Executive Overview

Corporate Overview, Background and Strategy - We are a Maryland corporation formed on September 13, 1996. Prior to significant changes in our business during 2007 and the first quarter of 2008, we originated, purchased, securitized, sold, invested in and serviced residential nonconforming mortgage loans and mortgage backed securities. We retained, through our mortgage securities investment portfolio, significant interests in the nonconforming loans we originated and purchased, and through our servicing platform, serviced all of the loans in which we retained interests. During 2007 and early 2008, we discontinued our mortgage lending operations and sold our mortgage servicing rights which subsequently resulted in the closing of our servicing operations.

Because of severe declines in housing prices and national and internal economic crises, we have suffered significant losses during 2007 and 2008 because of declining values of our investments in mortgage loans and securities. Liquidity constraints during 2007 forced us to pair operations and administrative staff and take measures to conserve cash.

During 2008, management focused on reducing operating cash uses, clearing follow-on matters arising from our legacy lending and servicing operations and evaluating investment opportunities. Management made a significant step in the rebuilding process by investing in StreetLinks National Appraisal Services LLC ("StreetLinks"). StreetLinks is a national residential appraisal management company. A fee for appraisal services is collected from lenders and borrowers and passes through most of the fee to an independent residential appraiser. StreetLinks retains a portion of the fee to cover its costs of managing the process of fulfilling the appraisal order. StreetLinks is currently not producing positive cash flow. Management believes that StreetLinks is situated to take advantage of growth opportunities in the residential appraisal management business. We are developing the business and have established goals for it to become a positive cash and earnings contributor. Development of the business is occurring through increased appraisal order volume as we have added new lending customers during 2008 and into 2009.

Going Concern Considerations - If the cash flows from our mortgage securities are less than currently anticipated and we are unable to invest in profitable operations and restructure our contractual obligations, there can be no assurance that we will be able to continue as a going concern and avoid seeking the protection of applicable federal and state bankruptcy laws. Due to the fact that we have a negative net worth, and that we do not currently have ongoing significant business operations that are profitable, it is unlikely that we will be able to obtain additional equity or debt financing on favorable terms, or at all, for the foreseeable future. To the extent we require additional liquidity and cannot obtain it, we will be forced to file for bankruptcy.

Our consolidated financial statements have been prepared on a going concern basis of accounting which contemplates continuity of operations, realization of assets, liabilities and commitments in the normal course of business. There is substantial doubt that we will be able to continue as a going concern and, therefore, may be unable to realize our assets and discharge our liabilities in the normal course of business. The financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

Strategy - Management is focused on building an operation or group of operations to restore our financial strength. If and when opportunities arise, available cash resources will be used to invest in or start businesses that can generate income and cash. Additionally, management will attempt to renegotiate and/or restructure the components of our equity in order to realign the capital structure with our current business model.

The key performance measures for executive management are:

· maintenance of adequate liquidity to sustain us and allow us to take advantage of investment opportunity, and

· generating income for our shareholders.

The following selected key performance metrics are derived from our consolidated financial statements for the periods presented and should be read in conjunction with the more detailed information therein and with the disclosure included elsewhere in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management's discussion and analysis of financial condition and results of operations, along with other portions of this report, are designed to provide information regarding our performance and these key performance measures.

Table 1 - Summary of Financial Highlights and Key Performance Metrics
(dollars in thousands; except per share amounts)
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                                                                    December 31,
                                                                 2008         2007
Cash and cash equivalents, including restricted cash           $  30,836     $  34,362

Net loss income available to common shareholders, per
diluted share                                                     (72.37 )      (78.55 )

Liquidity - During 2008, we received $86.8 million in cash on our securities portfolio. However, we used significant amounts of cash to repay outstanding borrowings, pay for costs related to our legacy mortgage lending and servicing operations, pay for current administrative costs and invest in StreetLinks. As of December 31, 2008, we had $30.8 million in cash, cash equivalents and restricted cash, a decrease of $3.5 million from December 31, 2007. As of May 27, 2009, we have $23.4 million in cash and cash equivalents (including restricted cash). We face substantial liquidity risk and uncertainty, near-term and otherwise, which threatens our ability to continue as a going concern and avoid bankruptcy. See "Liquidity and Capital Resources" for further discussion of our liquidity position and steps we have taken to preserve liquidity levels.

As part of our near-term future strategy, we will focus on minimizing losses, preserving liquidity and investing in opportunities that can contribute positively to our liquidity position. Our mortgage securities are our primary source of new cash flows. Based on the current projections, the cash flows from our mortgage securities will decrease in the next several months as the underlying mortgage loans are repaid and could be significantly less than the current projections if losses on the underlying mortgage loans exceed the current assumptions. We have no outstanding lending facilities available for liquidity purposes. In addition, we have significant outstanding obligations relating to our discontinued operations, as well as payment obligations with respect to unsecured debt. Our liquidity consists solely of cash and cash equivalents.

Significant Recent Events - As discussed above under Corporate Overview, Background and Strategy, during 2008 we acquired a majority interest in StreetLinks National Appraisal Services LLC ("StreetLinks"), a residential appraisal management company. Subsequent to 2008, during April 2009, we renegotiated the terms our junior subordinated debentures and we committed to acquire a majority ownership in Advent Financial Services LLC. Advent is in its start-up phase and will provide access to tailored banking accounts, small dollar banking products and related services to meet the needs of low and moderate income level individuals.

Impact of Consolidation of Securitized Mortgage Assets on Our Financial Statements

The discussions of our financial condition and results of operation below provide analysis for the changes in our balance sheet and income statement as presented using Generally Accepted Accounting Principles in the United States of America ("GAAP"). Mortgage loans - held-in-portfolio and certain of our mortgage securities - trading are owned by trusts established when those assets were securitized. The trusts issued asset-backed bonds to finance the assets. In accordance with GAAP, we have consolidated these trusts. Due to significant events that have occurred subsequent to the securitization of these assets, we no longer have a significant economic benefit from these assets. We have provided additional disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Assets and Liabilities of Consolidated Securitization Trusts to demonstrate the impact of the trusts on our consolidated financial statements.

Financial Condition as of December 31, 2008 as Compared to December 31, 2007

Cash and Cash Equivalents. See "Liquidity and Capital Resources" for discussion of our cash and cash equivalents.

Restricted Cash. Certain states required that we post surety bonds in connection with our former mortgage lending operations. During 2007, the sureties required that we provide letters of credit to support our reimbursement obligations to the sureties. In order to arrange these letters of credit, we were required to collateralize the letters of credit with cash. During the first quarter of 2008, we terminated the surety bonds when we surrendered state lending licenses as a result of the discontinuation of our mortgage lending operations. The sureties returned a portion of the cash collateral during 2008 ($3.0 million), but continue to hold $6.0 million of the collateral as a hedge against any claims that may be brought during the tail period. The timing of the return of the remaining cash is at the discretion of the sureties and is dependent upon their interpretation of the tail period for filing claims under the various state licensing regulations. No claims have been made against the surety bonds and none are expected to be brought, especially considering the significant amount of time that has elapsed since the bonds were cancelled and since we last originated any mortgage loans. Management expects the cash to be fully returned. However, the timing for return is unknown.

Mortgage Loans - Held-in-Portfolio. Mortgage loans - held-in-portfolio consist of subprime mortgage loans which have been securitized and are owned by three separate trusts - NHES 2006-1, NHES 2006MTA-1 and NHES 2007-1. We consolidate these trusts for GAAP reporting.

The mortgage loans - held-in-portfolio balance has declined as their value has decreased significantly. The value is dependent largely in part on their credit quality and performance. The credit quality of the portfolio continues to worsen and delinquencies have increased dramatically during the past two years. Therefore, we significantly increased the allowance for losses on these loans. The allowance has increased from $22.5 million as of January 1, 2007 to $230.1 million as of December 31, 2007 to $776.0 as of December 31, 2008. Additionally, the balance of mortgage loans - held-in-portfolio has decreased due to regular borrower repayments. During 2008 and 2007, respectively, the trusts received repayments of the mortgage loans totaling $288.2 million and $824.1 million. These balances will continue to decline either through normal borrower repayments or through continued devaluation as delinquencies, foreclosures and losses occur.

As discussed under the heading Assets and Liabilities of Consolidated Securitization Trusts, these assets have no economic benefit to us and we have no control over these assets. We have also provided the assets and liabilities of the trusts on a separate and combined basis.

Mortgage Securities - Trading and Available-for-Sale. The securities we own are generally securities we retained after the securitization of mortgage loans we originated prior to 2007. For all loan securitizations, we retained the residual interest bond, which means we receive the net of the principal and interest received on the underlying loans within the securitized trust less the principal and interest paid on the bonds issued by the trust, mortgage insurance premiums, servicing fees and other miscellaneous fees. For any loans that incur prepayment penalty fees, we receive those fees through the residual interest. In some securitization transactions, we also retained regular principal and interest bonds. Generally, these bonds were the lowest rated bonds issued by the trust or these bonds were not rated. Additionally, we have purchased some mortgage securities in the open market from unrelated entities. Upon acquisition of the bonds, we classified the securities as either trading or available-for-sale. No changes have been made to the classifications.

Significant deterioration in the quality of the mortgage loans serving as collateral for our mortgage securities has caused a devaluation of the securities. In general, the default rate on the underlying loans has increased dramatically over the past two years. Defaults are the result of national economic conditions that have led to job losses, severe declines in housing prices and the inability for credit-challenged individuals to refinance mortgage loans. In many cases, the securities we own have ceased to generate cash flow and we expect cash flow to continue to decline during the coming year. We have consistently written the value of our securities down over the past two years.

The following tables provide details of our mortgage securities.

Table 2 - Values of Individual Mortgage Securities - Available-for-Sale
(dollars in thousands)
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                                                            For the Year Ended December 31,
                                           2008                                                         2007
                                                 Constant                                                     Constant
                  Estimated                        Pre-         Expected       Estimated                        Pre-         Expected
Securitization      Fair          Discount       payment         Credit          Fair          Discount       payment         Credit
  Trust (A)         Value           Rate           Rate          Losses          Value           Rate           Rate          Losses
NMFT Series :
2002-3           $     2,041             25 %           16 %          0.8 %   $     1,932             25 %           24 %          0.6 %
2003-1                 5,108             25             13            2.0           3,260             25             20            1.7
2003-2                 2,272             25             12            1.9           2,817             25             18            1.2
2003-3                 2,402             25             12            2.7           1,233             25             16            1.2
2003-4                     1             25             13            2.7           1,279             25             20            1.6
2004-1                    16             25             15            3.4             180             25             24            2.4
2004-2                    27             25             14            3.5             180             25             23            2.4
2004-3                    73             25             15            4.4             986             25             24            3.0
2004-4                    11             25             16            4.3              48             25             26            2.6
2005-1                     -             25             17            6.2             512             25             27            3.6
2005-2                     -             25             16            7.0             642             25             24            3.3
2005-3                     -             25             17            9.3           1,562             25             24            3.6
2005-4                     3             25             18           11.5           1,556             25             27            4.5
2006-2                    73             25             19           17.0           2,301             25             32            6.8
2006-3                   125             25             20           19.8           2,994             25             31            8.4
2006-4                   136             25             20           20.0           2,960             25             32            8.2
2006-5                   214             25             20           24.0           4,217             25             31           11.0
2006-6                   286             25             19           24.4           4,712             25             30           10.0
Total            $    12,788                                                  $    33,371

Table 3 - Mortgage Securities - Trading
(dollars in thousands)
As of December 31, 2008
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                                                           Amortized Cost                         Number of          Weighted
            S&P Rating                 Original Face           Basis            Fair Value       Securities        Average Yield
Subordinated Securities:
Investment Grade (A)                  $        12,505     $         11,891     $        833                 3                6.25 %
Non-investment Grade (B)                      422,609              406,125            5,547                87                8.08
Total Subordinated Securities                 435,114              418,016            6,380                90                7.84
Residual Securities:
Unrated                                        59,500               15,952              705                 1               25.00
Total                                 $       494,614     $        433,968     $      7,085                91                9.55 %



As of December 31, 2007
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                                                           Amortized Cost                        Number of          Weighted
            S&P Rating                 Original Face           Basis            Fair Value       Securities       Average Yield
Subordinated Securities:
Investment Grade (A)                  $       389,881     $        367,581     $     80,004               91               11.46 %
Non-investment Grade (B)                       45,233               38,514            4,458               17               17.05
Total Subordinated Securities                 435,114              406,095           84,462              108               11.76
Residual Securities:
Unrated                                           N/A               41,275           24,741                1               21.00
Total                                 $       435,114     $        447,370     $    109,203              109               13.85 %

(B) Non-investment grade includes all securities with S&P ratings below BBB-.

We re-securitized, by way of a Collateralized Debt Obligation (CDO), some of the mortgage securities - trading we own in the first quarter of 2007. We retained a residual interest in the CDO. However, due to the poor performance of the securities within the CDO, our residual interest in the CDO is not providing any cash flow to us and has no value. As discussed under the heading Assets and Liabilities of Consolidated Securitization Trusts, the assets in the CDO have no economic benefit to us and we have no control over these assets. We have also provided the assets and liabilities of the trusts on a separate and combined basis.

Real Estate Owned. Real estate owned includes the value of properties for foreclosed loans owned by securitization trusts, as discussed under Mortgage Loans - Held-in-Portfolio. We consolidate the assets and liabilities as part of the securitization trust. A servicer that is independent from us and the trusts services the mortgage loans and processes defaults for liquidation. Proceeds from liquidation of this real estate will flow through the trust and will generally be paid to third party bondholders. The amount of real estate owned is dependent upon the number of the overall mortgage loans outstanding, the rate of defaults, the timing of liquidations and the estimated value of the real estate. The decrease in the amount of real estate owned from December 31, 2007 to December 31, 2008 results from the declining number of total loans as well as the decreasing estimated value of the real estate.

Under the heading Assets and Liabilities of Consolidated Securitization Trusts, we have provided the assets and liabilities of the trusts on a separate and combined basis.

Accrued Interest Receivable. Accrued interest receivable includes the interest due from individual borrowers to the trusts who own the mortgage loans - held-in-portfolio. For all mortgage loans that do not carry mortgage insurance, the accrual of interest on loans is discontinued when, in management's opinion, the interest is not collectible in the normal course of business, but in no case beyond when a loan becomes 90 days delinquent. For mortgage loans that do carry mortgage insurance, the accrual of interest is only discontinued when in management's opinion, the interest is not collectible. Management generally deems all of the accrued interest on loans with mortgage interest to be collectible. The quantity of delinquent loans has significantly increased, as a percent of total loans outstanding, from December 31, 2007 to December 31, 2008. Therefore, the amount of accrued interest has also increased.

Under the heading Assets and Liabilities of Consolidated Securitization Trusts, we have provided the assets and liabilities of the trusts on a separate and combined basis.

Other Assets. Other assets includes the value of derivative instruments owned by the CDO securitization trust, prepaid insurance, capitalized furniture and office equipment, appraisal fee receivables and other minor receivables. Generally, these assets have declined as we have decreased the size of our business operations.

Assets of Discontinued Operations. During 2007 and 2008, we discontinued our mortgage lending operations. As of December 31, 2007 and December 31, 2008, we owned mortgage loans - held-for-sale and real estate owned related to the mortgage lending business. The amount of these assets declined during 2008 as the assets were either liquidated or were further devalued based on the current market conditions.

Asset-backed Bonds Secured by Mortgage Assets. During 2006 and 2007, we executed three mortgage loans securitizations and one mortgage security re-securitization (a CDO). We consolidate the assets and liabilities of the securitization trusts under GAAP. The asset-backed bonds are obligations of the trusts and will be repaid using collections of the securitized assets. The trusts have no recourse to our other, unsecuritized assets. The assets securing these obligations are discussed under the headings "Mortgage loans - held-in-portfolio" and "Mortgage securities - trading." The balances of the asset-backed bonds have decreased during 2008 as the bonds have repaid. We record the value of the bonds secured by loans at the value of the proceeds, less repayments. We record the CDO (secured by mortgage securities) at its market value. These balances will decrease going forward as the underlying assets repay or may be charged off as the assets are deemed to be insufficient to fully repay the bond obligations.

Under the heading Assets and Liabilities of Consolidated Securitization Trusts, we have provided the assets and liabilities of the trusts on a separate and combined basis.

Short-term Borrowings Secured by Mortgage Securities. Prior to 2008, we entered short-term lending facilities to finance our mortgage assets, other than those securities that were owned by a securitization trust (see Asset-backed Bonds Secured by Mortgage Assets). As of December 31, 2007, we had an aggregate of $45.5 million outstanding under three separate agreements with aggregate borrowing capacity of $840 million. During 2008, we repaid all amounts outstanding and terminated the lending agreements.

Junior Subordinated Debentures. We have $78.1 million in principal amount of unsecured notes payable to two unconsolidated trusts, the balance sheet includes $77.3 million which is net of debt issuance costs. These notes secure trust preferred securities issued by the trusts. During 2008, these notes carried an interest rate of three-month LIBOR plus 3.5%.

During 2008, we purchased trust preferred securities with a par value of $6.9 million during 2008 for $0.6 million. As a result, $6.9 million of principal and accrued interest of $0.2 million of the notes was retired and the principal amount, accrued interest, and related unamortized debt issuance costs were removed from the balance sheet resulting in a gain of $6.4 million, recorded to the "Gains on debt extinguishment" line item of the consolidated statements of operations.

Due to Servicer. The mortgage loans - held-in-portfolio on our balance sheet have been securitized and we consolidate the securitized trust. In accordance with the agreements for the securitized mortgage loans, the servicer of the loans is required to make regularly scheduled payments to the bondholders, regardless of whether the borrower has made payments as required. The servicer is required to make advances from its own funds. Upon liquidation of defaulted loans, the servicer is repaid the advanced funds. Until such time as the loans liquidate, the trust has an obligation to the servicer, which we have classified as "Due to Servicer" on the balance sheet. The amount of the obligation is dependent on the rate and timing of delinquencies of the individual borrowers. During 2007 and 2008, the trusts experienced a significant increase in the amount of delinquencies, which increases the amount of advances the servicer has made to the bondholders and therefore increases the liability to the servicer.

Dividends Payable. During 2004, we issued $74.8 million in cumulative redeemable preferred stock (Series C) with a dividend equivalent to 8.9%. During 2007, we issued $50 million of redeemable preferred stock (Series D-1) with a dividend equivalent to 9.0%. We have failed to make all dividend payments since October 2007. As a result, the Series D-1 dividend increased to an equivalent of 13.0%, retroactive and compounded to the beginning of the first quarter in which the dividends were not paid. The unpaid dividends continue to accrue and have resulted in the large increase in unpaid dividends recorded in our balance sheet.

Accounts Payable and Other Liabilities. Accounts payable and other liabilities . . .