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NYMT > SEC Filings for NYMT > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for NEW YORK MORTGAGE TRUST INC



Quarterly Report

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


When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission, or SEC, or in press releases or other written or oral communications issued or made by us, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may" or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and, as such, may involve known and unknown risks, uncertainties and assumptions.

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities, changes in credit spreads, the impact of the downgrade of the long-term credit ratings of the U.S., Fannie Mae, Freddie Mac, and Ginnie Mae; market volatility; changes in the prepayment rates on the mortgage loans underlying our investment securities; increased rates of default and/or decreased recovery rates on our assets; our ability to borrow to finance our assets; changes in government laws, regulations or policies affecting our business, including actions taken by the U.S. Federal Reserve and the U.S. Treasury; our ability to maintain our qualification as a REIT for federal tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including the risk factors described in this report and in Part I, Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2012 and in Part II of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 and as updated by our subsequent filings with the SEC under the Exchange Act, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Defined Terms

In this Quarterly Report on Form 10-Q we refer to New York Mortgage Trust, Inc., together with its consolidated subsidiaries, as "we," "us," "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our wholly-owned taxable REIT subsidiaries as "TRSs" and our wholly-owned qualified REIT subsidiaries as "QRSs." In addition, the following defines certain of the commonly used terms in this report: "RMBS" refers to residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only and principal only mortgage-backed securities; "Agency RMBS" refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a federally chartered corporation ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or an agency of the U.S. government, such as the Government National Mortgage Association ("Ginnie Mae"); "Agency ARMs" refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS; "non-Agency RMBS" refers to RMBS backed by prime jumbo and Alternative A-paper ("Alt-A") mortgage loans; "IOs" refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans; "Agency IO" refers to an IO that represents the right to the interest component of cash flow from a pool of residential mortgage loans issued or guaranteed by a GSE, or an agency of the U.S. government; "POs" refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans; "ARMs" refers to adjustable-rate residential mortgage loans; "prime ARM loans" refers to prime credit quality residential ARM loans ("prime ARM loans") held in securitization trusts; "distressed residential loans" refers to pools of performing, re-performing and to a lesser extent non-performing, fixed-rate and adjustable-rate, fully amortizing, interest-only and balloon, seasoned mortgage loans secured by first liens on one- to four-family properties; "CMBS" refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans; "multi-family CMBS" refers to CMBS backed by commercial mortgage loans on multi-family properties; "CLO" refers to collateralized loan obligation; and "CDO" refers to collateralized debt obligation.


We are a real estate investment trust, or REIT, for federal income tax purposes, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets and, to a lesser extent, financial assets. Our objective is to manage a portfolio of investments that will deliver stable distributions to our stockholders over diverse economic conditions. We intend to achieve this objective through a combination of net interest margin and net realized capital gains from our investment portfolio. Our portfolio includes certain credit sensitive assets and investments sourced from distressed markets in recent years that create the potential for capital gains, as well as more traditional types of mortgage-related investments that generate interest income.

We have endeavored to build in recent years a diversified investment portfolio that includes elements of interest rate and credit risk. We believe a portfolio diversified among interest rate and credit risks is best suited to delivering stable cash flows over various economic cycles. Under our investment strategy, our targeted assets currently include Agency ARMs, Agency fixed-rate RMBS, Agency IOs, multi-family CMBS, direct financing to owners of multi-family properties generally through mezzanine and preferred equity investments, and residential mortgage loans, including loans sourced from distressed markets. Subject to maintaining our qualification as a REIT, we also may opportunistically acquire and manage various other types of mortgage-related assets and financial assets that we believe will compensate us appropriately for the risks associated with them, including, without limitation, non-Agency RMBS (which may include IOs and POs), collateralized mortgage obligations and securities issued by newly originated residential securitizations, including credit sensitive securities from these securitizations. In addition, we will continue to seek new areas of opportunity in the residential space, including mortgage servicing rights which may complement our Agency IO strategy.

We strive to maintain and achieve a balanced and diverse funding mix to finance our assets and operations. To this end, we rely primarily on a combination of short-term borrowings, such as repurchase agreements with terms typically of 30 days, and longer term structured financings, such as securitization and re-securitization transactions, with terms longer than one year.

We internally manage a certain portion of our portfolio, including Agency ARMs, fixed-rate Agency RMBS, non-Agency RMBS, CLOs and certain residential mortgage loans held in securitization trusts. In addition, as part of our investment strategy, we also contract with certain external investment managers to manage specific asset types targeted by us. We are a party to separate investment management agreements with The Midway Group, LP ("Midway"), RiverBanc, LLC ("RiverBanc") and Headlands Asset Management LLC ("Headlands"), with Midway providing investment management services with respect to our investments in Agency IOs, RiverBanc providing investment management services with respect to our investments in multi-family CMBS and certain commercial real estate-related debt and equity investments, and Headlands providing investment management services with respect to our investments in distressed residential mortgage loans. Prior to 2012, we were also a party to an advisory agreement with Harvest Capital Strategies LLC ("HCS"), which was terminated effective December 31, 2011.

Key Third Quarter 2013 Developments

Acquisition of a Pool of Distressed Residential Mortgage Loans and Other Investments

In September 2013, we purchased a pool of distressed residential mortgage loans with an unpaid principal balance of approximately $92.1 million for an aggregate purchase price of approximately $72.8 million. We financed our purchase of these distressed residential mortgage loans with the proceeds from the securitization transactions described below.

During the third quarter, we originated approximately $21.3 million in first mortgage loan, mezzanine, debt and equity investments.

Completion of Distressed Residential Mortgage Loans Securitization Transactions

During the third quarter, we completed three securitization transactions for the purpose of financing distressed residential mortgage loans having an aggregate unpaid principal balance of approximately $243.6 million. These distressed residential mortgage loans were acquired by the Company during the second and third quarters of 2013. The interest rate on the notes issued by the securitization trusts range from 4.25% to 4.85% and are subject to redemption starting in July 2016, in the case of one securitization and September 2016, in the case of the other two securitizations, at which times the securitization trusts may redeem the notes or allow them to remain outstanding, although, in each case, at increased per annum rate. The Company received net cash proceeds of approximately $136.6 million from these securitization transactions, after deducting expenses associated with the transactions.

Third Quarter 2013 Common Stock and Preferred Stock Dividends

On September 12, 2013, our Board of Directors (the "Board") declared a regular quarterly cash dividend of $0.27 per share on shares of our common stock for the quarter ended September 30, 2013. The dividend was paid on October 25, 2013 to our common stockholders of record as of September 23, 2013.

Also, in accordance with the terms of the Series B Preferred Stock of the Company, the Board declared a Series B Preferred Stock cash dividend of $0.484375 per share of Series B Preferred Stock for the quarterly period that began on July 15, 2013 and ended on October 14, 2013. This dividend was paid on October 15, 2013 to holders of record of Series B Preferred Stock as of October 1, 2013.

Subsequent Events

Multi-Family CMBS Transaction

In November 2013, we expect to purchase the first loss PO security in a newly issued Freddie Mac-sponsored multi-family K-Series securitization. Because this acquisition is pending, there can be no assurance that we will complete this purchase during the expected period, if at all.

Current Market Conditions and Commentary

General. The U.S. economy grew more than expected during the third quarter of 2013, with real gross domestic product ("GDP") estimated to have expanded by 2.8%. The U.S. Department of Labor estimates that the unemployment rate was at 7.2% as of the end of September 2013, down from 7.8% in December 2012. However, due to a decline in the labor force participation rate, the employment to population ratio has remained essentially unchanged in recent months. According to the U.S. Department of Labor, total nonfarm payroll employment increased by 148,000 in September 2013, down from the prior 12-month average of 185,000 new jobs per month. In a discussion of the economic situation and outlook at the Federal Reserve Open Market Committee (the "FOMC") meeting in September 2013, FOMC meeting participants agreed that data received since the FOMC's July 2013 meeting indicated that economic activity had continued to expand at a moderate pace, though somewhat more slowly than anticipated. Based, in part, on this data, and as more fully discussed below, the FOMC announced on September 18, 2013 that it had decided to await more evidence that economic progress will be sustained before commencing the tapering of asset purchases under QE3 (defined below). Since this decision by the FOMC, which was contrary to general market consensus, the yield on the 10-year U.S. Treasury note declined by approximately 34 basis points as of October 29, 2013, which we believe has contributed to a recent decline in mortgage rates, lower volatility and higher pricing for many fixed-income assets.

As disclosed in our prior periodic reports, the Federal Reserve has undertaken three rounds of quantitative easing in an effort to support a stronger economic recovery and to help ensure that inflation, over time, is at a rate that is most consistent with the Federal Reserve's dual mandate of fostering maximum employment and price stability. The most current version of the Federal Reserve's quantitative easing program, which is referred to as "QE3," involves the purchase by the Federal Reserve of Agency RMBS at a pace of $40 billion per month and longer-term U.S. Treasury securities at a pace of $45 billion per month, as well as the reinvestment of principal payments from its holdings of Agency debt and Agency RMBS in Agency RMBS and the rolling over of maturing U.S. Treasury securities at auction. The FOMC meeting minutes released on May 22, 2013 announced that the Federal Reserve was considering beginning to taper the pace of purchases of Agency RMBS as early as June 2013. In June 2013, the FOMC introduced more formal unemployment rate and inflation targets, with Chairman Bernanke announcing on June 19, 2013 that the Federal Reserve would begin to scale back Agency RMBS purchases later in 2013 if the economy continued to improve in line with the FOMC's current projections and that such purchases would cease entirely when the unemployment rate reached 7%. In his semiannual monetary report before the U.S. House of Representatives' Financial Services Committee on July 17, 2013, Chairman Bernanke indicated that if the incoming economic data confirms a strengthening labor market and inflation moving back toward the Federal Reserve's 2 percent target, the FOMC anticipates that it would be appropriate to begin to moderate its monthly pace of Agency RMBS purchases later in 2013, but then softened the statement by noting that any such moderation in purchases could be adjusted depending on incoming economic data. However, despite Chairman Bernanke's remarks before the House Financial Services Committee and the sluggish expansion of GDP in the first half of 2013, the markets appeared to have priced in the expectation that the FOMC would begin to taper in the near term, and that such tapering might be announced as early as September. As noted above, contrary to the general market consensus, the FOMC announced on September 18, 2013 that it would maintain its current level of asset purchases under QE3. Following its most recent meeting on October 30, 2013, the FOMC announced that it had elected to leave the pace of its asset purchases under QE3 unchanged.

The market reaction to the possible tapering of QE3 occurring in 2013 was extremely negative, although volatility has eased some and pricing has improved for many fixed-income assets subsequent to the FOMC's September announcement. The rate on the ten-year U.S. Treasury note moved sharply higher after dropping to 1.63% in early May, rising to 2.49% at the end of the second quarter and to as high as 2.99% in early September before falling to 2.61% at the end of September. As the yield on the ten-year U.S. Treasury note advanced, Agency RMBS underperformed, in some cases dramatically, as evidenced by significantly lower pricing on these assets. Losses on these assets have recovered some subsequent to the FOMC's September announcement. The Freddie Mac survey 30-year mortgage rate mirrored the move in the markets, rising from 3.57% at the end of the first quarter to 4.58% by mid-August, where generally rates remained until declining to 4.32% at the end of the third quarter. However, while market conditions have improved for many types of Agency RMBS, we believe ongoing uncertainty surrounding Federal Reserve actions relating to QE3 and the federal budget and deficit battles in Washington, DC has the potential to continue to weigh on and create additional volatility for Agency RMBS and other fixed-income assets in the coming months. The predictions for the future of QE aside, the FOMC has maintained its intent to keep the target range for the federal funds rate between 0% and 0.25% until either the unemployment rate drops below 6.5% or the projected inflation rate over the next one to two years increases above 2.5% and longer-term inflation expectations continue to be well anchored.

The market movements outlined above have had a meaningful negative impact on our existing Agency RMBS portfolio (including our Agency IOs) during the second quarter, which suffered from negative price movements outside of our hedged expectations, but have generally had a positive impact on the valuations for our multi-family CMBS and distressed residential mortgage loans, thereby mitigating to a large extent the downside impact of these events on our overall portfolio. Subsequent to the FOMC meeting, we saw a partial price recovery in most of our MBS portfolio with prices ending higher as compared to June 30, 2013. We expect that these overall market conditions may continue to impact our operating results and will cause us to adjust our investment and financing strategies over time as new opportunities emerge and risk profiles of our business change.

Single-Family Homes and Residential Mortgage Market. The residential real estate market showed signs of continued improvement in home prices in August 2013, although the rate of price gains have slowed since April 2013. Data released by S&P Indices for its S&P/Case-Shiller Home Price Indices for August 2013 showed that, on average, home prices increased by 12.8% for the 20-City Composite as compared to August 2012. In addition, according to data provided by the U.S. Department of Commerce, privately-owned housing starts for single family homes for August 2013 were at a seasonally adjusted annual rate of 628,000, the highest since February 2013 and 7% higher than starts in July 2013. We expect the single-family residential real estate market to continue to improve in the near term, but believe that higher interest rates and tepid job creation will contribute to slowing housing gains for single family homes over the next 12 months.

Multi-family Housing. While apartments and other residential rental properties remain one of the better performing segments of the commercial real estate market, August 2013 multi-family housing start data from the U.S. Department of Commerce suggested a recent softening. According to data provided by the U.S. Department of Commerce, starts on multi-family homes, such as apartment buildings, dipped in August 2013 to an annual rate of 263,000 units, which is approximately 11% below activity in the prior month. However, while multi-family construction slowed in August, which we believe is likely a result of increased interest rate volatility, starts for multi-family properties during the first eight months of 2013 are higher when compared to the same period last year. We believe the performance of multi-family housing in the past year is due, in part, to a significant decline in new construction during the recent economic downturn and increased demand from former homeowners, which has driven stronger rental income growth across the country. In turn, these factors have led to recent valuation improvements for multi-family properties and negligible delinquencies on new multi-family loans originated by Freddie Mac and Fannie Mae.

Recent Government Actions. In recent years, the U.S. Government and the Federal Reserve and other governmental regulatory bodies have taken numerous actions to stabilize or improve market and economic conditions in the U.S. or to assist homeowners and may in the future take additional significant actions that may impact our portfolio and our business. A description of recent government actions that we believe are most relevant to our operations and business is included under this same caption in our Annual Report on Form 10-K for the year ended December 31, 2012 and above under "-General".

Developments at Fannie Mae and Freddie Mac. Payments on the Agency ARMs and fixed-rate Agency RMBS in which we invest are guaranteed by Fannie Mae and Freddie Mac. As broadly publicized, Fannie Mae and Freddie Mac are presently under federal conservatorship as the U.S. Government continues to evaluate the future of these entities and what role the U.S. Government should continue to play in the housing markets in the future. Since being placed under federal conservatorship, there have been a number of proposals introduced, both from industry groups and by the U.S. Congress, relating to changing the role of the U.S. government in the mortgage market and reforming or eliminating Fannie Mae and Freddie Mac. The most recent bill to receive serious consideration is the Housing Finance Reform and Taxpayer Protection Act of 2013, also known as the Corker-Warner Bill, which was introduced in the U.S. Senate. This legislation, among other things, would eliminate Freddie Mac and Fannie Mae and replace them with a new agency which would provide a financial guarantee that would only be tapped after private institutions and investors stepped in. In addition, members of the U.S. House of Representatives recently introduced the Protecting American Taxpayers and Homeowners Act, a broad financing bill which serves as a counterpart to the Corker-Warner Bill. It remains unclear whether these or any other proposals will become law or, should a proposal become law, if or how the enacted law will differ from the current draft of these bills. It is unclear how the proposals would impact housing finance, and what impact, if any, they will have on mortgage REITs.

Credit Spreads. Credit spreads in the residential and commercial markets have generally continued to tighten further during the first nine months of 2013, continuing a trend exhibited during a significant part of 2012. Typically when credit spreads widen, credit-sensitive assets such as CLOs and multi-family CMBS, as well as Agency IOs are negatively impacted, while tightening credit spreads typically have a positive impact on the value of such assets.

Financing markets and liquidity. The availability of repurchase agreement financing for our Agency RMBS portfolio remains stable with interest rates between 0.35% and 0.42% for 30 day repurchase agreements for Agency ARMs and Agency fixed-rate RMBS as of September 30, 2013. The 30-day London Interbank Offered Rate ("LIBOR") was 0.18% at September 30, 2013, marking a decrease of approximately 3 basis points from December 31, 2012. Longer term interest rates were increased as of September 30, 2013 as compared to the 2012 year end, with the rate on the 10-year U.S. Treasury note increasing by approximately 85 basis points to 2.61%. We expect interest rates to rise over the longer term as the U.S. and global economic outlook improves.

In addition, financing and liquidity for commercial real estate securities and other credit sensitive assets have continued show signs of improvement, both in terms of financing rates and availability, as evidenced by the six longer-term structured financings we have completed since May 2012.

Bank Regulatory Capital Changes. In late June 2013, the Basel Committee for Banking Supervision, or "BCBS", issued proposed changes to the Basel III accord that, if finalized, would increase the amount of regulatory capital required by affected banks. Basel III introduced a minimum "leverage ratio" of at least 3% for banks. The leverage ratio is calculated by dividing a bank's Tier 1 capital (i.e., common shares and retained earnings plus certain qualifying minority interests) by such bank's average total consolidated assets. The proposed changes issued in June 2013 would expand the definition of assets, thereby increasing the denominator (which is often referred to as the exposure measure), but would maintain the minimum leverage ratio of 3%. Among the changes is a requirement that securities financing transactions, such as repurchase agreement financings, are included in consolidated assets on a "gross" basis (i.e., no recognition of accounting netting) when the bank acts as a principal in the transaction. Further, in July 2013, the Federal Reserve announced that the minimum Basel III leverage ratio would be 5% for systemically important bank holding companies in the U.S. and 6% for their insured bank subsidiaries. Under each rule as proposed, beginning on January 1, 2015, banks would publicly disclose their leverage ratios and would need to be in compliance with the final rule by January 1, 2018. These new rules, if finalized, could negatively impact affected financial institutions' appetite for various risk taking activities, including the issuance of repurchase agreement financing. As a result, it is possible that certain lending institutions could decide to reduce or otherwise limit their repurchase agreement financing in response to these developments, particularly in connection with the financing of Agency RMBS, which may make it more difficult to finance our investment portfolio on favorable terms in the future.

Prepayment rates. As a result of the significant increase in long-term term treasury rates and mortgage rates during the quarter ended June 30, 2013, mortgage originations related to refinancing decreased, resulting in lower prepayment speeds in many of our Agency RMBS portfolio. Although we expect the decline in mortgage rates subsequent to the FOMC's September 2013 announcement might cause prepayment speeds to move modestly higher in the fourth quarter of 2013, we expect prepayment speeds to decline over time as interest rates rise. For further information regarding prepayment rates on our Agency RMBS, see "-Results of Operations-Prepayment Experience."

Significant Estimates and Critical Accounting Policies

A summary of our critical accounting policies is included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012 and "Note 2 - Summary of Significant Accounting Policies" to the condensed consolidated . . .

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