| MFA MORTGAGE INVESTMENTS Item 1A Risk Factors |
| Our business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect our business, financial condition and results of operations |
| All references to “we,” “us” or “our company” in Item 1A of this annual report on Form 10-K refer to the Company and its subsidiaries, unless otherwise specified |
| The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets and the supply of, and demand for, MBS in the market place |
| Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (ie, the differential between long-term and short-term interest rates), borrowing costs (ie, interest expense) and prepayment speeds on our MBS portfolio, the behavior of which involves various risks and uncertainties |
| Interest rates and prepayment speeds, as measured by the CPR, vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty |
| Our operating results also depend upon our ability to effectively manage the risks associated with our business operations, including our interest rate and prepayment risks, while maintaining our qualification as a REIT In addition, we face risks inherent in our other assets, comprised primarily of interests in multi-family apartment properties, non-Agency MBS rated below AAA and derivative financial instruments |
| Although these assets represent a small portion of our total assets, less than 1dtta0prca at December 31, 2005, they have the potential of materially impacting our company’s operating performance in future periods |
| 6 ______________________________________________________________________ An increase in our borrowing costs relative to the interest we receive on our MBS may adversely affect our profitability |
| In general, we generate income primarily based upon the spread (ie, the difference) between the interest income we earn on our MBS portfolio, less net amortization of purchase premiums and discounts, and the interest expense we pay on our borrowings |
| We rely primarily on short-term borrowings (ie, one to 36 months) to acquire MBS with long-term maturities |
| Even though most of our MBS have interest rates that adjust over time based on short-term changes in corresponding interest rate indexes, the interest we pay on our borrowings may increase relative to the interest we earn on our MBS If the interest expense on our borrowings increases relative to the interest income we earn on our MBS, our profitability may be adversely affected |
| • Changes in interest rates, cyclical or otherwise, may adversely affect our profitability |
| Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control |
| In general, we finance the acquisition of our MBS through borrowings in the form of repurchase agreements, which exposes us to interest rate risk on the acquired assets |
| The cost of our borrowings is based on prevailing market interest rates |
| Because the term of our repurchase agreements typically ranges from one to 36 months at inception, the interest rates on our borrowings generally adjust more frequently (as new repurchase agreements are entered into upon the maturity of existing repurchase agreements) than the interest rates on our MBS During a period of rising interest rates, our borrowing costs could increase at a faster pace than our interest earnings on the leveraged portion of our MBS portfolio, which could result in a decline in our net interest spread and net interest margin |
| The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase |
| If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders |
| • Hybrid MBS have fixed interest rates for an initial period which may reduce our profitability if short-term interest rates increase |
| The ARMs collateralizing our MBS are primarily comprised of hybrids, which have interest rates that are fixed for a specified period (typically three or five years) and, thereafter, generally adjust annually to an increment over a pre-determined interest rate index |
| Accordingly, during a period of rising interest rates, the cost of our borrowings would increase while the interest income we earn on our MBS portfolio would not increase with respect to our MBS collateralized with hybrid ARMs that are then in their fixed rate period |
| If this happens, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders |
| • Flattening of the yield curve may adversely affect ARM-MBS prepayment rates and supply |
| Our net interest income varies primarily as a result of changes in interest rates as well as changes in interest rates across the yield curve |
| When the differential between short-term and long-term benchmark interest rates narrows, the yield curve is said to be “flattening |
| ” We believe that when the yield curve is relatively flat, borrowers have an incentive to refinance into hybrid mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our MBS to experience faster prepayments |
| In addition, a flatter yield curve generally leads to fixed-rate mortgage rates that are closer to the interest rates available on hybrid and adjustable-rate mortgages possibly decreasing the supply of ARM-MBS At times, short-term interest rates may increase and exceed long-term interest rates, causing an inverted yield curve |
| When the yield curve is inverted, fixed-rate mortgage rates may approach or be lower than hybrid or adjustable-rate mortgage rates, further increasing ARM-MBS prepayments and further negatively impacting ARM-MBS supply |
| Increases in prepayments on our MBS portfolio cause our premium amortization to accelerate, lowering the yield on such assets |
| If this happens, we could experience a decrease in net income or incur a net loss during these periods, which may negatively impact our distributions to stockholders |
| • Interest rate caps on the ARMs collateralizing our MBS may adversely affect our profitability if short-term interest rates increase |
| The financial markets primarily determine the interest rates that we pay on our borrowings used to finance the acquisition of our company’s MBS; however, the level of increase in interest rates on our ARM-MBS is typically limited by contract |
| The interim and lifetime interest rate caps on the ARMs collateralizing our MBS limit the amount by which the interest rates on such assets can adjust |
| Interim interest rate caps limit the amount interest rates on a particular ARM can adjust during any given year or period |
| Lifetime interest rate caps limit the amount interest rates can increase from inception 7 ______________________________________________________________________ through maturity of a particular ARM Our borrowings are not subject to similar restrictions |
| Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates paid by us on our borrowings could increase without limitation (as new repurchase agreements are entered into upon the maturity of existing repurchase agreements) while increases in the interest rates earned on the ARMs collateralizing our MBS could be limited due to interim or lifetime interest rate caps |
| • Adjustments of interest rates on our borrowings may not be matched to interest rate indexes on our MBS In general, the interest rates on our borrowings are based on LIBOR, while the interest rates on our ARM-MBS may be indexed to LIBOR or another index rate, such as the one-year CMT rate, MTA or COFI Accordingly, any increase in LIBOR relative to one-year CMT rates, MTA or COFI will generally result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on our ARM-MBS Any such interest rate mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders |
| Prepayment rates on the mortgage loans underlying our MBS may adversely affect our profitability |
| The MBS that we acquire are primarily secured by pools of ARMs on single-family residences |
| In general, the ARMs collateralizing our MBS may be prepaid at any time without penalty (other than certain MTA-indexed ARMs) |
| Prepayments on our MBS result when homeowners/mortgagees sell their mortgaged properties or decide to either satisfy (ie, payoff the mortgage) or refinance their existing mortgage loan |
| In addition, because our MBS are primarily Agency MBS, defaults and foreclosures on such MBS typically have the same effect as prepayments |
| When we acquire a particular MBS, we anticipate that the underlying mortgage loans will prepay at a projected rate which provides us with an expected yield on such MBS When homeowners/mortgagees prepay their mortgage loans faster than anticipated, it results in a faster prepayment rate on the related MBS in our portfolio and this may adversely affect our profitability |
| Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict |
| Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans |
| We often purchase MBS that have a higher interest rate than the prevailing market interest rate |
| In exchange for a higher interest rate, we typically pay a premium over par value to acquire these securities |
| In accordance with accounting rules, we amortize this premium over the life of the related MBS If the mortgage loans securing our MBS prepay at a rapid rate, we will have to amortize this premium on an accelerated basis which may adversely affect our profitability |
| Our investment policies allow us to acquire MBS at an average portfolio purchase price of up to 103dtta5prca of par value |
| As of December 31, 2005, the amortized cost of our portfolio of MBS was approximately 101dtta68prca of par value |
| Prepayments, which are the primary feature of MBS that distinguish them from other types of bonds, are difficult to predict and can vary significantly over time |
| As the holder of MBS, we receive a portion of our investment principal when underlying mortgages are prepaid |
| In order to continue to earn a return on this prepaid principal, we must reinvest it in additional MBS or other assets; however, if interest rates have declined, we may earn a lower return on the new investment as compared to the original MBS Prepayments may have a negative impact on the Company’s financial results, the effects of which depends on, among other things, the amount of unamortized premium on the MBS, the reinvestment lag and the reinvestment opportunities |
| Our business strategy involves a significant amount of borrowing that exposes us to additional risks |
| Pursuant to our financing strategy, we borrow against a substantial portion of the market value of our MBS and use the borrowed funds to acquire additional investment assets |
| Future increases in the amount by which the collateral value is required to contractually exceed the repurchase agreement loan amount, decreases in the market value of our MBS, increases in interest rate volatility, and changes in the availability of financing could cause our company to be unable to achieve the degree of leverage we believe to be optimal |
| In addition, if the interest income on our MBS purchased with borrowed funds fails to cover the interest expense of the related borrowings, our company will experience net interest losses and may experience net losses from operations |
| Such losses could be significant as a result of our leveraged 8 ______________________________________________________________________ structure |
| The use of borrowing, or “leverage,” to finance our MBS and other assets involves a number of other risks, including the following: • Our profitability may be limited by restrictions on our use of leverage |
| As long as we earn a positive margin between our borrowing costs and the interest and other income we earn on our assets, we can generally increase our profitability by using greater amounts of leverage |
| However, the amount of leverage that we use may be limited because our lenders might not make funding available to us at acceptable rates or they may require that we provide additional collateral to secure our borrowings |
| • If we are unable to renew our borrowings at favorable rates, it may force us to sell assets and our profitability may be adversely affected |
| Since we rely primarily on borrowings under repurchase agreements to finance our MBS, our ability to achieve our investment objectives depends on our ability to borrow money in sufficient amounts and on favorable terms and on our ability to renew or replace maturing short-term borrowings on a continuous basis |
| Our ability to enter into repurchase agreements in the future will depend on the market value of our MBS pledged to secure the specific borrowings, the availability of financing and other conditions existing in the lending market at that time |
| If we are not able to renew or replace maturing borrowings, we would be forced to sell some of our assets under possibly adverse market conditions, which may adversely affect our profitability |
| • A decline in the market value of our assets may result in margin calls that may force us to sell assets under adverse market conditions |
| As interest rates rise, the market value of interest-bearing assets, such as MBS, will decline |
| A decline in the market value of our MBS may result in our lenders initiating margin calls that require us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of our borrowings |
| If we are unable to satisfy margin calls, our lenders may foreclose on our collateral |
| This could force us to sell our MBS under adverse market conditions |
| • Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy |
| We use repurchase agreements for most of our borrowing |
| Our policy is to enter repurchase agreements only with financial institutions that have a long-term debt rating of, or, to the extent applicable, have a holding or parent company with a long-term debt rating of, single A or better as determined by one of the Rating Agencies |
| Borrowings made under repurchase agreements may qualify for special treatment under the US Bankruptcy Code |
| In the unlikely event that a lender under our repurchase agreements files for bankruptcy it may be difficult for us to recover our assets pledged as collateral to such lender |
| In addition, if we ever file for bankruptcy, lenders under our repurchase agreements may be able to avoid the automatic stay provisions of the Bankruptcy Code and take possession of, and liquidate, our collateral under these agreements without delay |
| We may experience a decline in the market value of our assets |
| The market value of our interest-bearing assets, such as MBS, generally move inversely to changes in interest rates and, as a result, may be negatively impacted by increases in interest rates |
| Accordingly, in a rising interest rate environment, the value of our assets may decline |
| A decline in the market value of our MBS may limit our ability to borrow or result in lenders initiating margin calls, which require a pledge of additional collateral or cash to re-establish the required ratio of borrowing to collateral value, under our repurchase agreements |
| As a result, we could be required to sell some of our assets under adverse market conditions in order to maintain liquidity |
| If these sales were made at prices lower than the amortized cost (ie, the carrying value) of such investments, our company would incur losses |
| In addition, if we are unable to meet our margin calls and default under our repurchase agreements, our lenders could liquidate the underlying collateral, which, at minimum, would result in a loss to our company of the difference between the value of the collateral and the amount borrowed under such repurchase agreements |
| In such a scenario, we could apply a strategy of reducing borrowings and assets, by selling assets or not replacing MBS as they amortize and/or prepay, thereby “shrinking the balance sheet |
| ” Such an action would likely reduce interest income, interest expense and net income, the extent of which would be dependent on the level of reduction in assets and liabilities as well as the sale prices of the assets sold |
| A decrease in our net interest income could negatively impact cash available for distributions, which in turn could reduce the market price of our securities |
| In addition, declines in the market value of our MBS or other assets may require us to recognize an “other-than-temporary” impairment against such assets for generally accepted accounting principles (“GAAP”) purposes if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such 9 ______________________________________________________________________ assets |
| If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired |
| Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale |
| Our investment strategy may involve credit risk |
| The holder of an ARM or MBS assumes a risk that the borrowers may default on their obligations to make full and timely payments of principal and interest |
| Our investment policy requires that at least 50prca of our assets consist of ARM-MBS that are either issued or guaranteed by a federally charted corporation, such as Fannie Mae or Freddie Mac, or an agency of the US government, such as Ginnie Mae, or are rated in one of the two highest rating categories by at least one of the Rating Agencies |
| Even though we have acquired primarily Agency MBS and AAA rated MBS to date, pursuant to our investment policy, we have the ability to acquire MBS and other investment assets of lower credit quality |
| If we acquire MBS or other investment assets of lower credit quality, we may incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on, or the Rating Agencies downgrade the credit quality of, these assets |
| Our use of derivatives to mitigate our interest rate risks may not be effective and may expose us to counterparty risks |
| In accordance with our operating policies, we may enter into certain types of derivative financial instruments, including interest rate swaps, caps and floors and other derivative transactions, to help us mitigate interest rate risk |
| No hedging strategy, however, can completely insulate us from the interest rate risks to which we are exposed or that the implementation of any hedging strategy would have the desired impact on our results of operations or financial condition |
| Certain of the US federal income tax requirements that we must satisfy in order to qualify as a REIT may limit our ability to hedge against such risks |
| We will not enter into derivative transactions if we believe that they will jeopardize our qualification as a REIT In addition, we presently use Caps and Swaps to hedge against anticipated future increases in interest rates on our repurchase agreements |
| Our policy is to enter into Caps and Swaps only with financial institutions that have a long-term debt rating of, or, to the extent applicable, have a holding or parent company with a long-term debt rating of, single A or better as determined by one of the Rating Agencies |
| In the unlikely event that one of our counterparties cannot perform under the terms of our Cap Agreements, in addition to not receiving payments due under such Cap Agreements that off-set our interest expense, our company would also incur a loss for all remaining unamortized premium paid for the specific Cap Agreement |
| Since Swaps do not involve a premium to be paid at inception, should a counterparty to a Swap be unable to make required payments pursuant to such Swap, the hedged liability would cease to be hedged for the remaining term of the Swap |
| In addition, we may be at risk for any collateral held by a counterparty to a Swap, should such counterparty become insolvent or file for bankruptcy |
| Changes in accounting treatment may adversely affect our profitability |
| We are in the process of evaluating whether the current financial statement presentation of certain transactions, which involve the acquisition of MBS from a counterparty and the subsequent financing of these MBS through repurchase agreements with the same counterparty, remains appropriate given our understanding of a technical interpretation of certain provisions of Statement of Financial Accounting Standards Nodtta 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities |
| ” Although we believe that our current accounting treatment for these transactions is appropriate, we will continue to evaluate our position as the interpretation of this issue among industry participants and standard setters evolves |
| If we were to determine that our company was required to apply this technical interpretation, the potential change in our accounting treatment would not affect the economics of these transactions, but would affect how these transactions were reported on our consolidated financial statements |
| The result of this technical interpretation would be to preclude our company from presenting these MBS and the related financings, as well as the related interest income and interest expense, on a gross basis on our consolidated financial statements |
| Instead, we would present the net investment in these transactions as derivatives and report the corresponding change in fair value of such derivatives on our consolidated statements of income |
| We are in the process of assessing the financial statement impact of applying such technical interpretation for the years ended December 31, 2005, 2004 and 2003 |
| Accordingly, if we were to determine to apply this accounting treatment, our annual and quarterly net income could be materially and adversely impacted by changes in the fair value of such derivatives and other factors |
| We may change our policies without stockholder approval |
| The Board establishes and monitors all of our fundamental operating policies, including our investment, financing and distribution policies, and any revisions to such policies would require the approval of our Board |
| Our Board may amend or revise these policies at any time without a vote of our stockholders |
| Policy changes could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions |
| We have not established a minimum dividend payment level |
| We intend to pay dividends on our common stock in an amount equal to at least 90prca of our REIT taxable income, which is calculated before deductions of dividends paid and excluding net capital gains, in order to maintain our qualification as a REIT for US federal income tax purposes |
| Dividends will be declared and paid at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT qualification and such other factors as our Board may deem relevant from time to time |
| We have not established a minimum dividend payment level for our common stock and our ability to pay dividends may be negatively impacted by adverse changes in our operating results |
| 10 ______________________________________________________________________ We are dependent on our executives and employees |
| As a self-advised REIT, we are dependent on the efforts of our key officers and employees, including Stewart Zimmerman, Chairman of the Board, Chief Executive Officer and President; William Gorin, Executive Vice President and Chief Financial Officer; Ronald Freydberg, Executive Vice President and Chief Portfolio Officer; Timothy W Korth, General Counsel, Senior Vice President - Business Development and Secretary; and Teresa D Covello, Senior Vice President, Chief Accounting Officer and Treasurer |
| The loss of any of their services could have an adverse effect on our operations |
| The economic return from our investments and interests in real estate will be affected by a number of factors |
| Our indirect interests in multi-family apartment properties expose us to risks associated with investing in real estate |
| These risks include the possibility that the properties will not perform in accordance with our expectations |
| In addition, the economic returns from our interests in these properties may be affected by a number of factors, many of which are beyond our direct control |
| These factors include general and local economic conditions, the relative supply of apartments and other housing in the applicable market area, interest rates on mortgage loans, the need for and costs of repairs and maintenance of the properties, government regulations and the cost of complying with them, taxes and inflation |
| Our interests in real estate may be illiquid and their value may decrease |
| Our indirect interests in multi-family apartment properties are relatively illiquid |
| To the extent we determine to do so, our ability to sell these assets, and the price we receive upon their sale, will be affected by the number of potential buyers, the number of competing properties on the market in the area and a number of other market conditions |
| Owning real estate may subject us to liability for environmental contamination |
| The owner or operator of real property may become liable for the costs of removal or remediation of hazardous substances released on its property |
| Various federal, state and local laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances |
| We cannot make any assurances that the multi-family apartment properties in which we currently hold indirect interests, or those we may acquire in the future, are not or will not be contaminated |
| The costs associated with the remediation of any such contamination may be significant and may exceed the value of the property causing us to lose our entire investment |
| In addition, environmental laws may materially limit the use of the properties underlying our real estate investments and future laws, or more stringent interpretations or enforcement policies of existing environmental requirements, may increase our exposure to environmental liability |
| Compliance with the requirements of the Americans with Disabilities Act of 1990 could be costly |
| Under the Americans with Disabilities Act of 1990, all public accommodations must meet federal requirements for access and use by disabled persons |
| A determination that one or more of the multi-family apartment properties in which we currently hold indirect interests does not comply with this Act could result in liability for both government fines and damages to private parties |
| If we were to make additional capital contributions to the entities that hold these multi-family apartment properties in order to fund unanticipated major modifications at these properties to bring them into compliance with this Act, it could adversely affect our profitability |
| Because of competition, we may not be able to acquire investment assets at favorable prices |
| Our profitability depends, in large part, on our ability to acquire MBS or other investment assets at favorable prices |
| In acquiring our investment assets, we compete with a variety of institutional investors, including other REITs, insurance companies, hedge funds, mutual funds, pension funds, investment banking firms, banks and other financial institutions |
| Many of the entities with which we compete have greater financial and other resources than us |
| In addition, many of our competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act |
| As a result, we may not be able to acquire MBS or other investment assets for investment or we may have to pay more for these assets than we otherwise would |
| 11 ______________________________________________________________________ Our qualification as a REIT We believe that we qualify for taxation as a REIT for US federal income tax purposes and plan to operate so that we can continue to meet the requirements for qualification and taxation as a REIT So long as we qualify as a REIT, we generally will not be subject to US federal income tax on our income that we distribute currently to our stockholders |
| Many of the REIT requirements, however, are highly technical and complex |
| The determination that we are a REIT requires an analysis of various factual matters and circumstances, some of which may not be totally within our control and some of which involve questions of interpretation |
| For example, to qualify as a REIT, at least 95prca of our gross income must come from specific passive sources, like mortgage interest, that are itemized in the REIT tax laws |
| In addition, the composition of our assets must meet certain requirements at the close of each quarter |
| There can be no assurance that the Internal Revenue Service (“IRS”) or a court would agree with any conclusions or positions we have taken in interpreting the REIT requirements |
| We also are required to distribute to our stockholders at least 90prca of our net taxable income (excluding net capital gains) on an annual basis |
| Such distribution requirement limits the amount of cash we have available for other business purposes, including amounts to fund our growth |
| Also, it is possible that because of differences in timing between the recognition of taxable income and the actual receipt of cash, we may have to borrow funds on a short-term basis to meet the 90prca distribution requirement |
| Even a technical or inadvertent mistake could jeopardize our REIT qualification unless we meet certain statutory relief provisions |
| Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult or impossible for us to remain qualified as a REIT If we fail to qualify as a REIT for US federal income tax purposes, we would be subject to US federal income tax at regular corporate rates |
| Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify |
| If we failed to qualify as a REIT, we would have to pay significant income taxes |
| This likely would have a significant adverse effect on the value of our securities |
| In addition, we would no longer be required to pay any dividends to stockholders |
| Even if we qualify as a REIT for US federal income tax purposes, we are required to pay certain federal, state and local taxes on our income and property |
| Compliance with proposed or enacted changes in securities laws and regulations could be costly |
| The SOX Act and the rules and regulations promulgated by the SEC and the New York Stock Exchange have increased the scope, complexity and cost of corporate governance, regulatory compliance and reporting and disclosure practices |
| We believe that these rules and regulations will continue to make it more costly for us to obtain director and officer liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain the same coverage |
| These rules and regulations could also make it more difficult for us to attract and retain qualified members of management and our Board (particularly with respect to Board members serving on our Audit Committee) |
| Loss of our Investment Company Act exemption would adversely affect us |
| We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes of, the Investment Company Act |
| If we failed to maintain our exempt status under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this annual report on Form 10-K The Investment Company Act exempts entities that are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” (ie, qualifying interests) |
| Under the current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain (i) at least 55prca of our assets in qualifying interests (the “55prca Test”) and (ii) at least 80prca of our assets in real estate related assets (including qualifying interests) (the “80prca Test”) |
| MBS that do not represent all of the certificates issued (ie, an undivided interest) with respect to the entire pool of mortgages (ie, a whole pool) underlying such MBS may be treated as securities separate from such underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55prca Test; however, such MBS would be considered real estate related assets for purposes of the 80prca Test |
| Therefore, for purposes of the 55prca Test, our ownership of these types of MBS is limited by the provisions of the Investment Company Act |
| In meeting the 55prca Test, we treat as qualifying interests those MBS issued with respect to an underlying pool as to which we own all of the issued certificates |
| If the SEC or its staff were to adopt a contrary interpretation, we could be required to sell a 12 ______________________________________________________________________ substantial amount of our MBS under potentially adverse market conditions |
| Further, in order to insure that it at all times qualifies for this exemption from the Investment Company Act, we may be precluded from acquiring MBS whose yield is higher than the yield on MBS that could be otherwise purchased in a manner consistent with this exemption |
| Accordingly, we monitor our compliance with both of the 55prca Test and the 80prca Test in order to maintain our exempt status under the Investment Company Act |
| As of December 31, 2005, the Company had determined that it was in and had maintained compliance with both of the 55prca Test and the 80prca Test |