| NEW YORK MORTGAGE TRUST INC Item 1A RISK FACTORS An investment in our securities involves various risks |
| You should carefully consider the following risk factors before making an investment decision involving our securities |
| The risks discussed herein can adversely affect our business, liquidity, operating results, prospects, and financial condition |
| This could cause the market price of our securities to decline and could cause you to lose all or part of your investment |
| The risk factors described below are not the only risks that may affect us |
| Additional risks and uncertainties not presently known to us also may adversely affect our business, liquidity, operating results, prospects, and financial condition |
| Our business strategy partially depends on our ability to originate prime adjustable-rate and hybrid mortgage loans for our portfolio |
| Our portfolio of prime adjustable-rate and hybrid mortgage loans will, over time, be comprised primarily of mortgage loans that we originate through NYMC If NYMC is not able to originate prime adjustable-rate and hybrid mortgage loans that meet our investment criteria at the volumes we expect, the time required for, and the cost associated with, building our portfolio may be greater than expected, which could have an adverse effect on our results of operations and our ability to make distributions to our stockholders |
| We may experience a decline in the market value of our assets The market value of the interest-bearing assets that we have acquired and intend to continue to acquire, most notably mortgage-backed securities and originated or purchased residential mortgage loans and any related hedging instruments, may move inversely with changes in interest rates |
| We anticipate that increases in interest rates will tend to decrease our net income |
| A decline in the market value of our investments may limit our ability to borrow or result in lenders requiring additional collateral or initiating margin calls under our repurchase agreements |
| As a result, we could be required to sell some of our investments under adverse market conditions in order to maintain liquidity |
| If such sales are made at prices lower than the amortized costs of such investments, we will incur losses |
| A default under our repurchase agreements could also result in the liquidation of the underlying investments used as collateral and result in a loss equal to the difference between the value of the collateral and the amount owed under our repurchase agreements |
| -14- _________________________________________________________________ [77]Back to Table of Contents [78]Index to Financial Statements Our success will depend on our ability to obtain financing to leverage our equity |
| If we are limited in our ability to leverage our assets, the returns on our portfolio may be harmed |
| As of December 31, 2005, our leverage ratio, defined as total financing facilities less subordinated debentures outstanding divided by total stockholders’ equity plus subordinated debentures at December 31, 2005 was 11 to 1 |
| Our repurchase agreements are not currently committed facilities, meaning that the counterparties to these agreements may at any time choose to restrict or eliminate our future access to the facilities and we have no other committed credit facilities through which we may leverage our equity |
| If we are unable to leverage our equity to the extent we currently anticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders |
| Interest rate fluctuations may cause losses |
| We believe our primary interest rate exposure relates to our mortgage loans, mortgage-backed securities and variable-rate debt, as well as the interest rate swaps and caps that we utilize for risk management purposes |
| Changes in interest rates may affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in financing these assets |
| Changes in the level of interest rates also can affect our ability to originate or acquire mortgage loans or mortgage-backed securities, the value of our assets and our ability to realize gains from the sale of such assets |
| This would adversely affect our profitability |
| Our operating results depend in large part on differences between income received from our assets, net of credit losses, and our financing costs |
| We anticipate that in most cases, for any period during which our assets are not match-funded, the income from such assets will adjust more slowly to interest rate fluctuations than the cost of our borrowings |
| Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income |
| Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us and may limit or eliminate our ability to make distributions to our stockholders |
| Our mortgage loan originations historically have been concentrated in specific geographic regions and any adverse market or economic conditions in those regions may have a disproportionately adverse effect on the ability of our customers to make their loan payments |
| Our mortgage loan originations have been and may in the future be concentrated in specific geographic regions — predominantly in the mid-Atlantic, Northeast and New England regions of the United States |
| Adverse market or economic conditions in a particular region may disproportionately increase the risk that borrowers in that region will be unable to make their mortgage payments |
| In addition, the market value of the real estate securing those mortgage loans could be adversely affected by adverse market and economic conditions in that region |
| Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in that geographic region could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, and business prospects |
| A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our operations |
| We believe the risks associated with our business will be more acute during periods of economic slowdown or recession if these periods are accompanied by declining real estate values |
| Declining real estate values will likely reduce our level of new mortgage loan originations, since borrowers often use increases in the value of their existing home to support the refinancing of their existing mortgage loans or the purchase of new homes at higher levels of borrowings |
| Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default |
| Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, and business prospects |
| Our past operating results have occurred during a period of rapid growth for the residential mortgage industry and may not be indicative of our future operating results |
| The growth rate of our origination platform has benefited from low interest rates, a long period of economic growth and strategic acquisitions of mortgage origination platforms |
| NYMC’s loan originations for the year ending December 31, 2005 increased 86prca over the prior period, aided in large part to our acquisition of Guaranty Residential Lending, Inc, while according to the MBA’s February 7, 2006 Mortgage Finance Forecast, lender origination volume for 2005 was flat versus the prior year |
| The MBA further projected that overall loan originations will decline in 2006 |
| These projected declines in overall volume of closed loan originations are likely to have a negative effect on our loan origination volume and net income |
| Accordingly, our historical performance may not be indicative of future results, and our results of operations may be materially adversely affected as interest rates rise |
| In addition, NYMC’s recent and rapid growth may distort some of its ratios and financial statistics and our change in business strategy to include the development of a portfolio of mortgage loans and mortgage-backed securities makes period-to-period comparisons difficult |
| In light of this growth and change in business strategy, our historical performance and operating and origination data may be of little relevance in predicting our future performance |
| -15- _________________________________________________________________ [79]Back to Table of Contents [80]Index to Financial Statements Excessive supply of or reduced demand for mortgage-backed securities in the market for these securities may cause the market to require a higher yield on our mortgage-backed securities and thereby cause a decline in the value of our portfolio |
| The mortgage-backed securities we will own are also subject to spread risk |
| The majority of these securities will be adjustable-rate securities valued based on a market credit spread to US Treasury security yields |
| In other words, their value is dependent on the yield demanded on such securities by the market based on their credit relative to US Treasury securities |
| Excessive supply of such securities combined with reduced demand will generally cause the market to require a higher yield on such securities, resulting in the use of a higher or wider spread over the benchmark rate (usually the applicable US Treasury security yield) to value such securities |
| Under such conditions, the value of our securities portfolio would tend to decline |
| Conversely, if the spread used to value such securities were to decrease or tighten, the value of our securities portfolio would tend to increase |
| Such changes in the market value of our portfolio could adversely affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital |
| Furthermore, shifts in the US Treasury yield curve, which represents the market’s expectations of future interest rates, would also affect the yield required on our securities and therefore their value |
| This would have similar effects on our portfolio and our financial position and results of operations as a change in spreads would |
| Loan prepayment rates may increase, adversely affecting yields on our planned investments |
| The value of the assets we have acquired and intend to continue to acquire may be affected by prepayment rates on mortgage loans |
| Prepayment rates on mortgage loans are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty |
| In periods of declining mortgage loan interest rates, prepayments on mortgage loans generally increase |
| If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets with lower yields than the yields on the assets that were prepaid |
| In addition, the market value of any mortgage assets may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates |
| Conversely, in periods of rising interest rates, prepayments on mortgage loans generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields |
| Under certain interest rate and prepayment scenarios, we may fail to recoup fully our cost of acquisition of certain investments |
| Our hedging transactions may limit our gains or result in losses |
| We use derivatives, primarily interest rate swaps and caps, to hedge our liabilities and this has certain risks, including the risk that losses on a hedging transaction will reduce the amount of cash available for distribution to our stockholders and that such losses may exceed the amount invested in such instruments |
| Our board of directors has adopted a general policy with respect to the use of derivatives, and which generally allows us to use derivatives when we deem appropriate for risk management purposes, but does not set forth specific guidelines |
| To the extent consistent with maintaining our status as a REIT, we may use derivatives, including interest rate swaps and caps, options, term repurchase contracts, forward contracts and futures contracts, in our risk management strategy to limit the effects of changes in interest rates on our operations |
| However, a hedge may not be effective in eliminating the risks inherent in any particular position |
| Our profitability may be adversely affected during any period as a result of the use of derivatives in a hedging transaction |
| The mortgage loans we typically invest in and the mortgage loans underlying the mortgage-backed securities we typically invest in are subject to risks of delinquency, foreclosure and loss, which could result in losses to us |
| Residential mortgage loans are secured by residential properties and are subject to risks of delinquency and foreclosure, and risks of loss |
| The ability of a borrower to repay a loan secured by residential property typically is dependent primarily upon the income or assets of the borrower, but also may be affected by property location and condition, competition and demand for comparable properties, changes in zoning laws, environmental contamination, changes in national, regional or local economic conditions, declines in regional or local real estate values, increases in interest rates, real estate tax rates, changes in governmental rules and regulations and acts of God, terrorism, social unrest and civil disturbances |
| In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral that we can realize upon foreclosure and sale and the principal and accrued interest of the mortgage loan |
| In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law |
| Foreclosure of a mortgage loan can be an expensive and lengthy process |
| The occurrence of an event of default or foreclosure could have a material adverse effect on our cash flow from operations and could limit the amount we have available for payment of our debt obligations and distribution to our stockholders |
| Residential mortgage-backed securities evidence interests in or are secured by pools of residential mortgage loans |
| Accordingly, the mortgage-backed securities we typically invest in are subject to all of the risks of the underlying mortgage loans |
| -16- _________________________________________________________________ [81]Back to Table of Contents [82]Index to Financial Statements We may be required to repurchase mortgage loans that we have sold or to indemnify holders of our mortgage-backed securities |
| If any of the mortgage loans that we originate and sell, or that we pledge to secure mortgage-backed securities that we issue in our securitizations, do not comply with the representations and warranties that we make about the characteristics of the loans, the borrowers and the properties securing the loans, we may be required to repurchase those loans in the case of the loans that we have sold, or replace them with substitute loans or cash in the case of securitized loans |
| If this occurs, we may have to bear any associated losses directly |
| In addition, in the case of loans that we have sold, we may be required to indemnify the purchasers of such loans for losses or expenses incurred as a result of a breach of a representation or warranty made by us |
| Repurchased loans typically require an allocation of working capital to carry on our books, and our ability to borrow against such assets is limited, which could limit the amount by which we can leverage our equity |
| Any significant repurchases or indemnification payments could significantly harm our cash flow and results of operations and limit our ability to make distributions to our stockholders |
| We may be subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees |
| When we originate mortgage loans, we rely upon information supplied by borrowers and other third parties, including information contained in the applicant’s loan application, property appraisal reports, title information and employment and income documentation |
| If any of this information is misrepresented or falsified and if we do not discover it prior to funding a loan, the actual value of such loan may be significantly lower than anticipated |
| As a practical matter, we generally bear the risk of loss associated with a misrepresentation whether it is made by the loan applicant, the mortgage broker, another third party or one of our employees |
| A loan subject to a material misrepresentation is typically unsaleable or is subject to repurchase or substitution if it is sold or securitized prior to detection of the misrepresentation |
| Although we may have rights against persons and entities who made or knew about the misrepresentation, those persons and entities may be difficult to locate, and it is often difficult to collect any monetary losses from them that we may have suffered |
| Our operations are subject to a body of complex laws and regulations at the federal, state and local levels |
| We must comply with the laws, rules and regulations, as well as judicial and administrative decisions, of all jurisdictions in which we originate mortgage loans, as well as an extensive body of federal laws, rules and regulations |
| The volume of new or modified laws, rules and regulations applicable to our business has increased in recent years and individual municipalities have also begun to enact laws, rules and regulations that restrict or otherwise affect loan origination activities, and in some cases loan servicing activities |
| The laws, rules and regulations of each of these jurisdictions are different, complex and, in some cases, in direct conflict with each other |
| It may be more difficult to identify comprehensively, to interpret accurately, to program properly our information systems and to effectively train our personnel with respect to all of these laws, rules and regulations, thereby potentially increasing the risks of non-compliance with these laws, rules and regulations |
| Our failure to comply with these laws, rules and regulations can lead to: · civil and criminal liability, including potential monetary penalties; · loss of state licenses or permits required for continued lending and servicing operations; · legal defenses causing delay or otherwise adversely affecting our ability to enforce loans, or giving the borrower the right to rescind or cancel the loan transaction; · demands for indemnification or loan repurchases from purchasers of our loans; · class action lawsuits; and · administrative enforcement actions |
| -17- _________________________________________________________________ [83]Back to Table of Contents [84]Index to Financial Statements We commenced operations as a newly public company in June 2004 and have a limited operating history |
| NYMC, our mortgage banking subsidiary, has a substantial operating history, but we were not formed until September 2003 and had no operations prior to closing our IPO on June 29, 2004 |
| As a result, we have a limited history managing a portfolio of mortgage loans or mortgage-backed securities for you to determine the likelihood of our achieving our investment objectives |
| Our executive officers have agreements that provide them with benefits in the event their employment is terminated following a change in control |
| We have entered into agreements with the members of our senior management team, Messrs |
| Schnall, Akre, Wirth, Fierro and Mumma, that provide them with severance benefits if their employment ends under specified circumstances following a change in control |
| These benefits could increase the cost to a potential acquirer of us and thereby prevent or discourage a change in control that might involve a premium price for your shares or otherwise be in your best interest |
| Certain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control which could have an adverse effect on the value of our securities |
| Certain provisions of Maryland law, our charter and our bylaws may have the effect of delaying, deferring or preventing transactions that involve an actual or threatened change in control |
| These provisions include the following, among others: · our charter provides that, subject to the rights of one or more classes or series of preferred stock to elect one or more directors, a director may be removed with or without cause only by the affirmative vote of holders of at least two-thirds of all votes entitled to be cast by our stockholders generally in the election of directors; · our bylaws provide that only our board of directors shall have the authority to amend our bylaws; · under our charter, our board of directors has authority to issue preferred stock from time to time, in one or more series and to establish the terms, preferences and rights of any such series, all without the approval of our stockholders; · the Maryland Business Combination Act; and · the Maryland Control Share Acquisition Act |
| Although our board of directors has adopted a resolution exempting us from application of the Maryland Business Combination Act and our bylaws provide that we are not subject to the Maryland Control Share Acquisition Act, our board of directors may elect to make the “business combination” statute and “control share” statute applicable to us at any time and may do so without stockholder approval |
| Maintenance of our Investment Company Act exemption imposes limits on our operations |
| We have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the Investment Company Act of 1940, as amended |
| We believe that there are a number of exemptions under the Investment Company Act that are applicable to us |
| To maintain the exemption, the assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act |
| In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our operations and the market price for our securities |
| Failure to qualify as a REIT would adversely affect our operations and ability to make distributions |
| We have operated and intend to continue to operate so to qualify as a REIT for federal income tax purposes |
| Our continued qualification as a REIT will depend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income, and the amount of our distributions to our stockholders |
| In order to qualify as a REIT, we generally are required each year to distribute to our stockholders at least 90prca of our REIT taxable income, excluding any net capital gain |
| To the extent that we distribute at least 90prca, but less than 100prca of our REIT taxable income, we will be subject to corporate income tax on our undistributed REIT taxable income |
| In addition, we will be subject to a 4prca nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85prca of our ordinary REIT income for that year, (ii) 95prca of our REIT capital gain net income for that year, and (iii) 100prca of our undistributed REIT taxable income from prior years |
| We have made and intend to continue to make distributions to our stockholders to comply with the 90prca distribution requirement and to avoid corporate income tax and the nondeductible excise tax |
| However, differences in timing between the recognition of REIT taxable income and the actual receipt of cash could require us to sell assets or to borrow funds on a short-term basis to meet the 90prca distribution requirement and to avoid corporate income tax and the nondeductible excise tax |
| -18- _________________________________________________________________ [85]Back to Table of Contents [86]Index to Financial Statements If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates |
| In addition, if we do not qualify for certain statutory relief provisions, we generally would be disqualified from treatment as a REIT for the four taxable years following the year in which we lost our REIT status |
| Failing to obtain, or losing, our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability, and we would no longer be required to make distributions to stockholders |
| Additionally, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax |