Funds from Operations (“AFFO”).

As of December 31, 2007, we failed to meet the minimum adjusted net worth, the minimum AFFO and the debt service coverage requirements. At June 30, 2008, we did not meet these requirements and we also failed to meet the recourse debt to adjusted net worth requirements, causing us to be in default of the loan agreement. As mentioned above, we will not be called upon to repay this facility as a result of such defaults.

NOTE 10 – Derivative Instruments

Our derivative instruments are comprised of cash flow hedges of debt and free-standing derivatives related to investments. While we carry derivative instruments in both categories at their estimated fair values on our condensed consolidated balance sheet, the changes in those fair values are recorded differently. To the extent that the cash flow hedges are effectively hedging the associated debt, we record changes in their fair values as a component of other comprehensive income within shareholders’ equity. If a cash flow hedge is ineffective, we include a portion of the change in its fair value in our condensed consolidated statements of operations. With respect to the free-standing derivatives, we include the change in their fair value in our condensed consolidated statements of operations.

Cash Flow Hedges of Debt

Our borrowings under repurchase facilities, CDO notes payable, related party line of credit and our preferred shares of a subsidiary (subject to mandatory repurchase) incur interest at variable rates, exposing us to interest rate risk. We have established a policy for risk management outlining our objectives and strategies for use of derivative instruments to potentially mitigate such risks.

As of June 30, 2008, we had five interest rate swaps with an aggregate notional amount of $370.9 million, which will expire on dates ranging from March 2010 through September 2016. At inception, we designated these swaps as cash flow hedges, with the hedged item being the interest payments on our variable-rate CDO notes payable and our subsidiary’s preferred shares (subject to mandatory repurchase). On an ongoing basis, we assess whether the swap agreements are effective in offsetting changes in the cash flows of the hedged financing. Amounts in accumulated other comprehensive income (as described above) will be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. An inherent risk of these swap agreements is the credit risk related to the counterparty’s ability to meet the terms of the contracts with us.

During July 2008, we terminated one of these swaps with a notional amount of $25.0 million that was hedging variable-rate interest payments on our subsidiary’s preferred shares (subject to mandatory repurchase). As a result, we paid $0.7 million in termination costs, which remains in accumulated other comprehensive income and will be amortized over the remaining life of the terminated derivative agreement as long as it is probable that there will be interest payments made on variable-rate debt throughout this term.

In connection with the disposition and refinancing of certain assets (see Note 2), we terminated 31 cash flow hedges during 2007 and another 15 during the first quarter of 2008. Termination costs of $1.6 million are recorded in “other losses” in 2008 due to changes to cash flows of forecasted transactions, and $1.5 million in unrealized losses remain in accumulated other comprehensive loss and will be amortized over the remaining lives of the terminated derivative agreements as long as it is probable that there will be interest payments made on variable-rate debt throughout this term.

- 12 - -

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For swap agreements that we do not plan to terminate, we estimate that $8.9 million of the net unrealized losses included in accumulated other comprehensive loss will be reclassified into interest expense within the next 12 months.

We are required to maintain a minimum balance of collateral with Bear Stearns in connection with these interest rate swaps. From time to time, as market rates fluctuate, we may be called upon to post additional cash collateral. These payments are held as deposits with Bear Stearns and will be used to settle the swap at its termination date if market rates fall below the fixed rates on the swaps. At June 30, 2008, we had $1.0 million of deposits held by Bear Stearns included in restricted cash.

Free-Standing Derivatives Related to Investments

During the first quarter of 2008, we terminated two free-standing swaps and recorded termination costs of $1.0 million in “other losses”.

Financial Statement Impact

Net (loss) income included the following related to our interest rate hedges and free-standing derivatives:

(in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Included in interest expense:
Interest receipts	$	--		$	495		$	3		$	797
Interest payments		(2,528	)		(99	)		(3,760	)		(234	)
Ineffectiveness(1)		--			182			(131	)		270
Subtotal	$	(2,528	)	$	578		$	(3,888	)	$	833
Included in other income (losses):
Loss on termination	$	--		$	--		$	(2,640	)	$	--
Change in fair value		--			681			--			650
Subtotal	$	--		$	681		$	(2,640	)	$	650
Net impact	$	(2,528	)	$	1,259		$	(6,528	)	$	1,483
(1) Relates to one swap, which includes an embedded financing component that has caused and will continue to cause same ineffectiveness within the limits allowed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to maintain hedge accounting.

NOTE 11 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

(in thousands)	June 30, 2008		December 31, 2007

Accrued interest payable	$	14,830	$	13,917
Other (1)		1,543		1,847
Total	$	16,373	$	15,764
(1) Includes refundable deposits, collected during the due diligence period of a loan transaction, which are payable to other parties.

- 13 - -

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – Fair Value Measurements

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements (emphasizing fair value as a market-based measurement). To comply with the provisions of SFAS 157, we incorporate credit value adjustments, where appropriate, to reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. The adoption of SFAS 157 as of January 1, 2008 resulted in a $0.8 million reduction in the fair value of interest rate derivatives which we recorded as a component of other comprehensive loss.

We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy specified by SFAS 157. The levels of fair value hierarchy are (from highest to lowest):

·	Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs utilize other-than-quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

·	Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following tables present the information about our financial assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2008, and indicate the fair value hierarchy of the valuation techniques we utilize to determine such fair value:

(dollars in thousands)	Level 1		Level 2		Level 3		Balance as of June 30, 2008
Measured on a recurring basis
Assets
Available-for-sale investments:
CMBS	$	--	$	--	$	43,013	$	43,013
Mortgage revenue bonds		--		--		4,743		4,743
Total assets	$	--	$	--	$	47,756	$	47,756

Liabilities
Interest rate derivatives	$	--	$	20,358	$	--	$	20,358
Total liabilities	$	--	$	20,358	$	--	$	20,358
Measured on a non-recurring basis
Assets
Mortgage loans receivable – held-for-investment-impaired(1)	$	--	$	32,653	$	--	$	32,653
Mortgage loans receivable – held-for-sale		--		7,668		--		7,668
Total assets	$	--	$	40,321	$	--	$	40,321
(1) We recorded impairment charges for four loans in this group during the first half of 2008 as described in Note 3. No other loans had further impairments during 2008.

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Provided below is a summary of the valuation techniques employed with respect to financial instruments measured at fair value utilizing methodologies other than quoted prices in active markets:

CMBS:	We generally estimate fair value of CMBS and similar retained interests based on market prices provided by certain dealers who make a market in these financial instruments. Due to limited market activity for CMBS, we perform additional analysis on prices received based on broker quotes. This process includes analyzing the securities based on vintage year, rating and asset type and converting the price received to a spread. The calculated spread is then compared to market information available for securities of similar type, vintage year and rating (i.e. CMBX). We use this process to validate the prices received from brokers.
Mortgage loans receivable:	We carry our mortgage loans receivable – held for sale at the lower of cost or fair market value. When a loan is classified as held-for-sale or when a loan is deemed impaired, we write the loan down to its fair value, which becomes its new cost basis. We measure the fair market value of a loan using the observable market price for sales of similar assets or the market value of the loan’s collateral if the loan is collateral-dependent. Market prices are determined by using a combination of updated appraised values and broker quotes or services supplying market and sales data in various geographical locations where the collateral is located.
Mortgage revenue bonds:	We estimate fair value for each bond by utilizing the present value of the expected cash flows discounted at a rate for comparable tax-exempt investments and then comparing against any similar market transactions.
Derivatives:	The fair value of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curve) derived from observable market interest rate curves. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as thresholds and guarantees.

The following table presents additional information about assets measured at fair value on a recurring basis and for which we utilized Level 3 inputs to determine fair value:

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AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(dollars in thousands)	CMBS			Mortgage Revenue Bonds			Total

Balance at January 1, 2008	$	69,269		$	4,879		$	74,148
Total gains or losses (realized/unrealized):
Included in earnings		(25,454	)(1)		--			(25,454	)
Included in other comprehensive income		--			(52	)		(52	)
Amortization of costs and fees		152			(44	)		108
Purchases, issuances and settlements		--			--			--
Transfers in and/of out of Level 3		--			--			--
Balance at March 31, 2008		43,967			4,783			48,750
Total losses (realized/unrealized):
Included in earnings		(1,095	)(1)		--			(1,095	)
Included in other comprehensive loss		--			6			6
Amortization of costs and fees		141			(46	)		95
Purchases, issuances and settlements		--			--			--
Transfers in and/of out of Level 3		--			--			--
Balance at June 30, 2008	$	43,013		$	4,743		$	47,756

The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets still held at the reporting date	$	(26,549	)(1)	$	--		$	(26,549	)
(1) Recorded as impairment charges in the condensed consolidated statement of operations.

Both observable and unobservable inputs may be used to determine the fair value of positions that we classified within the Level 3 category. As a result, the unrealized losses for assets within the Level 3 category presented in the table above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., historical company experience) inputs.

NOTE 13 – Income Taxes

We have elected to be treated as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (“the Code”). In order to maintain our qualification as a REIT, we are required to, among other things, distribute at least 90% of our REIT taxable income to our shareholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income tax with respect to the portion of our income that meets certain criteria and is distributed annually to shareholders. Accordingly, no provision for federal income taxes is included in the condensed consolidated financial statements with respect to these operations. We believe we have, and we intend to continue to operate, in a manner that allows us to continue to meet the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we could be subject to federal income tax.

- 16 - -

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – Comprehensive (Loss) Income

Comprehensive (loss) income for the six months ended June 30, 2008 and 2007 was as follows:

	Six Months Ended June 30,
(in thousands)	2008			2007
Net (loss) income	$	(33,832	)	$	8,641
Net unrealized gain on derivative instruments		1,421			12,217
Amortization related to termination of derivative instruments		222			--
Net unrealized holding loss on investments		(26,595	)		(5,294	)
Reclassification adjustment for impairment loss on investments		26,549			--
Comprehensive (loss) income	$	(32,235	)	$	15,564

NOTE 15 – Earnings per Share (“EPS”)

Diluted earnings per share is calculated using the weighted average number of shares outstanding during the period plus the additional dilutive effect of common share equivalents. The dilutive effect of outstanding share options is calculated using the treasury stock method. The dilutive effect of the Preferred Shares is calculated on the if-converted method. For the six months ended June 30, 2008, the effect of the assumed conversion of our Preferred Shares is not included, as the effect would be antidilutive. The effect of outstanding share options are not included in any period presented as the exercise price exceeded the average market price of our common shares.

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2008			2007		2008			2007

Numerator:
(Loss) income from continuing operations	$	(4,856	)	$	3,477	$	(33,832	)	$	5,110
Preferred dividends		(308	)		--		(616	)		--
Net (loss) income for EPS calculations	$	(5,164	)	$	3,477	$	(34,448	)	$	5,110
Denominator:
Weighted average shares outstanding (basic and diluted)		8,445			8,403		8,439			8,402
Calculation of EPS (basic and diluted):

(Loss) income as computed above	$	(5,164	)	$	3,477	$	(34,448	)	$	5,110
Weighted average shares outstanding		8,445			8,403		8,439			8,402
(Loss) income per share	$	(0.61	)	$	0.41	$	(4.08	)	$	0.61

- 17 - -

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – Related Party Transactions

The following summarizes all costs paid or payable to our Advisor and its affiliates:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2008		2007		2008		2007
Fees to Advisor and affiliates:
Shared services expenses	$	248	$	338	$	662	$	793
Asset management fees		199		435		429		819
Servicing fees		93		145		183		274
Total fees to Advisor and affiliates	$	540	$	918	$	1,274	$	1,886
Other costs:
Interest on related party line of credit	$	2,747	$	805	$	3,987	$	902

Fees to Advisor and Affiliates

Fees/Compensation

Under our amended Advisory Services Agreement with our Advisor (the “Advisory Agreement”), we pay certain fees, in addition to reimbursements of certain administrative and other costs that our Advisor incurs on our behalf for its ongoing management and operations of our Company. These fees include asset management fees, which are calculated as a percentage of our adjusted equity balance (as defined in the Advisory Agreement), and incentive management fees, provided certain financial hurdles are met. Loan origination fees may also be paid to the Advisor if we collect any from a borrower in connection with acquisitions of investments for us. There may also be termination fees due to the Advisor if the Advisory Agreement is terminated without cause.

Effective December 31, 2007, the following amendments were made to the Advisory Agreement:

·	For the purposes of calculating the asset management fee, the definition of Company Equity was modified to exclude unrealized losses recognized in earnings that result from changes in market values of securities classified as available-for-sale; and

·	Expense reimbursements are to be payable to the Advisor in the form of a quarterly flat-fee of $0.4 million based on the projected costs of the Advisor for providing services to us. Prior to the amendment, these fees were paid based on a complex allocation provided by the Advisor.

Servicing Fees

We pay Centerline Servicing Inc. (“CSI”), a subsidiary of Centerline, a fee for servicing and special servicing our mortgage loans and other investments equal to the Advisor’s actual costs of performing such services but not less than 0.08% per year of the principal balance of the related mortgage loan or other investment.

Other Related Party Transactions

At June 30, 2008, we had six mortgage loans receivable with carrying amounts aggregating $143.3 million secured by properties developed by a company partly owned by the chairman of Centerline. These transactions were approved by the independent members of our board of trustees and, in the opinion of management, the terms were consistent with independent third-party transactions.

We have a revolving credit facility with Centerline with a borrowing capacity of $80.0 million. The maturity date of the facility is June 2009 (see Note 9 regarding terms and the impact of our default). At June 30, 2008, and December 31, 2007, we had $79.9 million and $77.7 million, respectively, in borrowings outstanding, bearing interest at a rate of 9.46% and 7.60%, respectively.

- 18 - -

AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During March 2007, we sold our economic interest in the Concord properties to Centerline Real Estate Special Situations Mortgage Fund, LLC, a related party (“CRESS”) (see Note 5).

During the first quarter of 2008, we sold 11 mortgage loans to CRESS, for total proceeds of $55.0 million (see Note 3). In the opinion of our Advisor and CRESS’s advisory committee, the terms of this transaction are consistent with those of transactions with independent third parties.

During April 2008, in order to meet margin requirements, we borrowed $4.0 million from Related Special Assets LLC, a related party at an interest rate of 8.74%. The note was due to mature on May 19, 2008; however, we subsequently repaid the note with proceeds received from the repayment of one first mortgage loan during April 2008.

NOTE 17 – Commitments and Contingencies

Guarantees

In June and October of 2000, in accordance with a loan program with Fannie Mae, under which we agreed to guarantee a first-loss position on certain loans, we originated two loans totaling $3.3 million. In September 2003, we transferred and assigned all of our obligations with respect to these two loans to Centerline Mortgage Capital, Inc. (“CMC”), a subsidiary of Centerline. Pursuant to the agreement with CMC, Centerline guaranteed CMC’s obligations, and we agreed to indemnify both CMC and Centerline for any losses incurred in exchange for retaining all fees that we were otherwise entitled to receive from Fannie Mae under the program. The maximum exposure at June 30, 2008, was $3.1 million, although we expect that we will not be called upon to fund these guarantees.

During 2003, we discontinued our loan program with Fannie Mae and will issue no further guarantees pursuant to such program.

We monitor the status of the underlying properties and evaluate our exposure under the guarantees. To date, we have concluded that no accrual for probable losses is required under SFAS No. 5, Accounting for Contingencies.

NOTE 18 – Subsequent Events

During July 2008, our Advisory Agreement was amended effective December 31, 2007 (see Note 16) and our related party line of credit with Centerline was amended effective June 30, 2008, to extend the maturity date to June 30, 2009. We also entered into a forbearance agreement in connection with an event of default under the original loan agreement (see Notes 2 and 9).

Effective June 30, 2008, James L. Duggins, our chief executive officer retired. Donald J. Meyer has been appointed his replacement.

During July 2008, we terminated one interest rate swap that was hedging interest payments on our subsidiary’s preferred shares (subject to mandatory repurchase) (see Note 10).

During August 2008, one mortgage loan receivable with a carrying amount of $23.4 million was repaid at a discount. $23.0 million was received and $0.4 million was recorded as an impairment charge at June 30, 2008.

For the period from July 1, 2008 through August 7, 2008, we paid $3.5 million due to margin calls on our repurchase facilities.

- 19 - -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Beginning in 2007 and throughout 2008, developments in the market for many types of mortgage products (including mortgage-backed securities) have resulted in reduced liquidity for these assets. Widening credit spreads have led to reduced values and the inability to find adequate financing for these assets. This has resulted in an overall reduction in liquidity across the credit spectrum of mortgage products, presenting us with financing and liquidity challenges. As a result, we decided to temporarily suspend investment activity in the latter half of 2007 and began selling assets to meet liquidity requirements. The non-comparable gains and losses from those asset sales and the changes in our investment portfolio are detailed in the following sections of this discussion.

Factors Affecting Comparability

During March 2007, we sold our economic interest in the Concord portfolio, resulting in a gain of $3.6 million. This amount is recorded in discontinued operations along with rental income, property operations, mortgage interest and depreciation for the period up to the sale.

During 2008 and at December 31, 2007, as a result of the market conditions and our liquidity issues referred to above, we reclassified certain unrealized losses resulting from declines in market values on our CMBS investments previously recorded in accumulated other comprehensive income to a reduction of earnings in our condensed consolidated statements of operations. We have also recorded impairment of several mortgage loans due to declining operating performance of the underlying properties or because we do not expect to recover the full principal amount upon sale or repayment.

During the second half of 2007 and the beginning of 2008, we terminated a significant number of derivative instruments, resulting in termination costs recorded in other income.

Investment Activity

During the three and six months ended June 30, 2008 and 2007, we originated the following investments:

	Three months ended June 30, 2008 (1)					Three months ended June 30, 2007
(dollars in thousands)	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate

Mortgage loans receivable	$	--		--	%	$	141,711		8.15	%
CMBS		--		--			115,301		5.93
Total	$	--		--	%	$	257,012		7.15	%

	Six months ended June 30, 2008 (1)					Six months ended June 30, 2007
(dollars in thousands)	Amount		Weighted Average Interest Rate			Amount		Weighted Average Interest Rate

Mortgage loans receivable	$	--		--	%	$	244,874		7.98	%
CMBS		--		--			115,301		5.93
CDO securities		--		--			10,083		9.00
Total	$	--		--	%	$	370,258		7.36	%
(1) During the three and six months ended June 30, 2008 we had no origination activity.

- 20 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Sales of Investments

During the six months ended June 30, 2008, we sold 11 mortgage loans with an aggregate carrying amount of $55.0 million and a weighted average interest rate of 7.61%, resulting in realized losses of $3.1 million. There were no sales of assets during the comparable 2007 period.

Results of Operations

The following is a summary of our operations:

	Three Months Ended June 30,								Six Months Ended June 30,
(dollars in thousands)	2008			2007		Change			2008			2007		Change
Total revenues	$	9,811		$	15,312		(35.9	)%	$	20,495		$	27,813		(26.3	)%
Total expenses		15,162			12,853		18.0			52,143			23,690		120.1
Total other income (losses)		495			1,018		(51.4	)		(2,184	)		987		(321.3	)
Income from discontinued operations		--			--		--			--			3,531		(100.0	)
Net (loss) income	$	(4,856	)	$	3,477		(239.7	)%	$	(33,832	)	$	8,641		(491.5	)%

The decline in our revenues during the three and six months ended June 30, 2008, as compared to the same periods in 2007, resulted primarily from the sale of assets during the latter half of 2007 and the first quarter of 2008 as a result of current market conditions and liquidity issues.

Expenses increased during the three and six months ended June 30, 2008, as compared to the same period in 2007, particularly due to impairment of CMBS investments and several mortgage loans during the first half of 2008. There were no such impairments during comparable 2007 periods. Partially offsetting these impairment charges are decreased financing costs as a result of decreased leverage resulting from the sales of assets mentioned above and lower asset management fees.

Other income (loss) decreased for the three and six months ended June 30, 2008, as compared to the same periods in 2007, primarily due to other income recognized during 2007 as a result of the changes in market values of certain free standing derivatives. There were no such derivatives at June 30, 2008. The balance for the six months ended June 30, 2008 also includes losses recognized as a result of certain derivatives terminated during the first quarter of 2008.

Income from discontinued operations for the six months ended June 30, 2007 includes operations from real estate owned that was sold during 2007 and a gain from that sale.

- 21 - -

Management’s Discussion and Analysis ofs

Financial Condition and Results of Operations

(continued)

Revenues

	Three Months Ended June 30,				Change from Prior Period		% of 2008 Total Revenues		% of 2007 Total Revenues
(dollars in thousands)	2008		2007		Change from Prior Period		% of 2008 Total Revenues		% of 2007 Total Revenues
Interest income:
Mortgage loans	$	7,806	$	12,712	(38.6	)%	79.6	%	83.0	%
CMBS		1,686		862	95.6		17.2		5.6
Mortgage revenue bonds		101		105	(3.8	)	1.0		0.7
Temporary investments		215		89	141.6		2.2		0.6
Debt securities		--		1,208	(100.0	)	--		7.9
CDO securities		--		183	(100.0	)	--		1.2
Subtotal		9,808		15,159	35.3		100.0		99.0
Other revenues		3		153	(98.0	)	--		1.0
Total revenues	$	9,811	$	15,312	(35.9	)%	100.0	%	100.0	%

	Six Months Ended June 30,				Change from Prior Period		% of 2008 Total Revenues		% of 2007 Total Revenues
(dollars in thousands)	2008		2007		Change from Prior Period		% of 2008 Total Revenues		% of 2007 Total Revenues
Interest income:
Mortgage loans	$	16,360	$	22,928	(28.6	)%	79.8	%	82.4	%
CMBS		3,391		862	293.4		16.6		3.1
Mortgage revenue bonds		203		211	(3.8	)	1.0		0.8
Temporary investments		460		259	77.6		2.2		0.9
Debt securities		--		2,435	(100.0	)	--		8.8
CDO securities		--		190	(100.0	)	--		0.7
Subtotal		20,414		26,885	(24.1	)	99.6		96.7
Other revenues:
Participation income		--		699	(100.0	)	--		2.5
Other		81		229	(64.6	)	0.4		0.8
Subtotal		81		928	(91.3	)	0.4		3.3
Total revenues	$	20,495	$	27,813	(26.3	)%	100.0	%	100.0	%

At June 30, we had the following investments (exclusive of temporary investments):

	2008						2007
(dollars in thousands)	Carrying Amount		% of Total		Weighted Average Interest Rate		Carrying Amount		% of Total		Weighted Average Interest Rate
Mortgage loans receivable	$	464,822	90.7	%	6.89	%	$	727,675	78.7	%	6.28	%
CMBS		43,013	8.4		5.23			103,559	11.2		5.93
Mortgage revenue bonds		4,743	0.9		8.70			4,888	0.5		8.70
Debt securities		--	--		--			78,347	8.5		6.49
CDO securities		--	--		--			9,822	1.1		9.00
Total	$	512,578	100.0	%	6.76	%	$	924,291	100.0	%	6.30	%

- 22 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Interest income from mortgage loans decreased significantly for the three and six months ended June 30, 2008 as compared to 2007, primarily due to the sale of first mortgage loans, bridge notes, mezzanine loans and subordinated notes towards the latter half of 2007 and in the first quarter of 2008.

Interest income from CMBS increased during the three and six months ended June 30, 2008 due to the purchase of a portion of various classes of CMBS investments occurring during the second and third quarters of 2007.

Interest income from temporary investments increased for the 2008 periods, as compared to 2007, primarily due to interest earned on restricted cash balances held with custodians.

Interest income from debt (Government National Mortgage Association and Federal National Mortgage Association) securities decreased for the three and six months ended June 30, 2008, due to the sale of our debt security portfolio in November of 2007.

Participation income decreased for the six months ended June 30, 2008, as compared to 2007, due to a one-time payment received pursuant to a participating arrangement for a mortgage loan that was repaid in the first quarter of 2007. There were no such fees received during 2008.

Other revenues decreased for the three and six months ended June 30, 2008, as compared to 2007, due to certain fees received in 2007 relating to prepayment penalties and commitments for which we received no comparable amounts in the 2008 periods.

Expenses

(dollars in thousands)	Three Months Ended June 30,				% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
(dollars in thousands)	2008		2007		% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
Interest	$	8,808	$	10,633	(17.2	)%	89.8	%	69.4	%
Interest – distributions to preferred shareholders		547		554	(1.3	)	5.6		3.6
General and administrative		593		542	9.4		6.0		3.5
Fees to Advisor and affiliates		540		918	(41.2	)	5.5		6.0
Impairment of investments		4,470		--	100.0		45.6		--
Amortization and other		204		206	(1.0	)	2.1		1.3
Total expenses	$	15,162	$	12,853	18.0	%	154.6	%	83.8	%

(dollars in thousands)	Six Months Ended June 30,				% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
(dollars in thousands)	2008		2007		% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
Interest	$	16,805	$	19,128	(12.1	)%	82.0	%	68.8	%
Interest – distributions to preferred shareholders		1,095		1,123	(2.5	)	5.3		4.0
General and administrative		1,555		1,147	35.6		7.6		4.1
Fees to Advisor and affiliates		1,274		1,886	(32.4	)	6.2		6.8
Impairment of investments		30,968		--	100.0		151.1		--
Amortization and other		446		406	9.9		2.2		1.5
Total expenses	$	52,143	$	23,690	120.1	%	254.4	%	85.2	%

Interest expense decreased for the three and six months ended June 30, 2008, as compared to 2007, primarily due to the repayments on our repurchase facilities due to margin calls and our warehouse facility due to its termination in 2007, offset by default interest charges on our related party line of credit. Information related to our debt is as follows:

- 23 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Average outstanding	$	540,182		$	814,735		$	550,070		$	726,950
Weighted average interest rate (including effect of interest rate swaps)		6.84	%(1)		5.49	%		6.43	%(1)		5.57	%
Average notional amount of interest rate swaps	$	371,189		$	607,572		$	371,251		$	582,723
Weighted average fixed rate of interest rate swaps		5.38	%		5.18	%		5.38	%		5.18	%
(1) Includes default interest charged on our related party line of credit.

General and administrative expenses increased for the three and six months ended June 30, 2008, as compared to 2007 due to costs of $0.7 million incurred in the second half of 2007 and beginning of 2008 related to consulting work performed to analyze strategic investment alternatives for the Company. These increases were partially offset by fewer legal costs incurred during 2008 (as costs in 2007 were related to increased work on specially serviced assets) and decreased insurance costs.

Fees to Advisor and affiliates decreased for the 2008 periods, as compared to 2007, due to lower asset management fees paid to our Advisor during the first and second quarters of 2008, as a result of lower equity balances, the base on which the fees are calculated.

Impairment of investments during 2008 relates to charges for four mortgage loans in our specially serviced portfolio due to deteriorating operating performance, one mortgage loan that was repaid at a discount and from declines in market values of our available-for-sale CMBS investments. As the current credit environment may impede our ability to hold the CMBS investments until recovery, the declines in fair value are considered other-than-temporary impairment. We categorize CMBS investments as “level 3” investments as described in Note 12 of our condensed consolidated financial statements.

Other Income (Losses)

(dollars in thousands)	Three Months Ended June 30,				% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
(dollars in thousands)	2008		2007		% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
Gain on sale of investments	$	495	$	337	46.9	%	5.1	%	2.2	%
Change in fair value and loss on termination of derivative instruments		--		681	(100.0	)	--		4.4
Total other income	$	495	$	1,018	(51.4	)%	5.1	%	6.6	%

(dollars in thousands)	Six Months Ended June 30,					% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
(dollars in thousands)	2008			2007		% Change from Prior Period		% of Total 2008 Revenues		% of Total 2007 Revenues
Gain on sale of investments	$	456		$	337	35.3	%	2.2	%	1.2	%
Change in fair value and loss on termination of derivative instruments		(2,640	)		650	(506.2	)	(12.9	)	2.3
Total other (losses) income	$	(2,184	)	$	987	(321.3	)%	(10.7	)%	3.5	%

During 2007 and 2008, we received funds related to the sale of our investment in ARCap in 2006 from escrow balances that were set up and to be released upon completion of certain events. The amount received in 2008 was the final one to be received from the sale.

- 24 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

During 2008, we terminated certain swap contracts resulting in $2.6 million of charges recorded in “other losses” in 2008. The balance in 2007 relates to the change in the fair value of free-standing derivatives.

Funds from Operations

Funds from operations (“FFO”) represents net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of property, excluding depreciation and amortization related to real property and including funds from operations for unconsolidated joint ventures calculated on the same basis. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. Our management considers FFO a supplemental measure of operating performance, and, along with cash flows from operating activities, financing activities and investing activities, it provides management and investors with an indication of our ability to incur and service debt, make capital expenditures and fund other cash needs. Since not all companies calculate FFO in a similar fashion, our calculation presented below may not be comparable to similarly titled measures reported by other companies.

The following table reconciles net (loss) income to FFO for the three and six months ended June 30, 2008 and 2007:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2008			2007			2008			2007
Net (loss) income	$	(4,856	)	$	3,477		$	(33,832	)	$	8,641
Add back: depreciation of real property (1)		--			--			--			336
Less: gain on sale of real property (1)		--			--			--			(3,611	)
FFO	$	(4,856	)	$	3,477		$	(33,832	)	$	5,366
Cash flows from:
Operating activities	$	1,598		$	3,309		$	1,971		$	4,938
Investing activities	$	8,748		$	(186,282	)	$	73,249		$	(270,610	)
Financing activities	$	(6,884	)	$	175,298		$	(70,361	)	$	264,952
Weighted average shares outstanding:
Basic and diluted		8,445			8,403			8,439			8,402

(1) Related to properties sold during 2007 and included in discontinued operations in our condensed consolidated statements of operations.

Liquidity and Capital Resources

Market Factors

Beginning in 2007 and throughout 2008, developments in the market for many types of commercial mortgage products have resulted in reduced liquidity for these types of financial assets. Widening credit spreads have led to reduced values and the inability to find adequate financing for these assets. This has resulted in an overall reduction in liquidity across the credit spectrum of commercial mortgage products. Because of this we have suspended most investment activity, decided not to pursue a second CDO securitization and stopped making distributions to shareholders. We also agreed to terminate a repurchase facility used to finance our investment activity prior to securitization (see “Repurchase Facilities” discussion below). As a result, we are currently in negotiations with Citigroup to provide a new credit line that would replace this facility and would enable us to repay the amounts outstanding over time.

In August of 2008, one mortgage loan receivable was repaid at a discount, which generated $23.0 million of cash for us to repay debt obligations. As market conditions fluctuate, we will continue to evaluate additional strategies that could require us to sell assets or allow accelerated repayments and extinguish any related debt obligations that are secured by these assets. By repaying most of our debt obligations, we believe we can regain adequate financing and stabilize our liquidity for our operating cash needs. However, factors outside of our control, such as the continuing uncertainty of the credit markets, could further restrict our liquidity.

- 25 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Due to a decline in advance rates on one of our repurchase facilities, we expect a margin call of $6.9 million in the third quarter of 2008. Should we need to pay such an amount, we expect that we may sell assets or transfer assets into our CDO to generate cash needed. Absent further margin calls and further deterioration of the credit markets, we expect that cash generated through sales of assets that collateralize our debt obligations and interest receipts from our remaining investments will be sufficient to meet our needs for short-term liquidity and to pay all expenses. In order to qualify as a REIT under the Code, we must, among other things, distribute at least 90% of our taxable income (see Note 13 to our condensed consolidated financial statements). We believe that we are in compliance with the REIT-related provisions of the Code.

Sources of Funds

As of June 30, 2008, our sources of funds consisted of repurchase facilities and a related party line of credit. We had $0.1 million available to borrow from our related party line of credit, subject to Centerline’s approval (see “Related Party Line of Credit” below).

Repurchase Facilities

Under our repurchase agreements, we are subject to margin calls. Margin calls result from a decline in the value of our investments collateralizing our repurchase agreements, generally due to changes in the estimated fair value of such investments or reductions in advance rates. This could result from changes in market interest rates and credit spreads or other market factors. To cover a margin call, we may pledge additional securities or sell additional assets to repay borrowings.

For the six months ended June 30, 2008, there were net cash payments of $20.1 million due to margin calls/margin receipts on our repurchase facilities. Should market interest rates and credit spreads continue to increase wider, margin calls on our repurchase agreements could substantially increase, causing an adverse change in our liquidity position and strategy. The sources mentioned above may not be sufficient to meet our obligations, including margin calls, as they are due. As a result, further margin calls may result in additional asset sales.

At June 30, 2008, the following repurchase facilities were in place, categorized by lending institution:

·	Citigroup Facility

During December 2006, we executed a repurchase agreement with Citigroup for the purpose of funding investment activity for a planned CDO securitization. In October 2007, for the reasons mentioned above, we decided not to pursue that CDO securitization. In connection with that determination, we entered into an agreement to terminate this repurchase facility and we are currently in negotiations with Citigroup to provide a new credit line that would replace this facility and would enable us to repay the amounts outstanding over time (see Notes 2 and 8 to our condensed consolidated financial statements).

At June 30, 2008, advance rates on the borrowings remaining on this facility, range from 80% to 90% of collateral value. Interest on the borrowings, which ranges from 30-day LIBOR plus 0.60% to 30-day LIBOR plus 1.25%, was also determined on an asset-by-asset basis. At June 30, 2008, we had $37.0 million of borrowings outstanding under this facility (partially collateralized by $17.3 million of cash held in escrow at Citigroup) at a weighted average interest rate of 4.96%.

·	Bear Stearns Facility

During 2007, we executed a repurchase agreement with Bear Stearns for the purpose of financing our investment activity. At June 30, 2008, advance rates on borrowings from this facility were at 70% of the collateral value, and interest on the borrowings ranged from 30-day LIBOR plus 1.00% to 30-day LIBOR plus 2.00%, as determined on an asset-by-asset basis. The borrowings are subject to 30-day settlement terms. At June 30, 2008, we had $34.9 million of borrowings outstanding under this facility at a weighted average interest rate of 4.84% (see Note 8 to our condensed consolidated financial statements).

- 26 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Subsequent to June 30, 2008, we were informed that Bear Stearns will reduce the advance rates of this facility to 50% at some point in the near future. This reduction in advance rates would result in a $6.9 million margin call. We believe that it is also Bear Stearns’ intentions to have this facility repaid by September 30, 2008. (See also Liquidity Requirements after June 30, 2008 below.)

·	Banc of America Facility

During the third quarter of 2007, we executed a repurchase agreement with Banc of America to provide financing for investments in mezzanine loans and subordinated notes. There were no outstanding amounts on this facility as of June 30, 2008. Advance rates on borrowings, which would be determined on an asset-by-asset basis, would be subject to 30-day settlement terms. Interest rates on the borrowings would be based on 30-day LIBOR and would also be determined on an asset-by-asset basis. See Liquidity Requirements after June 30, 2008 below.

For information regarding the amount of borrowings and the amounts of hedged debt on our repurchase facilities secured by our investments, see Note 2 to the condensed consolidated financial statements.

Related Party Line of Credit

We finance our remaining investing and operating activity primarily through borrowings from an $80 million credit facility we maintain with Centerline, which was amended in July 2008 to extend the maturity date to June 2009. As of June 30, 2008, the amount outstanding was $79.9 million with an interest rate of 9.46%.

We have covenant compliance requirements on our related party line of credit. As of June 30, 2008, we failed to meet certain of these requirements, causing us to be in default of the loan agreement. As a result, we are being charged interest at a default interest rate of LIBOR plus 7.00%.

We have also entered into a forbearance agreement with Centerline whereby Centerline agreed to forbear from instituting any remedies under the loan documents and will not call the outstanding balance on the loan due to the defaults arising from the failed covenant requirements, provided interest payments remain current and that no lenders of debt on any other facility demand repayment due to default.

During the forbearance period, no payment of preferred or common dividends is to be made to shareholders as long as this event of default exists, except to preserve our REIT status.

Other Financing

During 2005, we issued $25.0 million of variable-rate preferred securities through a wholly-owned subsidiary. At June 30, 2008, the weighted average interest rate was 8.72%, including the effect of interest rate hedges and 6.45%, excluding the effect of these hedges, which were terminated in July 2008.

In order to preserve cash, during the second quarter of 2008, we elected to defer distributions on these securities. Because distributions are cumulative, we have accrued the required amounts. Distributions of these securities can be deferred for up to 20 quarters.

In 2006, we executed a CDO securitization. At June 30, 2008, we had outstanding CDO securitization certificates totaling $362.0 million at a weighted average rate of 5.21%, including the effect of interest rate hedges.

We have capacity to raise $153.0 million of additional funds by issuing either common or preferred shares pursuant to a shelf registration statement filed with the SEC. If market conditions warrant, we may seek to raise additional funds for investment through further offerings, although it is unlikely we will be able to access the capital markets given current market conditions.

- 27 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Summary of Cash Flows

	Six Months Ended June 30,
(in thousands)	2008			2007			Dollar Change			Percent Change
Cash flows provided by (used in):
Operating activities	$	1,971		$	4,938		$	(2,967	)	(60.1	)%
Investing activities		73,249			(270,610	)		343,859		(127.1	)
Financing activities		(70,361	)		264,952			(335,313	)	(126.6	)
Net increase (decrease) in cash and cash equivalents	$	4,859		$	(720	)	$	5,579		(774.9	)%

The decrease in operating cash flows was caused primarily by a decrease in net income adjusted for certain non-cash charges. As much of the net loss in the 2008 period was caused by non-cash charges (such as fair value changes in interest rate derivatives and impairment charges), those amounts are excluded from the calculation of operating cash flows.

The increase in net cash from investing activities was due to proceeds received from the sale of mortgage loans as well as the absence of investment activity in 2008 compared to a large amount of investment volume in 2007.

The decrease in net cash from financing activities can be attributed to a significant amount of repayments made on our repurchase facilities and payments made to terminate certain swap contracts during 2008. The amount in 2007 related to the higher level of investing activity in that period.

Liquidity Requirements after June 30, 2008

For the period from July 1, 2008 through August 7, 2008, we paid $3.5 million due to margin calls on our repurchase facilities.

Although no formal notice was received, we were informed that the advance rates on our Bear Stearns facility will be reduced from 70% to 50% at some point in the near future, which would result in a margin call of $6.9 million. We also believe that we may be called upon to repay this facility by September 30, 2008. We are currently pursuing strategic and financing alternatives that would allow us to pay this margin call when it comes due or refinance the assets that secure this facility. If we are unable to do so, we may be forced to sell the related assets.

As we sell or refinance assets pledged as collateral for our Citigroup repurchase facility (see Sources of Funds - - Repurchase Facilities above), we may, with the approval of Centerline, draw upon our related party line of credit, if available, or seek alternative sources of funds to cover any difference between the outstanding balance of that facility and the proceeds of assets sold or refinanced.

Absent significant additional margin calls, we expect that cash generated from normal operations, principally interest from our investments, will meet our short-term operating needs. Market conditions have continued to deteriorate in 2008, causing us to fund additional margin requirements with our repurchase facility lenders. If market conditions become worse, we may be called upon to fund more. While these margin requirements cannot be quantified at this time, we may not generate enough cash from operations or have adequate availability under our existing debt facilities to cover these requirements, and we may need to arrange alternative sources of financing or sell additional assets that could result in additional losses to satisfy these cash needs.

Fair Value Disclosures

In January 2008, we adopted SFAS 157 which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy, specified by SFAS 157, and specifically our CMBS investments as “Level 3” investments. These investments are publicly and privately traded bond issues backed by pools of commercial real estate mortgages. These securities are rated by nationally recognized rating agencies. There have been no downgrades to these ratings for the quarter ended June 30, 2008 (see Note 4 of our condensed consolidated financial statements for more information regarding the CMBS investments and their ratings).

During 2008, we recognized $26.5 million of impairments resulting from declines in market values of these “Level 3” investments. See “Results of Operations” above.

- 28 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Provided below is the percentage of “Level 3” assets as compared to total assets measured at fair value. We had no Level 3 financial liabilities for the periods presented.

(in thousands)	June 30, 2008			December 31, 2007
Level 3 assets held for our own account (Note 12):
Available-for-sale investments:
CMBS	$	43,013		$	69,269
Mortgage revenue bonds		4,743			4,879
Total Level 3 assets	$	47,756		$	74,148
Level 3 assets as a percentage of total fair value assets		73.4	%		50.0	%

The primary decrease in Level 3 assets relates to CMBS. These assets decreased principally due to the continuing decline in marks provided by certain dealers who make a market in these financial instruments.

For additional information, including a discussion of the related valuation techniques for Level 3 assets, see Note 12 to the condensed consolidated financial statements.

Other Matters

We are not aware of any trends or events, commitments or uncertainties, not otherwise disclosed, that will or are likely to impact liquidity in a material way.

Dividends

The following table outlines our total dividends and return of capital amounts, determined in accordance with GAAP, for the six months ended June 30:

(in thousands)	2008			2007
Total preferred dividends(1)	$	616		$	--
Total common dividends	$	--		$	3,782
Return of capital:
Amount	$	616		$	--
Per preferred share	$	0.91		$	--
Percent of total dividends		100.0	%		--	%
(1) Includes accrual of second quarter 2008 dividends that have been deferred.

In order to preserve cash, during the second quarter of 2008, we elected to defer distributions on our Preferred Shares. Because distributions are cumulative, we have accrued for the required amounts. If distributions on these shares are deferred more than six quarters, the Preferred Shareholders can exercise certain rights under the offering agreement that would allow them to appoint two members to our board of trustees.

Commitments, Contingencies and Off-Balance Sheet Arrangements

See Note 17 to our condensed consolidated financial statements for a summary of our guarantees and commitments and contingencies.

We have no unconsolidated subsidiaries, special purpose off-balance sheet financing entities, or other off-balance sheet arrangements.

- 29 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Contractual Obligations

In conducting business, we enter into various contractual obligations. Details of these obligations, including expected settlement periods, are contained below.

	Payments Due by Period
(in thousands)	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years
Debt:
CDO notes payable (1)(2)	$	362,000	$	--	$	--	$	--	$	362,000
Repurchase facilities (1)(2)(3)		71,939		71,939		--		--		--
Line of credit – related party (1)(2)		79,877		79,877		--		--		--
Preferred shares of subsidiary (subject to mandatory repurchase) (1)(2)		25,000		--		--		--		25,000

Funding Commitments:
Future funding loan commitments		18		18		--		--		--
Total	$	538,834	$	151,834	$	--	$	--	$	387,000

(1) The amounts included in each category reflect the current expiration, reset or renewal date of each facility or security certificate. Management believes we have the ability and the intent, to renew, refinance or remarket the borrowings beyond their current due dates.

(2) Includes principal amounts only. At June 30, 2008, the weighted average interest rate on our debt was 4.35%.

(3) $37.0 million of this debt is related to a repurchase facility that was due to expire in 2007, but was extended in 2008. See discussion in Sources of Funds - Repurchase Facilities above.

Forward-Looking Statements

Certain statements made in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of us and our management (which includes our Advisor) and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors, which are outlined in detail under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, include, but are not limited to, the following:

·	Risks related to current liquidity which include, but are not limited to:

·	Market volatility for mortgage products;

·	The availability of financing for our investments;

·	Risks associated with the repurchase agreements we utilize to finance our investments and the ability to raise capital;

·	Risks related to repayment of our debt facilities if we fail to comply with certain covenants;

·	Risks associated with CDO securitization transactions, which include, but are not limited to:

·	The inability to acquire eligible investments for a CDO issuance;

·	Interest rate fluctuations on variable-rate swaps entered into to hedge fixed-rate loans;

- 30 - -

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

·	The inability to find suitable replacement investments within reinvestment periods; and

·	The negative impact on our cash flow that may result from the use of CDO financings with over-collateralization and interest coverage requirements;

·	Risks associated with investments in real estate generally and the properties which secure many of our investments;

·	Risks of investing in non-investment grade commercial real estate investments;

·	General economic conditions and economic conditions in the real estate markets specifically, particularly as they affect the value of our assets and the credit status of our borrowers;

·	Dependence on our Advisor for all services necessary for our operations;

·	Conflicts which may arise among us and other entities affiliated with our Advisor that have similar investment policies to ours; and

·	Risks associated with the failure to qualify as a REIT.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report. We expressly disclaim any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions, or circumstances on which such statement is based.

- 31 - -

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the exposure to loss resulting from changes in interest rates and equity prices. The primary market risks to which we are exposed are interest rate risk and credit spreads, which are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and fluctuations in indices and other factors beyond our control.

Interest Rate Risk

Interest rate fluctuations can adversely affect our income in many ways and present a variety of risks, including the risk of mismatch between asset yields and borrowing rates.

Our operating results depend in large part on differences between the income from our assets (net of credit losses) and our borrowing costs. Although we have originated variable-rate loans, most of our assets generate fixed returns and have terms in excess of five years. We fund the origination and acquisition of a significant portion of our assets with borrowings that have variable interest rates that reset relatively rapidly, such as weekly, monthly or quarterly. In most cases, the income from assets will respond more slowly to interest rate fluctuations than the cost of borrowings, creating a mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Our borrowings under our related party line of credit, repurchase facilities and our subsidiary’s preferred securities subject to mandatory redemption bear interest at rates that fluctuate with LIBOR.

Various financial vehicles exist which would allow our management to mitigate the impact of interest rate fluctuations on our cash flows and earnings. We enter into certain hedging transactions to protect our positions from interest rate fluctuations and other changes in market conditions, including interest rate swaps. Interest rate swaps are entered into in order to hedge against increases in floating rates on our repurchase facilities.

Based on the $538.8 million of borrowings outstanding at June 30, 2008, of which $167.9 million was unhedged, a 1% change in LIBOR would impact our annual net income and cash flows by $1.0 million, including the impact on variable-rate assets. In addition, a change in LIBOR could also impede the collections of interest on our variable-rate loans, as there might not be sufficient cash flow at the properties securing such loans to pay the increased debt service. Because the value of our debt securities fluctuates with changes in interest rates, rate fluctuations will also affect the market value of our net assets.

Credit Spread and Margin Risk

Credit spreads measure the yield demanded on loans and securities by the market based on their credit relative to U.S. Treasuries or swap rates, for fixed-rate credit, or LIBOR, for floating rate credit. Our fixed-rate loans and securities are valued based on a market credit spread over the rate payable on fixed-rate U.S. Treasuries of like maturity or swap rates. Our variable-rate investments are valued based on a market credit spread over LIBOR. Excessive supply of such loans and securities combined with reduced demand will generally cause the market to require a higher yield on such loans and securities, resulting in the use of higher (or “wider”) spread over the benchmark rate to value them.

Widening credit spreads would result in higher yields being required by the marketplace on loans and securities. This widening would reduce the value of the loans and securities we hold at the time because higher required yields result in lower prices on existing securities in order to adjust their yields upward to meet the market.

As of June 30, 2008, a 1.0% movement in credit spreads would decrease the book value of the applicable assets by approximately 4.2%. Under the terms of our repurchase agreements, when the estimated fair value of the existing collateral declines, the lenders may demand additional collateral or repayment of debt (i.e., a margin call). This could result from changes in market interest rates and credit spreads or other market factors.

Should market interest rates and/or credit spreads on our investments continue to increase, margin calls on our repurchase agreements could substantially increase, causing an adverse change in our liquidity position and strategy. The cash flow from operations may not be sufficient to meet our obligations, including margin calls, as they come due; as a result, further margin calls may result in additional asset sales.

We expect that cash generated from normal operations, principally interest from our investments, will meet our short-term operating needs; however, if market conditions remain the same or become worse, we may be called upon to fund additional requirements with our repurchase facility lenders. While these margin requirements cannot be quantified at this time, as advance rates and spreads may vary, we may not generate enough cash from operations or have adequate availability under our existing debt facilities to cover these requirements, and may need to sell additional assets to satisfy these cash needs.

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Item 4. Controls and Procedures.

(a)	Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that our disclosure controls and procedures as of the end of the period covered by this quarterly report were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)	Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings.

	We are not party to any pending material legal proceedings.

Item 1A.	Risk Factors.

	There have been no material changes to the risk factors as disclosed in our annual report on Form 10-K for the year ended December 31, 2007.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds. None

Item 3.	Defaults upon Senior Securities. None

Item 4.	Submission of Matters to a Vote of Security Holders.
	The company held its annual meeting of shareholders on June 11, 2008. The common shareholders elected Jeff T. Blau, James L. Duggins, George P. Jahn, Harry Levine, Scott M. Mannes, Stanley R. Perla and Marc D. Schnitzer as trustees for one-year terms which will expire in 2009. Common shares of beneficial interest were voted as follows:
			Trustee nominee		For		Abstain/withheld
			Jeff T. Blau		6,480,639		657,103
			James L. Duggins		6,454,129		683,613
			George P. Jahn		6,515,218		622,524
			Harry Levine		6,516,868		620,874
			Scott M. Mannes		6,505,944		631,798
			Stanley R. Perla		6,520,532		617,210
			Marc D. Schnitzer		6,440,191		697,551
	There were no votes “against” any of the nominees. The common shareholders were also asked to ratify the appointment of Deloitte & Touche LLP, as the independent registered public accountants of American Mortgage Acceptance Company. The ratification was identified as proposal 2 in the proxy statement for the annual meeting and approved by the common shareholders. Common Shares of beneficial interests were voted on as follows:
				For		6,873,759
				Against		218,851
				Abstain		45,132
Item 5.	Other Information. None

Item 6.	Exhibits.

	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

	32.1	Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

	*	Filed herewith.

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SIGNATURES

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

AMERICAN MORTGAGE ACCEPTANCE COMPANY

(Registrant)

Date:	August 7, 2008	By:	/s/ Donald J. Meyer
			Donald J. Meyer Chief Executive Officer (Principal Executive Officer)
Date:	August 7, 2008	By:	/s/ Robert L. Levy
			Robert L. Levy Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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American Mortgage Acceptance (AMOA) Inactive 10-Q2008 Q2 Quarterly report

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